Outsourced Manufacturing and Trade Secrets: Outsourced Manufacturing (Part 2)

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There are two common categories of outsourced manufacturing: toll manufacturing and contract manufacturing. While both these manufacturing options have distinct and clear characteristics, their strategic advantage is their ability to provide customers with valuable ways to save both time and capital on their product line development.

In toll manufacturing, one company provides raw materials (or semi-finished goods) to a third party, who will then provide the rest of the services (manufacturing). Typically, the third-party company will already have particular equipment and organizational models in place, and they can supply subclasses of manufacturing processes for the first company for a fee.

Contract manufacturing also involves outsourcing production processes to a third party. In contract manufacturing, however, the third-party company hired to produce the goods is supplying the manufacturing process as well as sourcing the raw materials. Contract manufacturing creates a supply chain vendor for a branded, private label or custom-made product. The contract manufacturer is responsible for making the product to specification and meeting the delivery time requirements. This offers the customer a fast and effective method of extending their product line with minimal investment and a made-to-order supply program.

While outsourced manufacturing can provide companies short-term benefits to their bottom line, it presents unique risks for the potential loss of trade secrets and the creation of new competitors.

This series outlines a combination of structural, contractual, practical, and institutional measures companies should use in outsourced manufacturing arrangements and agreements in order to protect their trade secrets and other valuable intellectual property (“IP”).

Specifically, this series will:

  • Outline the risks and benefits of outsourced manufacturing arrangements.
  • Provide an overview of key due diligence measures to consider.
  • Suggest certain import structural ideas for outsourced manufacturing arrangements.
  • Discuss certain practical and contractual protective measures and controls to secure trade secrets and technological assets.
  • Give an overview of other key contractual provisions to include in the relevant agreements.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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