As much as possible, businesses would like to lower costs and expenses, since this would mean higher efficiencies and also higher net income appearing on their financial statements.
This cost reduction is mostly attributed to two benefits arising from contract manufacturing.
Fewer resources utilized. If you have another firm manufacture the product, or some of its parts, instead of manufacturing them internally, it means that you won’t have to spend on operational and maintenance costs of manufacturing machines and equipment. In the first place, you won’t even have to purchase any of those expensive machines and equipment, since you won’t be using them anyway. This is in the same manner that you are spared from having to purchase, and maintain inventory on raw materials and supplies to be used in the manufacture of the parts, since those will be shouldered by the firm that you contracted.
Lower labor costs. Since you won’t be manufacturing the product or its components, you won’t be spending on the labor needed for it. For example, that manufacturing a certain part will require a team composed of at least 3 people. If you outsource the production of that part, you don’t have to pay for the salaries and wages and other benefits for at least 3 people. The same principle applies when you think about the number of people that the company must keep in its employ. As the full-scale manufacturer that left most of the production functions to a CM, you can maintain a lean workforce.
There is another factor at play that will aid in the reduction of costs, and that has something to do with economies of scale. Since CMs have more than one or two clients they make the same product for, it is possible for them to come up with ways and means to perform mass production.
Mass production will enable them to sell the products at a lower selling price, which translates to lower costs for the full scale manufacturer or company using the CM.