Working with a Contract Manufacturer? 7 Key Elements for Your Next Manufacturing Agreement
Would you marry your spouse BEFORE going on your first date? Probably not! In the business world, a contract manufacturing agreement is the equivalent of a marriage certificate. If you sign one without first going on several dates with your partner, you could get yourself into a bad relationship that is hard to break.
Here are some essential dating questions that you should have your prospective partner answer before you think about getting a ring:
- Are you capable of protecting my company’s intellectual property?
- Will all factors of your pricing be transparent?
- Is your organization financially stable and capable of meeting my demand?
- Can you provide novel solutions to common problems that I may experience?
- To what extent do you employ lean manufacturing processes?
- What do past clients have to say about you?
As with any dating couple, transparency is key at this stage. When you get the answers to these questions, you should also expect to receive some supporting evidence. Once you determine that you want to move beyond dating, it is time to consider the marriage certificate, or in this case the Contract Manufacturing Agreement (CMA).
The pillars for maintaining a healthy relationship include communication, consistency and accountability. To achieve this with a contract manufacturer will require regular check-ins and a clear process for identifying, reporting and resolving issues quickly.
To ensure that you set up a good marriage, ensure that your CMA contains these 7 key elements:
- Non-disclosure Agreements (NDA): Prevent your soon-to-be spouse from spilling your secrets to those that come after you. Apple, for example, will always include an NDA in its contracts with third-party manufacturers to ensure that they have the element of surprise when revealing their latest products. If Apple makes this a standard part of their agreements, then you should too!
- Licensing Agreements: Without a licensing agreement, the contract manufacturer cannot legally manufacture a product. The licensing agreement is a crucial part of the CMA as it protects the contract manufacturer from receiving a lawsuit for trademark infringement.
- Purchase Orders (POs): You can establish specific terms of the transaction with the contract manufacturers through individual POs.
- Quality Standards: To ensure that the contract manufacturer maintains high-quality products and services, include stipulations related to quality standards. This saves time and effort in the long run and reduces the possibility of receiving sub-par products.
- Supply Chain Agreements (SCA): If your product requires further processing steps beyond a particular contract manufacturer, the CMA should include an SCA, which will improve efficiency and enable communication throughout the production process.
- Essential Processes: Oftentimes, contract manufacturers produce goods that go into various industries. To ensure that your contract manufacturer understands your products and commercial market, the CMA should define the terms for key processes including delivery, lead times, invoicing, and payment. Outlining the processes and defining the terms ahead of time will help to avoid headaches and frustration on both sides.
- Termination Clauses: This by far is the most important element of the CMA. To prevent a messy divorce, the CMA should address what happens when the relationship ends. The CMA should directly outline the circumstances in which the contract can be terminated (ie breach of the agreement or insolvency), and what happens to patents and intellectual property.
Before you start a CMA, you can review example manufacturing agreements to get a full view of their features to ensure your chance of success. Don’t let the price from your contract manufacture be the only determining factor for your decision to work with them.
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Q. What is the purpose of a Non-disclosure Agreement (NDA) in a contract manufacturing agreement?
Ans. An NDA is included to protect your company’s intellectual property and prevent the contract manufacturer from disclosing your proprietary information to others.
Q. Why is a Licensing Agreement important in a contract manufacturing agreement?
Ans. A Licensing Agreement ensures that the contract manufacturer has the legal right to manufacture your product without infringing on any trademarks or intellectual property rights.
Q. What role do Purchase Orders (POs) play in a contract manufacturing agreement?
Ans. POs establish specific terms and conditions for each transaction between you and the contract manufacturer, including pricing, quantities, delivery schedules, and other relevant details.
Q. Why are Quality Standards included in a contract manufacturing agreement?
Ans. Including quality standards ensures that the contract manufacturer maintains high-quality products and services, reducing the risk of receiving sub-par products and saving time in the long run.
Q. What is the purpose of a Supply Chain Agreement (SCA) in a contract manufacturing agreement?
Ans. An SCA is crucial if your product requires additional processing steps beyond the contract manufacturer. It helps improve efficiency, facilitates communication, and ensures a smooth production process.
Q. Why should essential processes be defined in a contract manufacturing agreement?
Ans. Defining key processes such as delivery, lead times, invoicing, and payment terms in the agreement helps both parties avoid confusion, delays, and frustration throughout the manufacturing process.
Q. Why are Termination Clauses important in a contract manufacturing agreement?
Ans. Termination Clauses outline the circumstances in which the contract can be terminated, such as a breach of the agreement or insolvency. They also address the fate of patents and intellectual property upon termination, preventing complications and ensuring a smooth transition if the relationship ends.