Is It Time To Use A Contract Manufacturer?

You’ve completed the RFQ process and selected your Contract Manufacturer (CM). You feel great about your choice; you’ve done your homework, you’ve met the management team and familiarized yourself with the people who will now become your own extended manufacturing team. Now what?

Since a contract manufacturer will completely take on your manufacturing process, you’ll create more opportunities within your company. When you choose to outsource the manufacturing process, you’ll free up time for your employees to create more innovative prototypes and design additional groundbreaking products. As mentioned before, an experienced contract manufacturer will know how to make improvements that could end up saving you a lot of time, money, and hassle in the future. Choose a Partner Over a Provider. The right contract manufacturer will ensure a long-lasting relationship with their clients. This is mutually beneficial for both parties.

Congratulations! You are officially on the path to getting your product made. Now you need to switch gears from picking the CM to managing them. Here are the next steps.


Is It Time To Use A Contract Manufacturer For A

The fact that the contract is priced at a loss does not preclude the manufacturer from concluding that the revenue should be recognized over time, as long as the terms of the contract provide for a pro-rata payment for work performed to date upon termination, assuming the product has no alternative use.

Part 1: The Contract

The contract, also known as the Manufacturing Services Agreement (MSA), is a legal document spelling out the details of the arrangement with your CM. It is broken out into the following sections:

  • Manufacturing Services:
    • Defines who is responsible for doing what
    • Material Operations: Vendors, procurement, consigned materials
    • Subcontractor agreement
  • Forecasts and Purchase Orders:
    • Forecast planning
    • PO procedures, lead times, cancellation
  • Fees and Payment:
    • Pricing (what’s included/not – VAT, taxes, fees, etc.)
    • Margins/Markup (standard vs. consigned vs. “special”)
  • Shipments, Samples, Quality Testing:
    • Shipping requirements, schedule
    • Samples: quantity, timing, who pays
    • Quality Testing: Who does it, who pays for it, how it is done
    • How Epidemic failures will be dealt with
    • Audit: Record keeping
    • Final Inspection Procedure
  • Product Acceptance & Warranty:
    • You can return product that doesn’t meet the specified warranty
    • Warranties: Professionally made, original work, tested as specified, manufactured as specified.
    • Clearly spell out that you’re allowed to visit and audit at any time
  • Representations & Covenants:
    • This is a legal document, no conflicts of interest
    • Manufacturing in a safe environment, no child labor, ethical, etc.
  • Intellectual Property Ownership:
    • Definitions
    • Who owns what
  • Confidentiality:
    • Mutual Non-Disclosure Agreement
  • Term & Termination:
    • Defines the term of the agreement
    • How you terminate the agreement
  • Indemnification & Liability Limitation:
    • General protection for everyone involved & related procedures
  • Miscellaneous:
    • Terms of agreement, use of name
    • Successors / assignment – new agreement
    • Controlling law, jurisdiction, venue

You should not be surprised if the CM pushes back on certain sections of the MSA as part of the negotiation process. All CMs are different and will have different requirements but in general, take into consideration their position and find an agreement that’s fair for everyone. The MSA process typically takes two to four weeks to complete. Finally, while MSAs are legal documents and considered quite common, there are many permutations so we strongly recommend having legal representation.

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Struggling with CAD file management?

Unmanaged CAD data can lead to wasted time and expensive mistakes, but traditional PDM and PLM solutions are too costly for many companies. This guide, written by industry analyst Jim Brown, will help you find the solution that fits your needs.

With many businesses facing high-start up costs and limited resources, companies often turn to contract manufacturing, also known as outsourcing. Contract manufacturing is used in many consumer product industries including food, cosmetics, medical, household products, fabrics, and plastics, to name a few. It allows a company to use the products or services that are manufactured by another external production company, vendor or third-party. The client will then take that product or service and use their own customer service, marketing and packaging to sell the goods. Since there is less labor and fewer resources to rely on, contract manufacturing is often the answer to many companies.

Why Contract Manufacturing?

Many companies may choose to use the method of contract manufacturing to save money, time and to improve quality of a product. The business may simply use this method because that product or service is not the company's core business. The company can rely on the expertise and reliability of the third-party. Contract manufacturing also allows clients to free their resources for other activities within their company, especially if they have limited knowledge of the product or service and limit space for production. By working with multiple providers, companies can often get the highest possible quality for products while at the same time, managing costs.
Contract manufacturing can take many forms. A company may choose to hire service or subcontractors for labor. They might also use contract manufacturing to use a certain product or may even use a facility. The term might also refer to a business using oversea products or services, such as labor and then importing it to sell using their own name or label.
The method of contract manufacturing can prove quite beneficial to companies looking to provide their consumers with their own services or name recognition, while relying on the top-quality and often lower production costs that other companies can offer. Outsourcing offers companies many ways to use cost-effective alternatives to help manage, staff and run their businesses.

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