Should You Contract Out Manufacturing?
by Wendy Priesnitz

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.

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