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OPERATIONS

What questions should I ask contractors before agreeing to outsource work to them?

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Offices & Operations mentor Charles Bodenstab responds to the following question from an inc.com user:
I am the president of a small frozen food manufacturing start-up. I am meeting with contract manufacturers this week to see if my product can be outsourced economically. I know very little about this subject -- about the questions to ask or the monetary terms to discuss. What do I need to know before negotiations?

Charles Bodenstab's response: The aim of outsourcing is to reduce costs, eliminate start-up costs, or have someone who has greater expertise than you do the work.

Accordingly, you want to explore and get information on a number of issues before negotiating with contractors. I suggest you consider the following:

  • What price will they charge you for the product?
  • How many units do you have to commit to to get this price?
  • How does their price compare with what you estimate your cost will be? (Be careful that you aren't too optimistic about your own capabilities when you calculate your own costs.)
  • What are the implications if you fail to meet their volume expectations?
  • Can the contractors deliver a list of references who can assure you that they meet their commitments and deliver good product, on time?
  • By what process will you and the contractor set the specifications that will ensure that both parties understand what is to be delivered?
  • Are they going to ask for up-front money to cover their start-up costs? (I hope not.)
  • Can you conduct periodic, unannounced inspections of their operations?

Generally, from my experience, using an outside source for many functions and products in a start-up situation is smart, if the vendors are reliable. The more you can keep your costs variable as opposed to fixed, the better. If volume fails to develop as quickly as you anticipated, you don't want fixed costs to sink you. Also, the more work you can offload to other people, the better, since you will have to deal with many other issues that arise during the launch. On the other hand, a vendor that is unreliable in either quality or delivery can be disastrous.

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