Manufacturing Contract: Everything You Need to Know

While there is hype about tech and AI business everywhere – one can’t forget how the traditional product business literally is the backbone of any economy – they aren’t going anywhere.

However, the biggest issue with these traditional businesses is – they are resource and capital-intensive. They need much more capital and investment to launch even a single product in the market. What if your firm doesn’t have the resources, funds and time to produce everything in-house?

The way around this is outsourcing the production. You hire a third-party manufacturer who will manufacture the products for you based on your specifications and instructions, you can then label your branding and get it in the market. Even big companies like Apple, Google, and Nike outsource their production to third-world countries where the production cost is much cheaper. Outsourcing the production of branded products is on the rise as it offers several benefits to the firm in terms of cost and time to invest in the core strengths of the firm. And when outsourcing production, manufacturing contracts play a very vital role in their relationship.

A manufacturing contract is a legally binding agreement between a manufacturer and a company for the production of certain components or products over a specified period. It occurs when a small business or big company like Apple outsources production to other manufacturing companies. These contracts are commonly used in a variety of industries, including automotive, electronics, and consumer goods. But what are the downsides of outsourcing production and what possible solutions to tackle such downsides?

Here’s a quick explanation about it.

1. Lack of Control: Outsourcing means losing some element of control over the production process. This is the biggest disadvantage of manufacturing contracts is a lack of control over the quality of finished products. Control is an important consideration for food processing and pharmaceutical industries to deliver the best and highest-quality produce products.
2. Intellectual Property Risks: Companies should be highly concerned about sharing intellectual property with contract manufacturers. Counterfeiting and competition are two major intellectual property risks as manufacturers may use proprietary processes or technologies without authorization, or may infringe on the company’s intellectual property rights.
3. Product Liability: If the product fails or is found to be defective or causes any harm, the company is simply exposed to liability for any such discrepancies with the product. Even though your company has a lack of control over what the contract manufacturer does, you will still be liable. To avoid such kind of product liability, make sure you’re aware of the contract manufacturer’s supply chain practices. Supply chain issues related to poor quality or questionable materials can drag your company into a rough legal situation.
4. Regulatory compliance issues: A manufacturer may fail to comply with health and safety regulations, environmental regulations, fair competition and antitrust laws, and IT security and privacy concerns. These compliance issues that manufacturing companies must comply with to ensure the smooth functioning of the production process.
5. Disputes Resolution: Disputes may arise due to contract breaches, communication issues, and other factors, which may be difficult to resolve sometimes. It’s important to establish clear dispute resolution procedures and have a neutral third party to mediate disputes and resolve conflicts.

These were the downsides of manufacturing contracts. However, these problems can be tackled with some simple legal steps that can be implemented to mitigate such risks associated with contract manufacturing.

1. Businesses should hire a legal attorney to get a strong manufacturing contract to prevent vulnerability to legal problems. Your entire relationship is built on the manufacturing contract, and if things go sideways, you should have the contract to deal with issues.
2. Including provisions in the contract to ensure compliance with local laws and regulations can help prevent compliance issues.
3. Including provisions in the contract to protect proprietary processes, trademarks, patents, or copyrights can help prevent intellectual property infringement.
4. Having a clear and detailed contract that sets out the specific terms and conditions of the agreement can help prevent misunderstandings and disputes.
5. Use Supplier Quality Management software that facilitates supplier compliance and tracks key metrics for contract manufacturers, giving you a big-picture view of overall performance.
6. Use Quality Management System (QMS) to manage and track the contract manufacturing process.
7. To avoid supply chain issues, choose a reputable and transparent contract manufacturer.
8. Communicate on the exact materials to use in the product to establish confidence in a healthy supply chain.
9. Companies need to have a strong plan for communicating requirements and expectations to contract manufacturers to avoid crucial missteps, especially when engaging an overseas manufacturer.

To conclude, from small startups to million-dollar companies employing manufacturing contracts in their business, outsourcing the production process to someone who specialises in your industry is key. But at the same time, it comes with challenges and these challenges can be tackled if the right strategies are employed. At the end of the day, how your company approaches those risks is what determines whether contract manufacturing presents a liability or a competitive advantage.