The word "partnership" has seen many evolutions and ultimately many changes in definition over time. Not exempt from this, contract development and manufacturing organizations (CDMOs), witness many forms of partnership changes. So, how do you know if you are entering into a true partnership?
A true partnership should define terms that balance the risk and reward for each party involved. In an article posted on Med Device Online, KMC Systems' Mike Kallelis, head of business development for the medical engineering and contract manufacturing firm, weighs in on how achieving an amicable business arrangement is likely and a contentious relationship can be mitigated.
Understanding the Terms of Your Contract
Kallelis states "A CDMO’s pricing model is fairly standard these days. The cost of material is determined, the labor hours are estimated, an overhead rate is applied to obtain a fully burdened cost, and then profit expectations are applied. The pricing model should be transparent and provide a price that does not hide the details of how they came up with it. Nonetheless, it is human nature to want to negotiate, so the organization will likely attempt to preserve the highest price they originally proposed, while the customer will always seek the lowest. This is where negotiations reach a fork in the road and where true partnerships can be won or lost."
Classical constructs which a contract development and manufacturing organization and a customer could enter:
- The contract balances the distribution of risk
- The distribution of risk is unbalanced, setting the relationship up for failure from the beginning.
If the distribution of risk is unbalanced, Kallelis explains that "the CDMO may agree to more favorable terms for the customer just to create an opportunity for a longer-term commitment or the promise of future business. By doing so, the CDMO and customer potentially doom the relationship by establishing unrealistic and aggressive terms. For example, the customer may request an overhead rate no higher than X and a profit marge of Y percent, regardless of product volumes. But what if the promised unit volumes fall short of the forecast? If the terms are too aggressive and the assumptions that went into developing an aggressive price don’t materialize, the CDMO could find itself in a losing situation." Ultimately, the relationship is now in jeopardy.
If a true partnership is the goal of both parties, the following must be taken into consideration:
- Allow for the natural ebb and flow of contract performance
- Changing market conditions, and corresponding margins
- Avoid relying on hard and fast requirements
Offering many benefits to both parties; A partnership based on clear expectations creates the foundation for a successful, long-term business relationship. If you desire a true partnership, make sure both parties gain benefits and share risks.
To learn more on creating an appropriate partnership with your contract development and manufacturing organization, Click here to read the full article on Med Device Online.