You signed a manufacturing agreement. Production is running. Units are shipping. Then your supplier raises prices 15%. Or goes out of business. Or starts selling your exact product configuration to a competitor.
Now what?
Most product companies don’t find out their supply agreements have problems until something goes wrong. By then, the leverage is gone.
Here are the terms that matter most—and what to watch before you sign.
Who Owns the Tooling?
This is the question most frequently overlooked, and it’s the one with the longest tail of consequences.
When you pay a manufacturer to build custom molds, dies, or fixtures specifically for your product, who owns them?
The answer isn’t obvious, and it isn’t always “you”—even if you paid for them.
In many standard manufacturer agreements, tooling ownership defaults to the supplier. That means if you want to move production to a different facility, your supplier can hold your molds hostage. You either stay, pay again to replicate them elsewhere, or negotiate a buyout at whatever price they name.
The fix is explicit language: tooling and molds developed for your product, paid for by you, belong to you. The agreement should specify that the supplier holds them as a bailee—they’re in their possession for production purposes, but ownership is yours. [ADDED: The term “bailee” means the supplier has temporary custody of your property with the obligation to return it; this is a recognized legal concept but may require brief explanation in non-legal contexts.]
Include the right to take physical possession on termination of the agreement.
This matters more as your product scales. A $15,000 injection mold is an inconvenience. A $200,000 custom die set that you can’t retrieve is a supply chain crisis.
Minimum Order Quantities and Cash Flow Reality
MOQ commitments are where supply agreements quietly damage margins.
Suppliers set minimum order quantities for legitimate reasons—they need production runs large enough to be economical. But the MOQ written into your agreement can lock you into inventory commitments that don’t match your actual demand cycles.
Consider this scenario: You agree to 5,000 units per quarter. Demand softens. You’re now sitting on six months of inventory, your working capital is tied up, and you’re still obligated to take the next shipment.
A few things worth negotiating:
Flexibility windows. Can you adjust order quantities within a defined range (say, plus or minus 20%) with 60 days’ notice? Suppliers will often accept this because it gives them planning visibility without hard caps.
Carry-forward provisions. If you take a reduced shipment in one period, can you apply the shortfall against a future order rather than forfeiting it?
Pricing tiers tied to actual volume. If your pricing is based on hitting certain quantities, make sure the agreement specifies what happens to unit pricing if you don’t hit them—not just that you’re in breach.
MOQ terms feel abstract when you’re excited about getting a product into production. They become very concrete when your warehouse is full and your cash flow isn’t.
Quality Standards and Inspection Rights
A supply agreement without defined quality standards is just a purchase order with extra steps.
Your agreement should specify: what constitutes an acceptable unit, what testing or inspection protocols apply, what your rejection rights are, and who bears the cost of non-conforming goods.
“Industry standard quality” is not a specification. It’s an argument waiting to happen.
For manufactured products with mechanical components—tolerances, material specifications, surface finishes, functional performance criteria—these need to be documented in the agreement or incorporated by reference to a separate specification sheet.
When there’s a dispute about whether a shipment meets standard, you want a document to point to, not a conversation to reconstruct.
Also worth including: the right to conduct facility audits and inspect work in progress. Suppliers sometimes resist this. Push for it anyway. The ability to catch a quality problem before 10,000 units are built is worth more than any remedy clause after the fact. [ADDED: For certain product categories—medical devices, food products, children’s products—regulatory requirements may independently mandate certain quality controls and inspection rights.]
Exclusivity: Yours or Theirs?
Exclusivity cuts both ways in supply agreements, and both directions have consequences.
If you want exclusivity from your supplier—meaning they won’t manufacture your product configuration for competitors—you’re likely giving up something in return. Usually that’s a volume commitment, a higher unit price, or both.
Make sure the exclusivity is scoped correctly: it should cover your specific product design, not just your product category.
The other side is supplier exclusivity requirements—some manufacturers will ask you to commit to them as your sole source for a product line. This can make sense early in a relationship, but it eliminates your ability to dual-source as volume grows, which is a significant supply chain risk.
Both types of exclusivity should have defined terms, clear termination triggers, and—critically—what happens to tooling, specifications, and IP if the exclusivity ends.
A technical understanding of manufacturing processes—what a mold is, what tolerance specifications mean in production, what happens when a supplier substitutes a material—helps identify which contract terms carry operational and legal risk.
If you’re working through a manufacturing or supply agreement and want a second set of eyes on the tooling ownership language or the MOQ structure, professional review can help identify gaps before production begins.
If you want contracts that hold, IP that’s protected, and legal bills that don’t surprise you every month—let’s talk. Garcia-Zamor Law Firm delivers fractional in-house counsel with a unique advantage: business law PLUS IP expertise, backed by 70+ years of combined experience. Passionately devoted to your success. Visit garcia-zamor.com or call (410) 531-9853.
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