Originally Published MX January/February 2004
BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT
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Challenge: A device manufacturer signs an exclusive supply agreement with an outsourcing company for a small new product. When the agreement ends, the product is generating more than half of the manufacturer's revenue, and the company is concerned about how much it should risk with a single outsourcing firm. What are the manufacturer's options to reduce its risk, and how can outsourcing firms help?
It is expected that the manufacturer initially investigated the risks involved in partnering with the outsourcing firm by evaluating its financial strength, management stability, experience, and technical competence. At renewal time, the manufacturer should continue to feel confident in its original assessment. But in addition, the manufacturer can now analyze the partnership in terms of actual past performance, improvements, cost savings, customer service, and product quality. If all such elements remain positive, renewing the exclusive agreement may be the manufacturer's best option.
The outsourcing company has invested considerable time and effort to support the early stages of the product and is integral to its success. Continuing with an exclusive agreement reduces the risk to the manufacturer, because the outsourcing firm is expert in manufacturing the product. The renewed contract should stipulate that the outsourcing company will provide the resources necessary to ensure an uninterrupted supply of the product. With trust and good communications, both companies are poised to continue benefiting from the product's sales growth. —Gil Reich, vice president, The MedTech Group Inc. (South Plainfield, NJ)
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