Contract manufacturing and product licensing

Thursday November 8 2018



Wambugu Wa Gichohi

Wambugu Wa Gichohi 

Contract manufacturing and manufacturing license agreements (MLAs, also called product licensing) are often confused with franchising. We differentiate them and explore how to combine them with franchising to accelerate business growth cheaply.

Owing to high living costs, many employed people run “side hustles”. Others, the unemployed, innovate to survive, while others innovate commercially. We focus on physical product-based innovations.

Whatever category, chances are that you start small-probably in your backyard-doing everything yourself. Orders grow, you employ more hands to help in production, still in your backyard or if you are the commercial innovator, you raise equity and relocate to bigger space and expand production. When production levels needed to meet current demand overtake your production capacity, it is time to consider options.

Contract manufacturing is the easiest, quickest and cheapest way to meet increased production gaps. For most industries, there will always be someone somewhere with excess production capacity for different reasons-maybe you are almost driving them out of business if selling the same product, maybe their production line for a phased-out product can handle yours, maybe they are just starting off and have invested excessively in production capacity- the trick lies in researching and knowing which available options work best for you. Then you contract them to produce your product in exactly the same quality as your own production system does, you pay them per piece/batch, collect your final product and sell the same way as that produced in your facility.

Needless to say, serious work goes into protecting your intellectual property to ensure the contracted party cannot plagiarize or abuse your product and that they produce exactly the same quality as yours. The arrangement is straight forward; produce X units of ABC quality at Z cost per unit, I pay you cash up-front, period. You retain full control of your product.

When your brand grows exponentially with changing market and technological dynamics, with you still unable or unwilling to invest in the required production capacity or should it be time to retire, consider manufacturing licence agreements (MLAs). In this arrangement, you license a manufacturer to produce and make money from your innovation in consideration for payment of volume-based royalties or a lumpsum. You would have already protected your intellectual property on your innovation, it is these that you license for an agreed period, after which you can regain full control of your product or alter it into a follow-up product.

MLAs are sometimes confused with franchises given their glaring similarity. The difference, however, lies in the level of support and control found in each. MLAs place the product at the complete and unencumbered control of the licensee, with very little support from the licensor. In franchising, ongoing franchisor support and strict control by the franchisor form the basis of the arrangement.

Most goods you buy from big showrooms in China are made by smaller manufacturers under contract manufacturing. From November 2018, universities in Canada under the Universities Allied For Essential Medicines-UAEM-have a Global Access Licensing framework to license non-exclusively publicly-funded medicines and life-saving health technologies to manufacturers to increase access in low-and-middle income countries. Coca Cola and PepsiCo use a hybrid system of MLAs and franchised distribution networks to entice manufacturers who see a ready market in the distribution network.

We can easily use the same principles as we drive the East African industrialization agenda. Government policies should support cottage industries that would soon require contract manufacturers across borders, then they would grow to adopt MLAs and franchised distribution.

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