Determine What the Company's Strategic Objectives Are and Which Business Operations to Outsource
Making the decision to outsource is only the first in a set of complex decisions. Outsourcing requires strategic planning, much at the beginning. A domestic company must thoroughly understand the operations, practices, and challenges that may become factors in any outsourcing relationship before entering into the relationship. The domestic company's first task is to clarify its strategic objectives and business expectations, determine what types of business operations will be outsourced, conduct an in-house outsourcing risk assessment to identify any barriers that could prevent the company from achieving its goals, and create a plan to overcome these barriers both now and in the future. To do so, the company must establish product specific guidelines: manufacturing instructions; specifications (e.g., for materials, components, and finished products); acceptable quality levels; test methods; and packaging configurations.
Select the Right Foreign Partner
Much like choosing the right mate, selecting the appropriate foreign vendor is one of the most important and most difficult tasks that a domestic company will face in the outsourcing process. Hiring the wrong global partner can be the root cause of most problems. Therefore, the domestic company must make the time to get the fundamentals of the new relationship right. Due diligence is crucial. Companies should never obtain materials or services from a vendor in a less regulated market without first: (1) conducting a detailed investigation of the vendor, including an investigation of the foreign vendor's financial condition and its country's specific risks, and (2) interviewing the vendor, including an on-site inspection of the manufacturing facility to assess the vendor's operations, procedures, and full distribution lifecycle. The domestic company should also consider the level of business sophistication and maturity of any potential foreign partner.
Negotiate Clear Contracts and Implement a Detailed Quality Assurance Program
With the assistance of legal counsel, the domestic company must negotiate sound, competitive, enforceable contracts with vendors in less regulated markets. These contracts must cover far more than how much a U.S. company will pay for goods or services. These contracts must govern every aspect of the relationship between the domestic company's business and the foreign vendor. Therefore, the contract must clearly and concisely set forth: (1) product specifications and performance standards; (2) service levels and technical agreements; (3) regulatory, privacy, information technology, and security requirements; (4) intellectual property expectations; (5) transition requirements; and (6) indemnification and risk-shifting provisions. These contracts should also detail risk management provisions for insurance. A separate technical agreement (often called the "quality agreement") should set forth detailed quality-control assurance policies and procedures (Quality Program).
Trust but Verify: Certified Third-Party Testing and Audits
Well written, detailed quality agreements are necessary, but absolutely pointless if the company does not implement active monitoring and execution. Spot checks of production quality and other precautionary steps may be ignored, falsified, or carried out incorrectly. Therefore, the domestic company must ensure that its vendors from less regulated markets undergo an ongoing evaluation of quality control systems and periodic facility audits. In process inspection and testing must be performed, including monitoring of the process and actual sample analysis at specified locations and times. The domestic company can either audit its foreign suppliers itself or hire a certified third-party testing laboratory, to independently verify compliance with current Good Manufacturing Practices and the Quality Program. Third-party audits by a certified testing laboratory are preferable because they ensure an objective assessment.
Document and Maintain Adequate Records.
A domestic company must maintain full and comprehensive documentation of the entire supply chain. For these reasons, the domestic company should ensure that a system be in place to manage relevant documents and data. Documentation serves many purposes. In addition to creating the required regulatory file, it provides a paper trail that can be followed if something goes wrong, so that the source of problems can be determined and corrective action undertaken quickly (as well as documenting that the company was not negligent in its practices). Documentation is especially useful if a company is forced to defend against liability claims, as it helps to demonstrate the company had appropriate quality control measures and the quality control measures were followed.
Many of the strategies discussed above deal with developing and maintaining the type of working relationship with global partners that will result in high-quality products. When things go wrong, however, it is mandatory for the U.S. company to ensure that adequate product liability insurance is in place. The domestic company should work closely with an experienced insurance agent or broker who understands both foreign requirements for any local insurance placement and U.S. policy exclusions that may leave the domestic company exposed. The goal is to make certain that insurance coverage extends to all the exposures and liabilities a company may face, regardless of where the claim arises or is filed.
Get expert advice.
Legal expertise is critical. Long before a domestic company enters into any formal arrangement with a global supplier or contractor; it is good practice to engage an attorney with appropriate expertise in product manufacturing and liability management to review any contract or quality assurance program with a foreign company
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