must make sure that the manufacturer’s standards are congruent with their own. They should evaluate the methods in which they test products to make sure they are of good quality. The company has to rely on the contract manufacturer for having good suppliers that also meet these standards. Intellectual property loss – When entering into a contract, a company is divulging their formulas or technologies. This is why it is important that a company not give out any of its core competencies to contract manufacturers. It is very easy for an employee to download such information from a computer and steal it. Outsourcing risks – Although outsourcing to low-cost countries has become very popular, it does bring along risks such as language barriers, cultural differences and long lead times. This could make the management of contract manufacturers more difficult, expensive and time-consuming. Capacity constraints – If a company does not make up a large portion of the contract manufacturer’s business, they may find that they are de-prioritized over other companies during high production periods. Thus, they may not obtain the product they need when they need it. Loss of flexibility and responsiveness – Without direct control over the manufacturing facility, the company will lose some of its ability to respond to disruptions in the supply chain. It may also hurt their ability to respond to demand fluctuations, risking their customer service levels. Pricing – This addition of a second company and second profit margin to be achieved, adds in cost to the product. The impact is seen either in a higher selling price to the customer or in a reduced profit margin for the company. Protectionism 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. This is a form of true protectionism. The iPad and iPhone, which are products of Apple Inc., are manufactured in China by Foxconn. Some devices may also be manufactured by Pegatron. Apple may move some fraction of iPhone assembly into the United States in the near future. See also Subcontractor (SUB) Interactive Contract Manufacturing (ICM) Electronic Contract Manufacturing (ECM) Electronics Manufacturing Services (EMS) Original Design Manufacturer (ODM) Joint Design Manufacturing (JDM) Contract Manufacturing Organization (CMO) Private Label or Parts List (PL) Bill of materials (BOM)