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Outsourcing Supply Chain Management

Outsourcing Supply Chain Management

<p>Working with contract manufacturers can be a complex topic, but a company should determine ahead of time what it needs from a partner and how it fits best into current strategy and risk-reward viewpoint.</p>

The term manufacturer" means the legal entity with the responsibility for the design, manufacture, packaging and labeling of a product or device, before or after it is placed on the market under its own name, one that owns the rights to sell the product under its own brand name. This is regardless of whether these operations are carried out by that entity, or partially or fully on its behalf by an outsourced third party.

Contract manufacturers (CMs) or contract manufacturing organizations (CMOs) are organizations that make products under contract for other companies. The difference between a CMO and an manufacturer is if company "A" owns the formulation or design of a product, but outsources the manufacturing or production to company "B", then company B is the contract manufacturer.

Outsourcing (or subcontracting) the production of products, parts, components and systems has been long used in operations and supply chain management. It makes sense to outsource for several purposes, including:


  1. Capacity: The use of a CMO enables companies to reduce the level of investment in their own manufacturing capabilities. It can also reduce or eliminate the additional expense required for expansion, and the risk of getting stuck with excess capacity it may not be able to utilize. Contract manufacturing enables companies to handle any overflow of production they may have, temporary or otherwise.
  2. Resource issues: If the suppliers prices are lower than internal costs, the financial aspect is to be certainly considered.
  3. Shipping costs: Check to see if there are any significant added transport costs of materials or finished product from the supplier.


CMOs can be relied on for capabilities a company does not have itself. Rather than having to reinvent the wheel, it is better to leverage someone else's expertise and capacity. This means utilizing a CMO allows a client to expand its technical resources without increased overhead.

Virtual Company

For "virtual" companies, the decision to use outsourcing is obviously an easy oneall production is outsourced.

Partner Selection

When the time comes to choose a CMO for a particular use, companies should carefully evaluate the candidates to ensure a win-win relationship. A company should consider this as a risk-management issue as well (supply, financial and reputational). The selection process should be narrowed to prospective candidates, by matching needs or requirements with those of the CMO, such as:

  1. Operational capabilities and competencies: A company needs to know if the CMO has a clear understanding of the capacity and capability requirements of manufacturing needs it requires. Can the CMO handle the job financially, equipment-wise and knowledge-wise?
  2. Integration/communication: One of the biggest challenges in operating effectively with a CM is communicationat the company level and at the level of individualsallowing communication to occur without hindrance. Good communication allows for visibility, planning, cutting costs and anticipating risks.
  3. Service: Good customer service means accurate and timely responsiveness to inquires and questions. The reliability of communication and service between companies is critical to success.
  4. Collaboration: Collaboration is about how people and technologies talk to each other. Collaboration is really a mindset in which you treat a CMO as a real partner, and both organizations work together to achieve common goals.
  5. Lead time: If a company is overbooked, it can create time problems, even worse if you happen to have quality or raw material issues.
  6. Manufacturing/quality agreement: It is important to consider having such agreements in place between companies. The purpose of these agreements is for the supplier to manufacture products for a company and to deliver them to the marketplace. A company's business and reputation depends on the ability of the supplier to meet its contractual obligations. The risk that the supplier does not deliver quality products in a timely manner could have substantial negative consequences.

Other criteria would include: cGMP (current good manufacturing practice) certifications, quality systems/standards, daily management, liabilities, insurance, contingency planning (dual vs. single sourcing), etc.

It is critical to ask the right set of questions before engaging with CMOs. The answers to these questions will then determine what partner should you use, how to plan and operate with a CMO, and how to organize internally to manage the CMO.

Robin Koon, executive vice-president at Best Formulations, has more than 25 years of pharmaceutical experience in clinical pharmacy, was a retail drug chain executive overseeing operations and has experience in managed-care.

Learn more about working with contract manufacturers in INSIDER's Content Library.

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