Outsourcing manufacturing can offer a strategic advantage, allowing businesses to focus on core capabilities while tapping into the efficiencies and expertise of specialized, third-party manufacturers. But like any complex commercial arrangement, success begins long before the contract is signed. Taking the time to align corporate objectives internally and vet external partners helps ensure long-term, desired outcomes. Below, we outline five steps to consider before negotiating an outsourced manufacturing arrangement.
1. Define Manufacturing Requirements
Working as a cross-functional team—including legal, operations, finance, and product development, the first step often involves defining the company's manufacturing needs, with attention to core elements, such as:
- Product Specifications: List materials, dimensions, required components, and quality standards.
- Compliance Requirements: Identify relevant ISO1 certifications, safety standards, or industry-specific regulations.
- Quantity: Determine expected production volume (initial and projected growth).
- Lead Time: Define production and delivery lead times.
- Budget: Establish cost parameters, balancing quality and price.
- Tariff Considerations: Evaluate how a manufacturer's geographic location could affect import duties and tariffs, shipping costs, or pricing structures.
This information may help to establish a framework for targeting and assessing potential manufacturers, guiding the selection process and alignment across corporate stakeholders
2. Conduct Diligence on at Least Two Vendors
It's easy to become overly committed to the first manufacturer that looks promising. Keeping two viable options in play can provide leverage and curtail "escalation of commitment" to a suboptimal partner. A strong due diligence process can:
- Examine the manufacturer's reputation, quality and compliance record, and litigation history.
- Request client references, and consider asking the references open-ended questions like,"Is there anything you wish you had done differently in working with this manufacturer?"
- Request product samples and perform your own quality testing.
- Explore the possibility of a short-term trial engagement (e.g., 3–6 months), before entering a longer term commitment (if applicable , ensure that proper IP protections are secured before sharing any proprietary designs or product specs).
- Determine if the goods to be manufactured are subject to tariffs or whether they may be exempted. If tariffs apply, verify the applicable tariff rate per the US Harmonized Tariff Schedule (HTS).
3. Develop a Detailed Scope of Work and Product Specifications
Address the following in the Scope of Work and Product Specifications. The more precise your product requirements are, the fewer surprises that may arise down the line, including:
- Precise specs like dimensions, materials, tolerance levels, functional components.
- Packaging, labeling, and branding requirements, including, review of and adherence to any applicable regulatory requirements.
- Specific features—even if they are "standard" in the industry.
- Compliance requirements, such as (a) requiring the manufacturer to adhere to your company's Supplier Code of Conduct (with a link it it), and (b) requiring the manufactured product to meet all applicable regulatory standards (e.g., FDA, ASTM) .
4. Set Clear Quality Control and Acceptance Terms
Address quality control requirements up front and in detail, such as:
- Define testing, inspection, and acceptance protocols on both sides.
- Allow for reasonable rejection periods after delivery and consider pro/con of "automatically accepted" timeframe.
- Specify how defects and non-compliance with quality standards will be remedied.
- Address warranty terms (including duration and remedy).
- Plan for possible recalls by outlining the procedure (e.g., which party leads, cost allocation, and communication plan).
5. Establish Realistic Timelines and Delivery Schedules
Reliability matters as much as product quality. You could address in the following ways:
- Define production lead times and delivery milestones.
- Build in flexibility for unforeseen delays.
- Specify remedies (e.g., credits or penalties) for missed delivery deadlines to help mitigate potential disruptions to your supply chain.
Investing time in this pre-contract diligence often pays off in smoother negotiations, stronger supplier relationships, and fewer surprises. By going through this process, you also have the tools to build a requirements checklist to help narrow down the field of potential manufacturers and set the stage for a contract that reflects your company's business objectives.
Stay tuned for Part 2, where we'll break down the key contract provisions for outsourced manufacturing agreements —from IP protection to termination rights.
Footnote
1. ISO standards are a set of internationally recognized guidelines, specifications and criteria developed by the International Organization for Standardization. ISO standards ensure the quality, safety, efficiency and consistency of products, services and systems across various industries and provide a common framework for global organizations to follow.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
