Maximizing Manufacturing Contracts

by | March 9, 2010

Over the past 18 months, many great ideas and inventions have come to the surface.  Maybe creativity and innovation is correlated with high levels of unemployment…  I haven’t looked into this but it makes sense.   Whatever the reason, we’ve seen more new products and concepts coming to market and our patent lawyer colleagues had a great year in 2009.  Along with these new concepts, though, arise many questions about how to take a product to market.  Often, an inventor or entrepreneur creates a prototype or manufactures small batches themselves.  At some point, they need to scale manufacturing but most people don’t have any idea how to do so.  There are a number of different models for manufacturing but most product innovators use contract manufacturing as their solution.   

Contract manufacturing is where the manufacturing process is outsourced to a third party.   The question always arises as to whether a company should manufacture locally or overseas.  It is important to interview multiple manufacturers and, if possible, visit their facilities to see first-hand what goes on.  You want to build a trusting relationship and many product companies want to ensure certain standards of living and working conditions are promoted by the manufacturer. 

After interviewing manufacturers, make sure you take the next step – the contract.  A critical component of managing your contract manufacturing relationship is the contract itself.  Below are some key points that need to be addressed in any contract for manufacturing.

Volume and Pricing.  When talking with manufacturers, a key question is “How much will it cost me?” In many cases, volume and price are inversely related – as you purchase higher volumes, costs decrease.  Even if your volumes are low to begin with, understand the cost structure as volumes increase.   The agreement should also spell out any rules for changing of pricing structure.   Payment terms should also be negotiated so that you ensure sufficient cash flow for operations.

Licensing Rights.  When a manufacturer puts your trademark on a product, you are granting the manufacturer a limited license to use the mark on the products.  It is important to clearly describe what rights the manufacturer has to use the mark. 

Intellectual Property Protection.  In addition to the license agreement, often a company’s proprietary information is shared with a manufacturer.  Confidentiality agreements are critical to ensure the manufacturer keeps the proprietary information confidential.  Sometimes, a non-compete agreement can be reached with the manufacturer so they are limited from manufacturing certain competitors’ products.  

Quality Control.  As the product manufacturer, you want to be absolutely certain that you quality specifications are adhered to and that the contract addresses how quality will be monitored as well as remedies for quality failures. 

Liability.  In the case of a lawsuit, most parties in the supply chain, from the inventor to the distributor, will be named as parties to the lawsuit.  The contract with the manufacturer should clearly provide for reimbursement, or “indemnification,” for a party that incurs costs that are solely the fault of the other party.  Other limitations on liability may be appropriate as well as a requirement that each party maintains a certain level of insurance coverage during the term of the agreement. 

These are core concepts that should be in any manufacturing agreement.  Of course, each relationship is unique and it is important that you work with an attorney that can craft specific provisions that protect your interests and maximize the value of your manufacturing relationship. 

Join us on March 24 for a roundtable discussion on Maximizing Your Manufacturing Relationship.