what is the difference between contract manufacturing and ou

what is the difference between (contract manufacturing) and (outsourcing)?

I cant get the difference I think they both mean the same thing!

here is the definition for both of them from my book :

international outsourcing: parts and products once made locally in the US by American companies are now being made offshore (overseas) or near-shore (in Mexico and Central America) Leeds to loss of jobs locally.

local outsourcing: use of local suppliers within the US to provide parts and services.

contract manufacturing: companies that specialize in manufacturing entire products, not just parts, under contract to other companies.

if you could give example in each one, I would be grateful.

Solution

Basically, Outsourcing is an umbrella term that refers to any activity for which a company avails a supplier’s services. It could be advertising, manufacturing of components or parts, recruitment of labor, distribution, sales and so on.

Contract Manufacturing is a specific term that refers to outsourcing of just the manufacturing process of a company while retaining other activities such as sales, distribution, R&D, marketing etc. in house.

A typical manufacturing company performs several functions that are depicted as follows.

Primary Activities: R&D -> Sourcing -> Manufacturing -> Warehousing -> Distribution -> Sales

Support Activities: Human Resource Management, Marketing, Support, Customer Relationship Management, Finance

Out of the above activities, contract manufacturing pertains only to the manufacturing activity while outsourcing can pertain to any of the primary or secondary activities.

For instance, when a company X manufactures a product for another company Y under X’s brand name, the two companies enter into a contract or a legal agreement that specifies the terms and conditions of availing the service. This is called contract manufacturing. For instance, Foxconn is a Chinese factory that manufactures Apple Phones by using Apple’s designs. In this case, Apple retains the ownership of its products while agreeing to pay a price to Foxconn to manufacture an agreed upon number of mobile phones.

However, when Company X enters into a contract with company Y for distributing Y’s products or recruit labourers for Y, then Y has outsourced its distribution or recruitment functions to X. For instance, many IT companies outsource their recruitment activities to HR consultancies. The HR consultancies are responsible for identifying the right candidates for the job, getting them evaluated through interviews and onboarding them with the IT company.

Both outsourcing and contract manufacturing involve legal contracts that are enforceable both on the supplier and the manufacturer. Thus, Outsourcing refers to a larger set of services that are availed by the company from a supplier while Contrcat manufacturing refers only to the actual process of converting raw materials into finished product.