Q:
I have a product that has been test marketed and is ready to
be manufactured and put onto the market. Due to past experience as a
salesman in the same industry, I have a number of prime accounts
lined up, ready to sell as much as I can produce. I have been
advised by a couple of people I trust to contract out the
manufacturing instead of doing it myself. Could you outline to
advantages and disadvantages of this small business strategy?
A: There are a number of significant advantages to
contracting out the manufacturing part of your business, especially
since you seem strong in the sales end of things.
A major advantage may be financial. You can use the
subcontractors money instead of tying up your own capital to
create production facilities. Having a ready-made production
facility will also allow you to generate revenue more quickly than
if you took the time to build and break-in your own facilities.
Perhaps just as importantly, using a subcontractor
will allow you to establish your production costs at an early stage
of business planning. There would be an initial degree of
unpredictability involved with undertaking the manufacturing
yourself. Using a subcontractor will eliminate that uncertainty and
allow you to be more confident in estimating your costs and in
setting your prices.
There are other advantages, which are related to the
best use of your time and talent. Leaving the manufacturing up to
someone else will allow you to concentrate on developing and
stabilizing your business without worrying unduly about the details
of quality issues and production volumes. It will free you up to
develop and expand the market for your product, an area where you
obviously have a great deal of expertise.
Allowing an expert to look after producing your
product will also mean you can take advantage of their technical
knowledge in order to fine tune the manufacturing process and to
prevent your product from becoming obsolete.
Having described these important advantages of
contracting out the manufacturing process, I should caution you to
be very careful to choose a suitable subcontractor.
You may find that a subcontractors per-unit cost
is higher than if you did the work yourself. Weigh that against the
advantages and be sure the extra cost allows your price to remain
competitive.
Research the subcontractors history of meeting
production deadlines before your commit to an agreement. Then draft
an iron-clad contract that will protect you if the company fails to
deliver the quality you need, on time.
You should also protect yourself with non-disclosure
and non-competition agreements that will discourage the
subcontractor from divulging trade secrets about your product or the
manufacturing process.
