Just like the name suggests, contract assembly is a term used to describe the process of outsourcing the assembly part of a manufacturing process to a company that is well-suited to handle the assembly. There are a number of reasons why a company might choose to go the contract assemble route. For some companies, it might be a form of comparative advantage in which they outsource the manufacturing process that they are least capable of handling profitably to another company that has no problem doing do so. In this case, the other company might have more modern equipment or a wider range of equipment and trained staff that will give a faster turnaround time. It may also be due to the fact that it could be cheaper for the company to outsource the assembly process for various reasons, or it may be that the company outsourcing the assembly might have less expertise in that phase of the manufacturing process than the company that was contracted to do so.
When the decision to engage in contract assembly has been made, the company outsourcing the assembly will look for a company that handles the particular type of assembly process that it desires. Usually, the main types of manufacturing processes that require contract assembly include the manufacture of electronics, machines with intricate parts, or even some seemingly innocuous products that merely require the contract assembler to put together a particular item in its final stages, such as binding a book to specifications and packing the final product in specified packages. In the case of electronics, most companies outsource the production of the individual items and electronic components, mainly to Asian countries where labor is much cheaper. When these items are ready, they will be shipped to the location of the company that owns them, from where they will be sent to the company that may have been engaged to perform a contract assembly of the items.
In this scenario, it can be seen that it is possible for an investor to outsource different phases of the manufacturing process to outside companies, including the engagement of such a company in contract assembly. Even a portion of the manufacturing of machinery or automobiles can be outsourced through contract assembly. In such a case, the contract assembler may be engaged to assemble some component of the vehicle on behalf of the car manufacturer.