Key Issues for Consideration before Sourcing Production Abroad
Distributors and vendors commonly argue as to whom should bear the costs of gearing up for production. This stage of product development is characterized by the necessity of creating tools and other machinery that will be used to create the product in question. (Washburn and Huang) Agreements between suppliers and distributers are usually required so that production can begin while protecting the interests of both parties. The supplier typically does not want to bear the early production costs unless there is a guaranty in place so that the supplier can recoup the initial costs of production. Conversely, distributors do not want to tie themselves to these costs in case the product does not perform well in its market. (Washburn et al.) A multi-year contract is often the solution to this problem. In this contract the supplier is reimbursed for the initial costs of production and the equipment used becomes the property of the distributor. Additionally, the distributor may offer an advance on all costs at the beginning of the business relationship. (Washburn et al.) It should also be noted that since labor and material costs can change from one year to the next, a cost increase clause can be inserted into these production contracts. This allows the supplier to adjust their compensation, usually at the end of the year. If the distributor refuses the increase, then the contract is terminated and the short term contract is over. (Washburn et al.) The litigious nature of American society created the need for product liability and insurance in case a problem arises resulting from the normal use of the produced item. Since the items will be produced in a foreign country this step should nor be discounted or ignored. One solution is to require the supplier to purchase the insurance policy and allow the