In a contract manufacturing business model, the hiring firm - typically an OEM - approaches the contract manufacturer with a design or formula. The contract manufacturer will quote the parts based on processes, labor, tooling, and material costs. Typically an OEM will request quotes from multiple CMs. After the bidding process is complete, the hiring firm will select a source, and then, for the agreed-upon price, the CM acts as the hiring firm's factory, producing and shipping units of the design on behalf of the hiring firm.
Many well-known companies use contract manufacturing as an alternative to operating and maintaining their own factories. Contract manufacturing can be used for anything from single components to a complete product. Printers, computers, and cellular phones personal care products are all examples of products that are made using this method.
In an international context, establishing a foreign subsidiary as a contract manufacturer can have favorable tax benefits for the parent company, allowing them to reduce overall tax liabilities and increase profits, depending upon the activities of the contract manufacturer.