Before you sign on the dotted line

Herbalife International?s contract manufacturing director Colin Whittington identifies six important areas to evaluate before inking a deal with a contract manufacturer

Signing a contract with a contract manufacturer is no small commitment. What are the key issues you should consider before signing on the dotted line?

The scope of the contract should be clearly defined as this can impact the detail and depth of the contract, as well as the cost.
Is it a manufacturing-only contract with defined processes, or is product development an important part of the relationship? It is important to ensure that the product development responsibilities are highlighted and also how this work is compensated for. Most important is ?ownership? of any formula, process or method developed during the outsourced process.

The quality standards, associated QA/QC tasks/work/operations and the analysis requirements for each production run should be discussed and agreed upon.
Responsibility for incoming inspection (including free issue goods), in process inspections, and finished goods inspection tasks are not free, and therefore the scope and cost of these quality activities need to be clearly defined. In addition, laboratory tests such as actives purity testing, actives levels in finished goods testing, micro testing, verification of input, etc, can be expensive.

The type and extent of the tests carried out on bulk and finished goods vary from supplier to supplier and so they must be clearly defined and agreed upon. This is key to a successful outsourcing supply chain at standard costs.

The pricing and the pricing structure should be agreed upon.
The purchase price needs to be agreed upon and stated in the contract as an attachment so that any purchase orders reflect the agreed pricing at the price break parameters.

The pricing structure should also be established in terms of which price break parameters and price drivers (materials, quantities, labour rates, production runs and production cycles, batches etc) can vary the price, and what the trigger levels for these are.

The price review period needs to be defined so that both parties understand the commitment and the time scales.

The agreed lead times for the order placement process, component and product delivery, and modification of orders need to be agreed upon and stated.
It is important that the various ?lead times? within the supply chain are known and included so that both supplier and client understand the supply chain process. Time for delivery from a purchase order, times for delivery if components are changed, time period where the order could be adjusted, lock-in date for the production run, etc, can impact both the product supply and the product cost, and therefore should be negotiated within the contract.

Delivery and payment terms need to be agreed upon using a body of regulations, such as Incoterms.
The agreed time for payment of invoices should be agreed upon, as should the transfer of product title, export information, etc. Ex works, FOB, FCA are all terms where the product is collected at the manufacturer?s facility, but the transfer of title is slightly different and can become an issue. This very minor clause can also impact import into non-EU countries.

The performance standards for measuring the contract need to be agreed upon and stated.
This is important for both parties as this can ensure the supply chain is operating correctly. It can also be the grounds for contract breach and end of agreement, and so the performance indicators must be specific, measurable, achievable (industry standards) and reliable indicators to true performance.

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