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When expanding your business and developing new products, your relationship with your manufacturer is crucial. While engaging a manufacturer is necessary, it does involve some legal risks. It is, therefore, crucial to undergo due diligence before engaging a manufacturer, to:

  • ensure that they are a right fit; and
  • ensure that they understand your business needs; and
  • address potential risks that could cause disputes arising down the track. 

This article will outline some useful steps and considerations when conducting due diligence before engaging a manufacturer.

Finding the Right Manufacturer

The success of your business will often depend on the quality of your product. So, finding the right manufacturer will save you time and money in the future. As with any business decision, conducting research is essential when searching for manufacturers. You can search for manufacturers:

  • online;
  • by attending industry events or exhibitions;
  • on industry databases or association websites; and
  • through talking to businesses selling similar products for personal recommendations.

Research & Compare Manufacturers

Once you have compiled a list of potential manufacturers, you should do your research and compare their different services and offerings. This will assist you in determining which manufacturer best suits your business plans and goals. When deciding on a manufacturer, you should take note of the following key factors.

Price

Your budget affects all aspects of your business. However, cheaper does not always equate to good value for your money. 

While a lower priced manufacturer may help with cash flow when starting out, compromising on the quality of your products runs the risk of damaging your business reputation and having unsatisfied customers.

Large vs Small Manufacturers

Larger manufacturers are likely to have the resources and systems in place to ensure that if anything does go wrong, they can adequately remedy it.

However, it may be easier to develop closer and stronger business relationships with smaller manufacturers.

Stability

When researching manufacturers, you should take note of their experience and how long they have been in business. Experienced manufacturers with a good track record may be more suitable for your business.

However, a new manufacturer may be able to provide you with a more personalised service.

Location

Local manufacturers are likely to have shorter delivery time frames and low freight costs. But, they may be more expensive. 

However, overseas manufacturers are likely to be cheaper, but have longer delivery time frames and extra freight costs. Therefore, if you are ordering your products in bulk, you may be able to negotiate shipping costs.

Equipment You will need to consider whether the manufacturer has the equipment to manufacture every aspect of your product. If not, you will you need to engage multiple manufacturers to each create specific parts of your entire product.

 

Get to Know Potential Manufacturers

After narrowing your list of potential manufacturers, you should reach out to discuss working with them and obtain quotes. You may need to discuss the specifics of your product with manufacturers for them to provide you with information on how they can best assist you. When discussing your product with manufacturers, it may be crucial to ensure they sign a non-disclosure agreement (NDA).

An NDA is a legal contract that protects your intellectual property and confidential information about your: 

  • products; 
  • designs; 
  • business; and 
  • plans.

An NDA ensures that your manufacturer will not take any of the information you reveal during meetings and use it to sell your products as their own. They also will not be able to disclose any of your information to others.

Questions to Ask

When discussing your product with potential manufacturers, you should ask the right questions and request as much information as possible. This will help you make an informed decision. This table details some of the information you should gather.

Negotiating Power When dealing with manufacturers, especially large and experienced ones, you should ask about all of your options and whether you have the flexibility to negotiate any terms.
Scope of Engagement

You can use a manufacturer for more than just producing your products.

For example, your manufacturer might be able to also distribute your products. They could also even actively represent your brand through sales and marketing.

Quality Assurances

You should ensure that your potential manufacturer has the appropriate licences and permits.

For example, to manufacture chemicals (to create soap, paint, cosmetics or cleaning products), businesses must be registered with the National Industrial Chemicals Notification and Assessment Scheme (NICNAS).

Reliability You should ensure that you can count on your manufacturer to deliver your products on time and with consistent quality. Having a reliable manufacturer will allow you to manage your stock and your customers’ expectations when setting delivery times.
Samples and Prototypes Making sure that manufacturers will be able to produce your products is crucial. So, you may wish to ask them to create a prototype or sample of your product before formally engaging them as your manufacturer.

Manufacturing Agreements

Once you make a decision on which manufacturer best suits your business, you should ensure you have a manufacturing agreement in place. A well-negotiated and well-drafted manufacturing agreement can reduce any future disputes with your manufacturer. It should clearly define the obligations of both your manufacturer and yourself. 

Most manufacturers, especially larger ones, will provide you with a manufacturing agreement. However, some manufacturers may request you to draft one.  

A manufacturing agreement typically addresses the following terms:

  • length of engagement – consider whether you need your manufacturer for a one-off project or for an ongoing period;
  • scope of engagement – the agreement should stipulate what, exactly, your manufacturer will assist you with; and
  • intellectual property (IP) – your agreement must state that you will retain all the intellectual property rights in the product.

Key Takeaways

Before engaging a manufacturer, it is crucial to do your due diligence by: 

  • conducting research;
  • getting to know them; and 
  • weighing up your options based on your business needs and plans. 

After completing your due diligence, you should negotiate a manufacturing agreement to outline the scope of your relationship and minimise any future risks. If you have any questions about engaging a manufacturer, get in touch with LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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