5 Key Parts To Cover In Your Next Manufacturing Contract
When you outsource to a contract manufacturer, it’s important to have a comprehensive supply agreement. Neglecting to outline a key part in the contract may lead to misunderstandings that will cost you thousands of dollars. You may feel inclined to sign a bare-boned contract, especially if you’re rushing to bring a manufacturer on board, but you’d be better off ensuring that both you and the manufacturer are on the same page from the get go.
Drafting up a fair and comprehensive supply agreement is complex and tricky, but we’re here to help. The first thing you want to do is to ensure that the manufacturer you choose to bring on board is the right choice for your business.
Finding The Right Contract Manufacturer For Your Business
Finding a contract manufacturer that has a solid track record for quality and reliability isn’t easy, but it’s doable. The keys are to look for a contract manufacturer with financial resources, experience, and good customer service.
Sufficient Financial Resources
A good contract manufacturer makes sure that their bank account remains healthy at all times so they can invest in the latest technology and equipment or can dip into it in case of emergency. A financially healthy contract manufacturer is far less likely to go out of business and leave you stranded. Having said that…any financial promises should be reasonable. Like the old adage goes, if it’s too good to be true, it probably is.
Experience Producing The Product You Need
A manufacturer that has experience making the exact or similar product you need will save you a boatload of time and money compared to an inexperienced manufacturer that needs to go through a trial and error stage before providing a product that meets your expectations.
Customer Service
Contract manufacturers outside of the US or Canada often do not adhere to US expectations as far as customer service is concerned. Same-day responses to emails and phone calls aren’t common. Immediate access to decision makers isn’t always possible. Rapid turnaround on various requests isn’t always honored.
At Intran, we pride ourselves on our US-style commitment to customer service. However, this is not common among contract manufacturers in Mexico (or many other nations for that matter), so it’s something we mention.
Read more about what sets a great contract manufacturer apart from the rest here.
Why You Need An Ironclad Supply Agreement
An ironclad supply agreement not only protects your business from expensive errors but also ensures a good relationship with your contract manufacturer. There will be fewer misunderstandings, and both parties will have the peace of mind that they’re on the same page.
There are five key parts to cover in a supply agreement:
1. Materials
It’s important for the contract manufacturer to know which raw materials and components you want in your product, especially when you rely on them to source the raw materials and components for you. With a solid understanding of your expectations, the manufacturer can produce results faster and reduce the risk of product defects and recalls.
Tip: Include a bill of materials in the agreement.
2. Pricing
Including detailed pricing provisions (in addition to the unit price) in the agreement helps prevent unexpected price adjustments in the future. Account for fluctuations in commodity and transit pricing to avoid future complications (or nasty surprises depending on the company you’re dealing with).
3. Quality Control
You’re putting the quality of your product into the manufacturer’s hands. That’s why it’s important to let them know exactly what you expect in terms of quality. A few suggestions:
- Specify the quality control and inspection procedures you want them to perform
- Include detailed product and packaging specifications
- Ask to have your parts warrantied against product defects
4. Ownership Of Mold/Tooling
To avoid any misunderstandings, clarify in the supply agreement that you own all the molds and tooling that will be used to manufacture your product. You can also use the opportunity to request a liquidated damage provision in case the contract manufacturer damages or loses one of your molds or tools.
5. Intellectual Property
To protect your design and trade secrets, ask the contract manufacturer to acknowledge in the agreement that they understand the intellectual property laws in your country — as well as their own — and that they won’t leak your design and trade secrets to anyone else.
One of the reasons we recommend outsourcing to a parts manufacturer in Mexico is because Mexico’s intellectual property laws and protections are similar to those in the USA, so you don’t have to worry about proprietary information being stolen. (For more on IP in Mexico and other benefits to manufacturing in Mexico, take a look at this Intran article.)
As long as you have all of the five key parts in your supply agreement, you should be just fine. However, we always recommend hiring a lawyer to assist with the process.