Aiding supply chain transparency through a contract manufacturing agreement

Agreement provisions supporting transparency include clauses around physical audit capabilities, and ready access to upstream supplier documentation and manufacturing records.

Abhishek Gurnani, Abhishek Gurnani

October 1, 2020

6 Min Read
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Insider Takes

  • As consumers push for greater transparency, brands are seeking new levels of trust with manufacturers.

  • The days of relying on a purchase order are over, and instead, a supply agreement should be executed.

  • A contract negotiation process establishes, in writing, clear expectations of all the involved parties.

The Food Safety Modernization Act (FSMA) was implemented about four years ago, and while the regulations within FSMA establish guidelines to ensure transparency of the supply chain, transparency is also now increasingly driven by consumers—and the need for companies to build trust with their customers. With social media being an all-important aspect of marketing and connecting with consumers, companies must be transparent with their audience and provide key information about their products, which in the past was not routinely shared. An increasing number of companies are embracing the concept of transparency and are sharing intimate company information to customers, including descriptions of manufacturing processes, test results and origin of components in order to distinguish their products from others. Other companies are engaging lifestyle bloggers and the public on social media to answer sophisticated questions about the quality and composition of products. However, in order to build trust with the consumer, a brand must first build trust with its manufacturer.

Traditionally, transparency initiatives have been focused on manufacturing quality issues and analytical testing, largely for contaminants like heavy metals. More recently, consumers are becoming concerned with where and under what conditions the products, or components of the products, are manufactured. Child labor, forced labor, slavery, human trafficking and other human rights issues are part of a growing awareness campaign by consumers.

Building trust and transparency with a contract manufacturer requires a multifaceted approach. First, the days of just relying on a purchase order are over, and instead, a supply agreement should be executed. Documenting these aspects in writing during a contract negotiation process not only clearly sets forth each party’s expectations for the business relationship, but it also provides each party an initial understanding of the other party’s commitment to compliance and transparency. Any agreement with the contract manufacturer should articulate the need for rigorous product testing, candid sharing of documentation, and affirmations regarding integrity of business practices within the supply chain.

Provisions in an agreement that further transparency initiatives include clauses that allow a brand certain physical audit capabilities, either themselves or by third-party auditors, and ready access to upstream supplier documentation and manufacturing records, for example:

At the Company’s request, and within a reasonable time after such request, Supplier shall make available to the Company the results of (including any reports resulting from) all federal, state and local inspections and sanitation audits conducted from thirty (30) days before to thirty (30) days after the Term and relating to or affecting (A) the Facility; or (B) the equipment, raw materials, ingredients, packaging materials, labeling, work in process or Products located therein, subject to appropriate safeguards for proprietary or other confidential information of Supplier or its customers. Supplier shall provide the Company a copy of all documents disclosed to any regulatory authority within two (2) days after an Inspection, with any confidential commercial information of Supplier redacted. Additionally, upon the arrival of any duly authorized federal, state or local regulatory authority at the Facility to inspect the processing, manufacturing or packaging of the Products, Supplier immediately shall notify the Company by telephone and email.

From time to time, the Company (and/or any organization certifying Company’s Products) shall have the option to perform quality control [QC] audits of the Facility and Supplier’s quality systems, procedures and inventories used or to be used by Supplier to produce the Products to ensure compliance with this Agreement. During normal business hours, and with five (5)-day advanced written notice, Supplier shall provide to the Company, and its representatives, access to the Facility and equipment involved in, and to all records that concern, the sampling, testing, production, packaging or storage of all Materials and the Products. During such inspections, the Company shall use reasonable efforts not to interfere with Supplier’s operations.

Supplier shall prepare, maintain and retain complete and accurate books and records relating to Materials and the production, sampling, testing, storage and shipment of the Products, lot coding records and production code accountability records, including, without limitation, production sheets, standard operating procedures and all records of chemical, physical, microbiological and process tests of Materials, intermediate products and finished Products that Supplier conducts or obtains from its suppliers. All such books and records shall be maintained and retained by Supplier and shall be made available to the Company for inspection, download and/or photocopying for at least three (3) years from the relevant manufacturing date, whether during the Term or after the expiration or early termination of this Agreement (or such longer period as may be required by applicable laws) upon reasonable advance written notice at any time during Supplier’s regular business hours.

With respect to integrity within the supply chain, brands should include language that requires suppliers to warrant the absence of conduct that may violate human and employee rights, for example:

Supplier represents and warrants that it shall not, nor shall it source from any suppliers that, (i) use child or involuntary labor; (ii) treat its personnel without dignity or respect or coerce or harass its personnel; (iii) unlawfully discriminate in hiring and employment practices, (iv) provide an unsafe and unhealthy working environment, (v) compensate its personnel below minimum levels required by local laws, regulations or ordinances, or (vi) disregard or violate environmental safety regulations.

While an agreement provides some comfort that a brand owner and its supplier are on the same page with respect to transparency and other aspects of the business relationship, it is important to remember that the agreement is still just words on a document. These words are empty unless a brand executes, and the supplier delivers, on its obligations. A brand must establish procedures for routine communication with its supplier to request documentation and remain up to date on all aspects of the supply chain involving its products. As they say, the “proof is in the pudding,” but a brand should be vigilant about knowing exactly what goes into that pudding. To be transparent with consumers, a brand must first trust and demand transparency of its manufacturing partners.

Abhishek Gurnani is a partner at Amin Talati Wasserman LLP. Gurnani represents a wide variety of health and wellness-focused companies addressing issues such as quality control, recalls, government investigations and class action lawsuits, as well as dealing with matters before FDA, FTC, U.S. Customs and USDA.

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