The Beginner’s Guide on Product

Manufacturing and Contract

Manufacturing:
The Beginner’s Guide on Product Manufacturing and Contract

Manufacturing

1. Introduction
1.1 What is Product Manufacturing?
1.2 What is Outsource Manufacturing?
1.3 What is Contract Manufacturing?

2.1 Conceptualization
2.1.1 Product Design Concept
2.1.2 Project Charter
2.1.3 Business Case
2.1.4 Feasibility Study
2.2 Product Design and Development
2.3 Prototyping
2.4 Full-Scale Production

3.1 Pros and Cons of In-House Manufacturing

3.1.1 Production Control
3.1.2 Flexibility and Adaptability
3.1.3 Communication
3.1.4 Intellectual Property Security
3.1.5 High Labor Cost
3.1.6 High Production Costs
3.1.7 Requires Sales to Happen
3.1.8 More Legal Responsibilities
3.2 Pros and Cons of Outsource Manufacturing
3.2.1 Lower Labor Cost
3.2.2 Technically Skilled Workers
3.2.3 Fewer Regulations
3.2.4 Lower Overhead Cost
3.2.5 Focus
3.2.6 Increase in Operating Capital
3.2.7 Lower Price Levels
3.2.8 Lack of Control
3.2.9 Communication Issues
3.2.10 Bad Reputation
3.211 Cost of Logistics
3.3 When Does Outsource Manufacturing Make Sense?

4.1 Pros and Cons of Domestic Contract Manufacturing and Overseas

Contract Manufacturing
4.1.1 Production Costs
4.1.2 Quality Assurance
4.1.3 Lead Time
4.1.4 Order Quantity
4.1.5 Communication
4.1.6 Logistics
4.2 Why China Is the Best Country to Outsource Manufacturing
4.2.1 China has a highly skilled workforce.
4.2.2 China has stable facilities and advanced technologies.
4.2.3 China has healthier political stability than its counterparts.
4.3 Challenges of Outsourcing Manufacturing in China
4.3.1 Lack of Capable Service Providers
4.3.2 Lack of Interest in Small-Scale Production
4.3.3 Possible Assignment to Subcontractor for Smaller Production
4.3.4 Loss of Control
4.3.5 Minimal Commitment to Environmental Protection
4.3.6 Lack of Overall Post-Production Review
4.4 Hidden Cost of Outsourcing Manufacturing
4.4.1 Inventory Liabilities
4.4.2 Fluctuation Costs
4.4.3 Storage and Transportation Charges
4.4.4 Indirect Costs
4.4.5 Warranty or Returns

5.1 How to Find a Manufacturer in China

5.1.1 Alibaba
5.1.2 AliExpress
5.1.3 Trade Fairs
5.2 How to Choose a Contract Manufacturer or Supplier in China
5.2.1 Communication and Customer Service
5.2.2 Price and Minimum Order Quantity
5.2.3 Quality Control System
5.2.4 Experience and Scalability
5.2.5 Performance Metrics
5.2.6 Financial Stability
5.2.7 Location
5.2.8 Value-Added Services
5.3 How to Calculate Manufacturing Overhead
5.4 How to Request Quotation From Supplier
5.4.1 Preparation
5.4.2 Management
5.4.3 Awarding
5.4.4 Closing
5.5 How to Ensure Product Quality and Lead Time
5.6 How to Protect Your IP From Your OEM Partner
A great deal of product ideas has held back an awful lot of inexperienced
entrepreneurs because they have no idea how to manufacture a product, or
how to find a manufacturer to make their product happen. Putting good product
ideas on the back burner is like throwing away a possible million-dollar
opportunity that nobody in the business can afford to make.

It is what this comprehensive beginner’s guide is for–to help new entrepreneurs

turn their ideas into tangible products and bring them to market. In the
succeeding sections, you will get to learn more about the following:

 New product introduction (NPI) process

 In-house and outsource manufacturing
 When to outsource manufacturing
 Domestic and offshore/overseas contract manufacturing
 Reasons China is the best country to outsource manufacturing
 Challenges of outsourcing manufacturing in China
 Hidden costs of outsourcing manufacturing

Later in the article, we will also walk you through the steps on how to
manufacture a product, including:

 How to find a manufacturer in China

 How to choose a supplier in China
 How to calculate manufacturing overhead
 How to request a quotation from suppliers
 How to ensure product quality and lead time
 How to protect your intellectual property from your manufacturer
  And all the ins and outs of product manufacturing and contract
manufacturing from China

To get you started, here are some common manufacturing terms you will meet along
the way.

