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Supply Chain Insights

What to look for in a manufacturing contract

From the different types of manufacturing agreements to the type of manufacturer itself, manufacturing contracts are confusing! Dive into some helpful tips!

Contract manufacturers (CM) take ideas and turn them into reality by providing manufacturing services like packaging, warehousing, and distribution. However, CMs are businesses just like yours — they have their own goals, needs, and challenges that can impact how well they work with you as a partner. If you want to succeed with your manufacturing business relationship, here are some things to consider:

What is a manufacturing contract?

A manufacturing contract is a legal agreement between a business and its supplier. It’s essential to running any business and can help you stay on budget and avoid unexpected costs.

A manufacturing contract lays out who does what, when it must be done, how much each party is responsible for, and who pays for what. A good manufacturing contract will also include:

  • Delivery dates: The time frame in which your product needs to be delivered should be clearly defined in the contract so that both parties are clear on what’s expected of them at all times, as well as specific milestones along the way.
  • Quality standards: Established by both parties upfront will help minimize problematic issues later down the road (like getting sued because something didn't meet expectations).
  • Quantity requirements: Be sure they're stipulated clearly enough so there aren't any misunderstandings later on down the line either!

Benefits of a manufacturing agreement with your CM

The benefits of a manufacturing agreement with your CM can be substantial. You will realize cost savings by removing the need to purchase raw materials, store inventory and pay for shipping. Your CM also provides distribution services that allow you to sell products directly to consumers without having to worry about logistics.

Another advantage of outsourcing your manufacturing is that it allows you to focus on core competencies while still creating value for customers. With greater flexibility than a production line requires, you can implement new product lines quickly in response to market demands or changing consumer tastes.

Key components of a contract manufacturing agreement

A contract manufacturing agreement (CMA) is an important legal document that outlines the relationship between a manufacturer and the company they are producing products for. This article will cover some of the key components to look for when choosing a CMA, including:

  • Essential processes
  • Licensing agreements
  • Non-disclosure agreements
  • Purchase orders
  • Quality standards

The most popular manufacturing contracts

Although there are other types of contract manufacturing agreements, they tend to fall into one of these four categories: OEM pricing model, fixed materials pricing, component cost pricing, or cost-plus pricing.

OEM Pricing Model:

OEM stands for "original equipment manufacturer." It's a pricing model for hardware companies and contract manufacturers that allows the company to buy a product from another company, then sell it under their own brand.

Fixed Materials Pricing:

This is a common way to get a price quote for your product. The manufacturer will provide a list of materials they use and their prices, then you can decide how much profit margin you want to make on each unit, and the cost per unit will be calculated automatically. This is great because it allows you to see exactly where your money is going at every step of the process.

Component Cost Pricing:

This is a little more difficult to calculate because it depends on how much your components cost. It allows you to price your products based on the cost of the components used to make them. This means that if you buy your parts at a lower price, you'll be able to sell your product at a lower price, too.

Cost-Plus Pricing:

This is a pricing method that allows you to set a profit margin and then add on the cost of materials and labor. This is great if you want to make sure that your product is profitable but don’t want it to be too expensive for consumers.

Make sure you can get out of the contract if you need to.

Regardless of the type of manufacturing agreement, when you're reviewing a contract, make sure that the terms allow you to get out of the contract if things don't go according to plan. It's best to create a trial run before signing a long-term agreement. Make sure that the payment terms are clear and easy to understand so there are no surprises at the end of production. Also, give yourself enough time for review and edits—this process can take longer than expected!

Give yourself enough time for review and edits.

When you’re reviewing and negotiating a manufacturing contract, you need to make sure that you have enough time to review all of the terms and conditions. This includes understanding how much time it will take to make a prototype, how much money is set aside for design changes, who covers the cost of shipping and insurance, etc. All of these things can affect your bottom line—so be sure to give them ample consideration!

If you have any questions about anything in the contract be sure to contact a registered lawyer!

Things to watch out for.

One of the most common issues we see with manufacturing contracts is that they often overcharge because of their negotiating power. For example, if you want them to take on alternate component sourcing, they may offer this component shortage risk mitigation as a service but charge way too much money.

With Amplio, you can handle component shortages on your own in just a few minutes. That way, you can always have the analytics and risk mitigation you need for a fraction of the price and in your control.

Off to the races!

Hopefully, this article has given you a better idea of what to look for when negotiating a manufacturing contract. Remember that these are just general tips, and there are many other factors that go into the deal. The most important takeaway is to be sure to research your options thoroughly and make sure that the contract is in your best interests before signing it!

Written by
Terry Jeffords

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