Production models

Manufacturing activities in a group can be organized in different forms. In general, we distinguish four basic models, namely: a full-fledged producer, a manufacturer with limited powers, a contracted manufacturer, and wage labor.
A full-fledged manufacturer carries out all manufacturing activities, from the design of the product to the final sale to the customer. This type of manufacturer bears all risks associated with production and sales. He possesses significant intangible assets like patents, proposals.
A manufacturer with limited powers is also responsible for all phases of the production process with the exception that the intangible assets are not in his possession but these are leased out in the form of licenses.
The contract manufacturer is responsible only for manufacturing activities and quality control. The production is carried out according to the Principal’s specification and his production is pre-sold. He has ownership rights to manufactured products. He is not engaged in product design, distribution and sales activities. He can be considered a service provider.
The wage labor has the lowest risk profile. This model is similar to that of a contracted manufacturer, with the difference that the manufacturer does not have the right to inventories and finished products.
In theory and practice of transfer pricing, the basic rule says, the more risk and exercised powers are there, the higher is the expected reward.