MEANING OF SUB- CONTRACTING

Sub- contracting system is a mutually beneficial commercial relationship between the two companies. This is known as ancillarisation in India and more generally as sub- contracting. Sub- contracting can be defined as follows:

A sub- contracting relationship exists when a company (called the subcontractee) places on order with another company (called the sub- contractee0 for the production of parts, components, sub- assemblies or assemblies to be incorporated into a product sold by the contractor. Such orders may include the processing, transformation or finishing of materials or parts by the subcontractor at the request of the contractor.

In practice, large scale industries do not produce all goods on their own instead they rely on small scale enterprises called sub- contractors for a great deal of production. When the work assigned to small enterprises involves manufacturing works, it is called Industrial Sub- contracting. In other cases, it is known as commercial sub- contracting. It is not unusual for sub- contractors to work for more than one contractor.

ADVANTAGES AND DISADVANTAGES OF SUBCONTRACTING

ADVANTAGES

1. It increases production in the fastest way without making much effort.
2. The contractor can produce products without investing in plant and machinery.
3. Sub- contracting is particularly suitable to manufacture goods temporarily.
4. It enables the contractor to make use of technical and managerial abilities of the sub-contractors.
5. Despite leading to dependence, sub- contracting ensures existence of sub- contractors by providing them business.
6. Last but no means the least; sub- contracting makes the core firms more flexible in their production.

DISADVANTAGES

However, sub-contracting is not an unmixed blessing. It has some disadvantages also. These are:

1. It does not ensure the regular and uninterrupted supply of goods to the core firms, i.e. contractors that adversely affect the functioning of the core firms.
2. Goods produced under sub- contracting system are often qualitatively inferior.
3. Sub- contracting also delimits the expansion and the diversification of the core firms.
4. Delays in payments, a common feature by the contractor to the subcontractor’s endanger the very survival of the latter.