4 Pitfalls of Contract Manufacturing (and How to Avoid Them)

By ETQ on February 18, 2016

Contract manufacturing is on the rise, with companies from Apple to Xerox outsourcing production of their branded products. The approach is associated with several benefits like reducing overall costs and allowing companies to concentrate on core strengths like product design and marketing.

It’s also a key strategy for companies looking to shrink time to market, a crucial consideration in highly competitive industries like pharmaceuticals and biotech. In fact, experts peg the current value of the pharmaceutical outsourcing market at over $130 billion.

But what are the downsides that outsourcing companies need to be aware of? This post takes a look at some key issues companies should consider, plus what they can do to mitigate risk in those areas.

Loss of Control

Outsourcing necessarily means losing some element of visibility and control over the production process. This has several implications for the company, including:

  • Loss of critical knowledge and skills around production techniques.
  • Supply chain issues related to poor quality or questionable materials (like conflict minerals).
  • Increased vulnerability to problems in the contract manufacturer’s facility, which can increase costs and extend production schedules.

Quality Issues

One big implication of outsourcing production processes is a loss of control over the quality of finished products. It’s an important consideration for industries like food processing and pharmaceuticals, where quality issues can threaten the health of consumers (and ultimately damage the outsourcing company’s reputation).

Intellectual Property Risks

According to the National Crime Prevention Council, more than 10 percent of all pharmaceuticals in the world are counterfeit. In some countries, that number approaches a staggering 70 percent. Counterfeiting is a huge intellectual property issue, and companies are rightly concerned about sharing their information with contract manufacturers.

Competition is another big risk. As many companies have seen, giving contract manufacturers access to intellectual property isn’t just a matter of leaking secrets to competitors—the contract manufacturer itself might just become your competitor.

New Product Introduction (NPI)

When introducing a new product to the market, companies need to have a strong plan for communicating requirements and expectations to contract manufacturers in order to avoid crucial missteps.

That’s because new products often involve several components and subassemblies, leading to multiple sub-projects with many moving parts, so to speak. Last-minute design changes, manufacturing delays and cost overruns can all torpedo your product rollout, putting your investment (and your relationship with the contract manufacturer) at risk.

How to Protect Your Company

First and foremost, you should focus on strengthening your Supplier Quality Agreement (SQA), which outlines quality and compliance responsibilities for both parties. Once you have a strong agreement in place—one that addresses key aspects like intellectual property ownership, delivery commitments and liability for failures—you can start exploring how to use your existing Quality Management System (QMS) to manage and track the contract manufacturing process.

Applications aimed at improving supplier quality are especially helpful, allowing you to extend your company’s quality objectives down the supply chain, promote regulatory and standard compliance and monitor supply chain risks. Key capabilities to focus on include:

  • Project Control applications to manage NPI projects from start to finish. This allows you to collaborate with the manufacturer while protecting your intellectual property via controlled access to the QMS.
  • Corrective Action and Complaint Handling tools to address any issues that come up in a timely manner. Effective problem resolution is an important part of preventing ballooning costs and project delays later on.
  • Supplier Quality Management software that facilitates supplier compliance and tracks key metrics for contract manufacturers, giving you a big-picture view of overall performance.

Finally, your company should put risk at the center of the decision-making process. Again, this is an approach that’s best supported via the QMS, using quantitative Risk Assessment tools like risk matrices and decision trees that can be incorporated into various applications.

When we talk about the challenges of contract manufacturing, most of those challenges come down to risk mitigation. At the end of the day, how your company approaches those risks is what determines whether contract manufacturing presents a liability or a competitive advantage.