Posted in Operations and Supply Chain Terms, Total Reads: 1548
It is a service offered to those companies which are incapable of investing in heavy capital . This lowers their production cost , downtime cost on equipment and other pilot run costs associated with market testing .
They are much more engaged in the process as compared to the trading company .They supervise the complete process and conduct regular quality checks before shipping of to their final customers. It is usually on contract based agreement between the provider of raw material and the party processing , converting and providing financial relief to the supplier of raw materials .
However the ownership of the final product lies with the supplier of raw material. The processing company does not buy the input raw materials from the supplier neither can it sell the final output produced. However it can charge for the services it has delivered.
The agreement between an oil drilling company and an oil refinery .The drilling company supplies the raw oil to the refinery .It is processed , distilled and refined and separated to give several fractions .The final product is delivered back to the drilling company . The infrastructure and capital setup , production and processing supervision, warehousing and finally the distribution all these activities are handled by the other contracting party.