Got It Made
The duct tape and staples worked fine for your prototype. At some point, however, if you want to reach the market, you'll need to transform your idea into a finished product and produce it in large quantities. Therefore, you need to find a manufacturer whom you can trust to turn your idea into reality. But where can you find one?
The first and easiest step is to contact friends, business associates, former clients, customers and anyone else you know to see if they can recommend someone they trust. Finding a trustworthy manufacturer can take time. If these associates can shorten the process, all the better.
Your next step is to contact trade associations. Generally, if a manufacturer is a member of a trade association (or its local chamber of commerce), it at least wants to be viewed as reputable. Associations that will provide you with information on their members tend to screen them and weed out those with poor reputations or unscrupulous business practices. The American Electronics Association, for example, produces a roster of its members and cross-indexes them by type of business. To find the appropriate trade association for your needs, most libraries have two reference books: the National Trade and Professional Associations of the United States (Columbia Books Publishers) and the Encyclopedia of Associations: National Organizations of the U.S. (Gale Research).
Another helpful reference guide is the Thomas Register, a multivolume set of cross-referenced books on the manufacturing of nearly every product made or sold in the United States. Keep in mind that the Thomas Register, which can be accessed on the Web at www.thomasregister.com, does not tell you how reputable the listed manufacturers are.
Once you have a list of potential manufacturers and the appropriate contact people, prepare a verbal presentation before speaking with them, so that you can explain clearly what you want.
Approach manufacturers with a phone call, not a letter. A phone call is faster and gives you an immediate response. The objective when first contacting a manufacturing company is to find out if it does contract work. Don't address this question to the first person who answers the phone; ask to speak to someone in the sales department or a production manager.
Once you've identified prospective manufacturers, consider their locations. It's best to find a manufacturer within driving range. If a problem arises, it's much easier to solve it in person than over the phone. A lot of value should be placed on a manufacturer in close proximity to you.
If you're not located in an area with many manufacturers or you need a specific manufacturer that is distantly located, visit the manufacturer before reaching any kind of agreement. If a manufacturer refuses an on-site visit, consider this a large, waving red flag.
A site visit will tell you many things. You'll get a feel for how the manufacturer does business--are areas clean and organized or dirty and cluttered? You'll see firsthand the company's setup and capabilities: new equipment and ample employees or old equipment and a skeleton crew. You'll also see the quality of products coming off the assembly line.
The other advantage of an on-site visit is the ability to put a face to a name. Knowing who your contact is and what he or she is all about builds a bond between you that otherwise wouldn't exist. Giving personality to a business relationship also makes it harder for your manufacturing company contact to refuse special requests.
Working It Out
Most contract manufacturing relationships take one of two forms. The first is a turnkey relationship where the manufacturer supplies all the parts and materials and makes your finished product for a set charge per unit. In the other common arrangement, you provide all the needed materials to the manufacturer, who then performs the appropriate manufacturing process and charges you a set fee. This fee could be per unit, per hour, per process or a combination of the three. There may also be a fixed setup charge; this is a flat fee charged each time you want the manufacturer to make your product. You're usually charged for setup when the machines need to be adjusted, equipment needs to be moved or extra people need to be hired. Your arrangement could also be a hybrid of these two relationships.
The manufacturer will charge you more for turnkey production. After all, it has taken on your headaches and responsibilities for outsourcing, purchasing, storing and financing the inventory. The company has also taken on overhead: handling costs for finished goods, management time and labor, and general factory operating costs (depreciation, electricity and so on). These will be included in the manufacturer's price, but you won't see them itemized on the invoice.
The alternate arrangement has you doing all this work, plus dealing with the logistics of getting the materials to the facility in a timely fashion. If you're doing any significant volume with a product containing many parts, you'll likely need a full-time employee to handle this.
I am a big advocate of turnkey relationships because they make life easier. In many cases a manufacturer is already outsourcing parts and raw materials for someone else's product that your product can also use. The company is able to make volume purchases and thus buy your parts for less. Turnkey agreements also remove some of your liability. If the wrong part is ordered, it's not your problem. If there are shipping delays, you aren't charged for scheduling changes. You don't have to find storage facilities. And the list goes on. The bottom line is you need to put pencil to paper and weigh the two arrangements to see which will work best for you.
Once you've selected the best arrangement for you, get quotes from the company you've selected for manufacturing a variety of volumes. For example, ask a manufacturer to quote you prices based on 1,000, 5,000, 10,000 and 50,000 units. There should be a price drop with each increase in volume. Asking for pricing using large numbers also shows the manufacturer it may have big business coming its way. But don't misuse this strategy. Asking for a 50,000 quote and then only ordering 500 units makes the manufacturer question your integrity.
If your idea doesn't have a patent pending, have the manufacturer sign a nondisclosure agreement before you fully divulge your idea. Also get in writing that your idea and any adaptation of it are owned solely by you. This protects you if there's a major modification to your idea. Most manufacturers are familiar with these agreements and are willing to sign them.
Many advisors suggest signing a production contract with your manufacturer. This allows you to lock in a cost and provides protection should either party default. Most production contracts include the quality standards the manufacturer agrees to meet, the specifications of the item being produced, the specifications of any unusual raw materials needed in the process, and the consequences if either party defaults. The manufacturer, in exchange for signing such an agreement, may want you to commit to minimum production levels during the term of the agreement.
I suggest you avoid this kind of contract. It's best to maintain flexibility should product demand not be as high as you had hoped. The downside is that a manufacturing firm will want its price quote to vary depending on the units it produces. Manufacturers aren't crazy about production contracts either. They usually want an attorney to be involved, and this could get working relationships off on the wrong foot.
If you decide not to sign a production contract, be aware that a purchase order is already legally binding. When a manufacturing company accepts the purchase order, it's agreeing to the price, volume and delivery date. There are also many laws that protect you from manufacturers who make poor-quality products. Finding out about existing protections may help you decide whether to use a contract.
Avoid signing long-term purchase orders for parts or raw materials. Large judgments have been awarded to suppliers whose customers did not take delivery of all the parts and raw materials the supplier purchased for them under a binding purchase order.
Most manufacturers are in the business of manufacturing only. It's rare to find a manufacturer who also does marketing. Manufacturers don't steal inventors' ideas very often because marketing inventions takes time and money. A manufacturer without a sales force is probably not interested in taking a product to market. The company is simply interested in making the product and getting paid.
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