Insights / August 1st, 2016

Manufacturing - sourcing offshore production

For several of our clients, cheaper base production costs may be offset by difficulties in communicating clear requirements, high or unexpected set up costs, dealing with ‘political’ or administrative requirements, risks of losing their IP, long lead times, inconsistent quality control, large minimum quantity demands and relationship and distance management.

These things can add cost quickly but the costs may not be always obvious. Here are some tips our clients have learned, too often the hard way.

Proceed with caution!

Establish a relationship with an offshore manufacturer using a similar process, but a higher level of caution, as you would use to build a relationship with any local supplier. Do your research and seek advice in finding the right partner that will deliver to your requirements, support your goals and protect your business interests. Don’t just default to the first manufacturer that shows interest or the manufacturer someone you met in the pub said was good.

Finding the right partner

Product development is (mostly) done and now you’re looking for a manufacturer. Whether you look locally or overseas, here are some practical considerations:

  1. Inbuilt expertise and experience.

    Find out about what type of products potential manufacturers make. If they manufacture products similar to your own, they will already have a level of inbuilt expertise and experience, implying fewer growing pains in adapting to your manufacturing requirements. The downside risk may be that they are better able to knock off your IP so protect your IP as best you can.

  2. Checking in on product quality.

    You will have your own expectations and specifications for your product outcomes; the finish, the workmanship, the precision. Hands on checking of samples and products made by the manufacturer is important to see if can match the quality you are seeking. Also consider how you will work with the manufacturer to specify requirements and address imperfections. In general, the greater level of control and interaction you need, the higher the cost is likely to be.

  3. Social proof.

    Nothing beats hands on experience. Speak with other customers who use this manufacturer to find out what it’s like to work with them. Read reviews and recommendations. Who else do they work with that gives you confidence in using them too? The manufacturer won’t give you the contact details for a customer that had problems so you may need to do your due diligence.

  4. Protecting your design and ideas.

    Think about how you should protect intellectual property before you enter the relationship or even before you start talking. Confidentiality agreements (CA) are essential but bear in mind you need to find out about a breach before you can enforce the CA terms. You may also need to deal with a legal system that is not as helpful to your cause as you would like. I recommend you don’t deal with someone if you think there is a real chance you may need to resort to the CA. Patent, design and trademark registration (and in some countries, copyright registration) in your own country and others you contract to and operate in is important, as is consideration over how you will protect any trade secrets. In any manufacturing contract, make sure that these are protected, as well as any IP developed as a result of working together. Absent an agreement to the contrary, the manufacturer will likely own IP rights it develops. This can be a real complication so get IP ownership terms in place.

  5. Be aware of pricing inclusions and exclusions.

    Be across production of samples, including the cost, before proceeding with full run production. Make sure you understand the cost implications of making further refinements to your product, minimum run quantities, the quantity / cost relationship and pricing structures. Look beyond manufacturing costs towards in-market delivery. It’s obvious but the cost of getting your product to market can eat into your margins.

  6. Communication.

    You’ll need to work closely with your manufacturer for new stock orders, lead times, product quality issues, delivery and a whole range of business communications. Being comfortable with your two way communication, developing a common understanding, being responsive and timely is important.

  7. Time has a cost.

    Production lead times can make or break a business or product launch, impacting cash flows, customer relationships and reputation and giving competitors and edge. Be clear on best case and worst case production lead times and plan your marketing and management around this.

  8. Contracting the right business.

    Make sure that you are entering a contract with a proper foreign entity and you have measures in place to protect your interests. Contacts ‘off the shelf’ or ‘off the internet’ are rarely the right choice. You want a contract that properly addresses the terms important for making the relationship work well.

  9. When something goes wrong.

    Whether working across borders or within your domestic environment, product liability and warranty needs to be addressed in your contract and via insurance policies. Indemnity provisions are common, so consult with a lawyer to ensure that you get this right. Also think about how you will address potential contract infringement, where will a dispute be decided and whose law and language will apply. People often think these terms are just the agreement boilerplate clauses but they can have a major tactical impact in the event of a dispute.

As with any business dealing, proper due diligence at the outset can prevent problems in practice. We have many in-market contacts around the world and keeping connected with them has enabled us to support clients to reduce the risks associated with cross border transactions.

Cowell Clarke is a member of ALFA International the global legal network. We have local relationships worldwide that support clients to transact and operate in foreign countries. ALFA International provides some great resources on this topic. You can read ‘Considerations for contracting with foreign manufacturers’ here or contact me directly to discuss your situation.