Manufacturing agreements are one of the first contracts that you’ll need in the FMCG world. And they can be challenging because manufacturers can hold the upper hand if they’re large/you’re a small business and/or you don’t have many options.
Our Rebecca De Lorenzo, who has loads of FMCG experience, has some top tips for making it easier and ensuring this key contract helps set you up for success.
1. Do your due diligence before you decide on a manufacturer
Check their financial, regulatory and compliance position – you need to know they will be in business for some time. Depending upon your sector, the product and the location of the manufacturer, additional checks may be needed to ensure ethical and environmental standards are met – failure to do so could damage your brand.
2. Don’t appoint a manufacturer on an exclusive basis if you don’t have to
It’s risky to put all your eggs in one basket. What if something goes wrong? Ideally have more than one and/or a back-up plan.
3. Be crystal clear about the end-product (and when you want it)
Set out the specification and quality you require carefully, avoid any ambiguities and include production and delivery schedules.
4. Make sure the contract protects against nasty surprises
Get clarity from the manufacturer about pricing, potential price changes, expenses (e.g. cost of bought-in materials/ components), etc. Ensure you have a right to walk away if the manufacturer deviates from these without your agreement.
5. Don’t sign up to minimum volumes (monthly/yearly/rolling) without very careful thought
Manufacturers often need a minimum order to go to production, but that can be expensive if your business slows down for any reason.
6. Protect your Intellectual Property (IP)
A very well known example of this is the Coca Cola recipe. Disclose to the manufacturer only what is necessary (which may be a lot). Ensure you have processes and protection in place to manage disclosure and confidentiality. Make sure the manufacturer can only use information for the purposes of manufacturing your goods. If the manufacturer is helping you develop (or enhance) products, will you own the design/recipe or share ownership? What about if you are restricted from using shared IP after the agreement ends?
7. Make sure you have exit (or extension) rights
Work through what you want to happen at the end of the relationship and make sure your contract adequately reflects this, i.e. a good quick handover to a new manufacturer.
8. Include a right to audit the manufacturer’s records and processes
…. within an agreed timeframe, and to require changes if you reasonably think these are needed.
9. Think about the unthinkable
What’s the worst that could happen? Deal with product recall procedures, liability and insurance. Think of what might go wrong and what each party should have to do and pay in those circumstances.
10. Don’t’ forget insurance
Speak to your broker about what policies you need to put in place.
And finally…
Any ‘standard contract’ provided by the manufacturer will be drafted to benefit them, so don’t sign without reading it and getting advice/help. Investment in good legal advice to protect your business will pay further down the line. At a minimum it’s an insurance policy.
How can we help you?
Rebecca can help by reviewing your manufacturing contracts, advising on drafting and negotiating better terms. Get in touch on info@legaledge.co.uk
