Hiring a contract manufacturer has many advantages, but there are some potential risks to be aware of. Issues such as quality defects, late delivery, and cost overruns can all pose a threat to your business, so it’s important to have effective risk management strategies in place.
To help manage these risks, vet potential contract manufacturers carefully and always draw up a legally binding agreement. You’ll also need to identify, assess, and prioritise the specific risks to your business. And of course, you should put together a comprehensive contingency plan to minimise disruption if something does go wrong.
In this post:
Identifying risks in contract manufacturing
Before entering into a legal agreement with a contract manufacturing company, make sure you’ve done your due diligence. Research the company thoroughly and take a tour of their facilities. This will give you the chance to inspect their equipment, meet the team and establish whether they’ll be able to perform the job to a high standard.
It’s important to remember that even after you’ve screened potential contractors, there will always be some level of risk. Depending on the nature of the risk, this could result in financial losses or reputational damage.
Here are some of the risks you should identify and assess before hiring a contractor manufacturer.
1. Quality control and assurance
Quality control and quality assurance might seem interchangeable, but they’re actually distinct concepts. The former primarily involves testing batches of finished products for possible defects and identifying those that don’t meet the required quality standards. Quality assurance, however, is a more proactive process that involves researching, designing, and prototyping products to ensure they comply with the quality standards before they’re mass-produced.
Before hiring a contract manufacturer, familiarise yourself with the company’s best practices and quality protocols. Choosing a contractor that has strong quality accreditations, such as ISO 9001, can also reduce the risk of potential problems later on. Here at ReAgent, quality is at the heart of everything we do and we hold various quality standards that ensure our customers receive the best possible service.
2. Intellectual property concerns
Whether you’re hiring a contract manufacturer to produce components or finished products, you should be aware of any potential intellectual property issues that might arise. This is especially true if you’re outsourcing production to contract manufacturers in other countries.
Some products may be locally patented and you could find yourself caught up in a costly and damaging legal battle if you’re not careful.
3. Supply chain interruptions
Of course, contract manufacturers will also have their own subcontractors and suppliers. Although you won’t have direct control over these third parties, it’s worth doing some research to find out more about them and their reputation.
This will enable you to identify potential risks and supply chain disruptions. You can then devise a comprehensive contingency plan to mitigate these risks and help protect your business.
4. Communication barriers
If you’re working with a contract manufacturer in another country, language and communication can sometimes pose a challenge. However, these barriers extend beyond merely linguistic differences.
Interpreting and understanding industry specifications, best practices, and standards can also be tricky. To minimise the risks of miscommunication, it’s best to adhere to commonly accepted and agreed standards wherever possible.
Approaches to strategic risk management
Strategic risks are anything that can potentially hinder or jeopardise your business strategies. To help prevent possible losses and long-term damage to your business, you’ll need to identify and assess these risks early on so you can formulate the necessary contingency plans.
An effective strategic risk management process should include the following:
- Identifying risks – pinpoint the specific risks for a particular aspect of your business operation. For example, supply chain interruptions are a common risk because of the multiple factors that are beyond your control. This risk usually increases if you outsource your manufacturing needs.
- Quantifying risks – risks are measurable in terms of probability. There are various tools and actuarial tables you can use to quantify certain risks, for example, the likelihood of accidents in the workplace. You can also analyse large amounts of numerical data to measure potential risks and possible outcomes.
- Mitigating risks – once you’ve identified and quantified the risks involved, you can then put together contingency plans and safety nets to deal with them. This can help to minimise the impact or potential damage to your business.
When it comes to managing risks in contract manufacturing, some aspects of the general strategic risk management framework still apply. For example, you’ll need to regularly monitor key performance indicators (KPIs) and key risk indicators (KRIs).
Here are the three main aspects to consider if you want to manage the risks associated with contract manufacturing.
Selecting the right contract manufacturer
Prevention is the best way to minimise risk – that’s why it’s so important to do your due diligence when choosing a contract manufacturer. Don’t just opt for the closest company; aim to compile a shortlist of several potential candidates. Research them all thoroughly, do background checks and, if possible, visit their premises.
It might take time and effort, but searching for the right contract manufacturer will help you build an efficient and productive business relationship while minimising risk. For tips and advice on how to find the best contractor for your needs, read our post ‘How to find a contract manufacturer in the UK’.
Comprehensive agreements and contracts
Once you’ve chosen a contract manufacturer, draw up a detailed and comprehensive contract manufacturing agreement. Be very specific about the standards you expect and make sure the contractor has a clear understanding of what you want.
The contract should also explain how any mistakes will be corrected and what will happen if the quality falls below the agreed standard. Read the draft contract carefully and don’t be afraid to make modifications if necessary.
Regular audits and quality checks
Relying on a contractor’s own internal quality assurance and quality control procedures isn’t enough. Consider conducting audits and checks periodically based on the agreed KPIs and quality standards. This will help to ensure the products or components continue to be made to a high standard. You might also want to conduct random sampling of the finished products.
At ReAgent, we welcome customer audits and appreciate how important they can be. Whether you’re an existing client or a prospective customer, you will always be treated in a hospitable manner and we welcome any feedback you might have.
Outsourcing your manufacturing comes with some risks, so it’s important to put measures and practices in place to manage these threats. Once you’ve identified and quantified the potential risks, you’ll need to draft appropriate contingency plans. You can further mitigate the risk by researching potential contract manufacturers before you sign any agreement. After you’ve chosen a company to partner with, draw up a detailed contract and conduct regular audits and quality checks.
ReAgent offers high-quality contract chemical manufacturing services to businesses from a range of industries. Read our complete guide to contract manufacturing here or contact our friendly team to find out more.