Tips to Make Sure That Your Supplier Does not Become a Competitor

This morning, I'd like to welcome back a regular guest columnist to Spend Matters. Brian Sommer is a Senior Fellow at Azul Partners, founder of Tech Ventive, and is author of the blog Services Safari.

Business Week's SmallBiz Winter 2006 edition (Ripoff Nation) told a troubling story of a California executive who is fluent in Mandarin, has a Taiwanese mother and a father from mainland China. This executive moved production of his company's commemorative pins to a Chinese manufacturer 10 years ago. Three years ago, his contract manufacturer was caught selling knockoffs at 20% less than this firm. Even after the offender was confronted, the company could do little about it as the anti-counterfeiting laws are still not well enforced in China.

There was one excellent nugget advice in this piece. And that's if you squeeze margins too much on your offshore manufacturer, you raise the distinct possibility that you will force them into becoming your competitor.

Let me add these additional thoughts:

- Never let any contract manufacturer manufacture an entire product. Always keep some portion of the manufacturing in-house.

- Never let any component provider ship directly to your customers.

- Always include monstrous economic penalties, (i.e., liquidated damages) if the contract manufacturer is caught moving counterfeit or look-alike products. Be quite specific how these infractions will be evaluated and by whom and the consequences to be suffered (i.e., seizure of plant and all of its assets). Be prepared though to make the contractor capable of earning a fair return on this work. No one will sign up for odious penalties if you cannot ensure them a long-term contract, fair profits and reliable cash flow.

- Defections of key employees within the contractor's firm are a cause for concern especially if they go to work for firms with the ability to make competing or knockoff products. While you can reward your contract manufacturer if they achieve specific retention targets, penalizing them for defections is hard to get enforced and virtually impossible to get plant operators to sign off on.

Brian Sommer authors the blog: Services Safari

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