11.30.2021
The rise in using a global contract manufacturer has come up with several benefits for the companies. It includes cutting the production and personnel costs, focusing solely on core strengths such as designing, developing, marketing and sales. But, it comes with some potential risks that need to mitigate to achieve the desired results.
Contract manufacturers produce a product for other companies. The contractor makes a product to the hiring company's design, enabling the latter to focus on its core strengths solely.
The contractor empowers small businesses to start selling their products while mitigating the need to raise significant capital to build and run a factory. In addition, this way of executing all processes makes it easy for businesses to introduce new products in the market faster with bearing less cost.
Contract manufacturer also makes it easy for larger businesses to expand their business in new markets without setting up their operations in-country. For all these reasons, a company might find using a global contract manufacturer more suitable for its business needs. But, this relationship also carries some risks.
The first and foremost risk a company faces when hiring a global contract manufacturer is the lack of control over the quality of the final product. Especially if a business employs a contract manufacturer from another country, lack of direct control might result in poor product quality.
The hiring company relies only on the contractor's information and does not physically examine the manufacturing process. Moreover, the contract manufacturer will also work with other companies; therefore, the contractor might prioritize one company over another.
Hiring a global contract manufacturer comes with another risk, weak communication. It is the result of a weak relationship between the hiring company and the contract manufacturer. For example, suppose in-person visits are costly for a business, and the company outsources the production. In this case, there are chances that the manufacturer will fake test results to cover up the poor manufacturing process. Especially in the time of the pandemic, the lack of strong communication might increase between both parties.
Another risk involved is a weak contract which mainly relates to the product liability claims or recalls. These risks usually arise when the produced product does not meet the regulatory standards, requirements, specifications both parties agreed upon, or other quality and safety requirements.
The contractual agreement must make the contractor responsible for all costs and ensure that the hiring company can claim them. An unclear deal might result in the contract manufacturer stopping communication with the company to prevent expenses during the recall situation.
Some companies hire different contract manufacturers for each product. Managing multiple contract manufacturing companies at the same time can be very time-consuming. In addition, outsourcing from several contract manufacturers might lead to insufficient oversight, and also, the poor safety and quality issues might go unreported.
It is not common, but some unethical contract manufacturers may share the recipe, formula, or product ideas with other favored companies. Moreover, the contract manufacturers might produce a product similar to the hiring company's product and sell it themselves.
To mitigate the risks when using a global contract manufacturer, these are the key points that will help a business avoid any risk.
Doing an on-site audit by the company or its representative would be beneficial to examine the contract manufacturer's capabilities and expertise. In addition, it will help both parties produce products that meet quality, safety, and commercial requirements.
If, for some reason, an in-person visit is not possible, asking for relative certification status and getting some testimonials about the manufacturer would be beneficial. Moreover, both companies must ensure that their IT departments communicate properly to mitigate any ambiguity.
A business shall check on the current certification status of the contract manufacturer to check if they hold a certification to a relevant and recognized standard (i.e. relevant ISO standard). For this purpose, check the most updated certification audit reports to examine identified issues by the certification body.
Getting testimonial statements from the contract manufacturer's existing customers would give a better understanding of the reputation of the contractor. If a contractor's existing customers are happy with the performance and recommend to work with, it's good to consider this contractor.
The fourth key area revolves around the transparency between both companies and traceability of the valuable record. The contractor needs to maintain an appropriate record to facilitate all processes.
Moreover, to streamline all the processes, it is necessary to maintain complete transparency between the contractors and the hiring company. Therefore, both parties shall conduct regular reviews to avoid any ambiguity with the help of the record maintained.
Ensuring a robust contract between both the customer and the supplier must be established when making the contract. It will help both parties define the precise requirements, expectations, and arrangements to handle certain situations.
The contract must include:
1. Commitment to meet all applicable regulatory requirements for all products.
2. Inspection rights of the customer to the manufacturing site to confirm that the production is following the agreed design and specification.
3. Post-termination agreement: it relates to the products having a longer expected lifetime and the claims regarding products made after the termination of the contract.
Moreover, the contract might include quarantine, crisis or incidents at the product’s manufacturing site.
Incorporating the mitigating risk techniques mentioned above will minimize the risk of using a global contract manufacturer. A contract that suits the interests of both parties ensures a successful business. After all, an excellent professional relationship between the hiring company and contractor will thrive upon trust and better communication.
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