How to link up communication and ensure good quality control when outsourcing production to third parties
If you’re a brand owner, you might find yourself in one of these positions…- Having a groundbreaking product idea but no factory to make it (i.e. pioneering startups)
- Being well-established but unable to expand due to existing production limitations
- Experiencing a sudden increase in demand but can’t scale facilities quickly enough
- Entering new markets but it’s too costly to ship internationally
- Needing specialized production equipment or expertise but lacking in-house resources
In any of these scenarios, toll manufacturing or contract manufacturing might be perfect for you, as they both let you expand production without investing in new machinery or building a new factory.
However, outsourcing production to a third party brings certain challenges, such as data transfer and quality control. In this article, we’ll look at ways to overcome these issues by opening up secure communication channels and using QMS software.
Understanding Third-Party Manufacturing
Third-party manufacturing is a model whereby production is carried out by a manufacturer that is separate from your own operations. In other words, manufacturing of items is outsourced to specialists who already have the necessary tools and facilities.
There are two distinct types of third-party manufacturing, both catering to different needs.
- Toll Manufacturing is where you supply raw materials to the third-party manufacturer, who then processes the finished goods or carries out specific production tasks. You pay a fee or a toll for this service. It’s ideal if you want to retain control over materials and formulation, but outsource the processing.
- Contract Manufacturing takes things a step further, as the manufacturer also sources materials that meet your spec. It’s more common if your products are complex to process or you’re in a heavily regulated industry, such as pharmaceuticals or cosmetics.
In contract manufacturing, the manufacturer often handles everything including procuring raw materials, quality checks, packaging, and sometimes distribution too. In toll manufacturing, they might only handle small specific processing tasks such as mixing ingredients, applying specialized coatings, or doing the final assembly.
Both types of manufacturing are becoming more popular due to rising production costs, rapid tech advancements that require specialist facilities, and regulatory demands.
For example, a growing number of pharmaceutical companies choose to outsource generic drug production to toll or contract manufacturers. This allows the pharma brand to focus on research and development, which is more capital-intensive.
Another example is Primaloft, a U.S. brand that develops high-tech fibers, but outsources the actual manufacturing to specialized plants in Asia. This is to reduce costs and take advantage of established factories that are able to produce goods without delay.
Some companies, especially startups or SMEs, might face regulatory, space, or capital constraints that stop them from growing. In this case, third-party manufacturing is a necessity rather than a choice.
Overall, outsourcing to third-party manufacturers lets you focus on your core competencies, such as product development and marketing and sales. You can safely leave the more complex production tasks in experienced hands. This helps you to stay more agile and adapt quickly to market shifts without splashing out on big upfront investments.
So far we have covered the benefits of toll and contract manufacturing methods, but they also pose some challenges. Read on to find out what these challenges are and how to overcome them.
Contract Manufacturing & Toll Manufacturing Challenges
Maintaining Communication Between All Parties
Brand owners often work with more than one manufacturer. They might have one for a certain part of the production process and another for a different one. For instance, Tesla uses different companies to manufacture different vehicle components. They have multiple battery suppliers (including Panasonic and LG), others to manufacture electronic components, and another to assemble the vehicle frames (the Idra group in Italy).
Likewise, manufacturers might deal with anywhere between 10 and 100 brand owners. This means it’s a “one-to-many” relationship on both ends, which complicates matters.
When you’re working with multiple contacts, the issue of how to securely share and synchronize data throughout the supply chain arises – both downstream and upstream. As we’ll show in a moment, a good Quality Management System (QMS) can help solve this problem.
Managing Quality Control in Contract Manufacturing
Keeping the quality of items consistent is a big concern for brand owners, after all, it’s their reputation that suffers if there are bad reviews or product recalls. QC checkpoints give brand owners reassurance that everything is being checked and verified against rigorous standards.
QC checkpoints often include testing and inspection of raw materials, in-process checks during manufacturing, and final inspections before shipping. At each checkpoint, the items must meet certain criteria before moving onto the next stage.
Many brand owners and third-party manufacturers opt to use a QMS with portal-like capabilities to manage quality control. A good QMS offers a cloud-based central hub where manufacturers can upload quality data directly (or automatically using an integration) and brand owners can monitor and analyze it for patterns and trends.
The QMS can be configured to flag non-conformities early. Any data that doesn’t meet predefined criteria triggers an immediate review and escalates the issue if necessary.
A QMS portal also serves as a repository for all relevant documentation, such as standard operating procedures (SOPs), quality test procedures, compliance documents, and more. This is useful when dealing with multiple partners, as everyone is then working to the same standards.
Managing Risk in Contract Manufacturing
Brand owners should be cautious when outsourcing manufacturing activities, especially in industries like textiles where production might be offshored to low-wage countries for efficiency.
While costs might be lower, the risks related to compliance and quality control are sometimes higher.
If you decide to outsource your manufacturing overseas, you need to get a clear understanding of local laws and regulations and ensure that your partners are compliant. To ensure compliance, brand owners often schedule regular audits – planned and surprise – to make sure that production standards are met consistently.
Ensuring Contractual Obligations
Securing intellectual property (IP) rights is another common concern. When you sign a contract, make sure it clearly defines who owns any IP related to products, processes, or innovations developed during the course of the manufacturing agreement. The contract should also include non-disclosure agreements (NDAs) to protect any proprietary information shared with the manufacturer.
You should also ensure that pricing and payment terms are set out clearly in the contract. Include details on production timelines, delivery dates, and any consequences if these are not met. Contracts should also include terms for dispute resolution, mediation or arbitration before moving to litigation, as it saves both time and resources.
Don’t forget to include a “force majeure” clause, which frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of either party strikes, such as war, riots, industrial action, crime, or act of God (hurricanes, floods, earthquakes, etc.).
Maintaining Agility
Staying agile is important in dynamic industries like FMCG (Fast-Moving Consumer Goods), where market demands and consumer preferences shift rapidly.
Having a QMS that quickly syncs and updates between both parties gives brand owners a competitive edge. It means that when a product formula needs tweaking or a production process needs adjusting, things like SOP changes are communicated immediately.
Integrate Supply Chain Communication with a QMS
A single point of communication that covers the whole supply chain is the best way to manage third-party manufacturing contracts.
A QMS with portal-like features, such as AlisQI, is the ideal solution. It keeps all your data and documents synced. Every update, change order, new compliance requirement, production metric, and quality test result is instantly accessible to the people who need it – right across the supply chain. It also automates quality control procedures such as non-conformity detection and automatic escalation.
Find out how AlisQI can help make toll manufacturing and contract manufacturing easier to manage and more quality-focused. Book a demo today.