1.1 What is Product Manufacturing?

Product manufacturing, or simply manufacturing, is the production of goods
out of raw materials on a large scale. Finished goods or final/end products may
be sold to other manufacturers for the production of more complex products, or
be sold to wholesalers, retailers, or end users and consumers.
The product manufacturing process begins with a product design and
specifications from which the product is made.

Note: If you want to explore the ground rules on how to manufacture a product,
or what is known in the industry as new product introduction, we will dive
deeper into this topic in Chapter #2.

1.2 What is Outsource Manufacturing?

Outsource manufacturing is the transfer of manufacturing and related
support functions to third-party business entities, whether these third parties
are onshore/domestic or offshore/overseas. Primarily, cost reduction and
cost-saving drive companies to hire third parties.
Note: If you want to get to know more about the advantages and
disadvantages of in-house manufacturing and outsource manufacturing, you
will learn them in Chapter #3.

1.3 What is Contract Manufacturing?

Contract manufacturing is a form of outsourcing where a manufacturer
contracts with a purchasing company to do the production of product
components or ready-to-use end products.
Contract manufacturing companies that handle packaging operations are
called copackers or contract packagers. Contract manufacturing companies
that work for another manufacturer are called subcontractors.
In the contract manufacturing business model, a purchasing company
approaches different contract manufacturing companies to produce products
for them, either with a product design or formula at hand or based on the
contract manufacturer’s design. Contract manufacturing companies will quote
the parts based on the cost of processes, labor, tooling, and raw materials.
After a purchasing company decides which contract manufacturer to partner
with, the contract manufacturer will then produce and/or ship the components
or end products either directly to end consumers or to the purchasing company
(for assembly, packaging, etc.)

Contract manufacturing is used by various industries such as electronics,

semiconductor, textiles, food, energy, personal care, and automotive, among
many others. Over the years, contract manufacturing as a business model has
proven to be an unfailing strategy mainly for cost reduction, from tax liabilities
to labor.

Contract manufacturing done within a country is called domestic

outsourcing/contract manufacturing. When a company outsources
manufacturing of a product outside a country, it becomes offshoring or
offshore/overseas contract manufacturing.
Note: You will learn more about the advantages and disadvantages of
domestic contract manufacturing and overseas contract manufacturing in
Chapter #4.
How to Manufacture a Product: New
Product Introduction Process

We have seen companies–big and small–introduce new products or fresh

models of existing products in trade fairs year after year, from smartphones to
laptops to virtual reality headsets and automobiles. What most people often do
not realize is the rigorous process these products went through before they
come to life. Behind the success of a product is the implementation of new
product introduction.

What is a new product introduction?

New product introduction is used by contract manufacturing companies

when getting started with a new product. A new product introduction process
consists of various undertakings in stages, from the concept creation up to the
manufacturing of the final product. The final product could be new or an
iteration of an existing product and tangible (smartphones, laptops, etc.) or
intangible (software as a service, product as a service, etc.).
New production introduction is often used interchangeably with new product
development (NPD). Both NPI and NPD are part of the process of materializing
a product or service from conceptualization to market. Most notably, the
pre-release aspects are referred to as new product development, while the
release to manufacturing and market aspects are referred to as new product
introduction.

There are no exact same sets of steps as to how an NPI process should go as
it all depends from organization to organization. But one thing is for sure to
make the entire NPI process hit the mark is the cooperation and active support
of the key decision-makers in an organization.

Why is it necessary to implement an NPI?

An organization that develops and implements a solid NPI process positions
itself closer to the success of a product. One obvious advantage is cost
reduction; every decision in the product development process affects the cost
be it brought by repeated revisions, validation testing, and design changes.

Cutting down the frequency of revisions, validation testing, and design changes
could mean more time to market the product or an early generation of revenue.
An NPI process also helps determine whether a product concept is marketable
and/or saleable.

If a purchasing company enters an agreement with any contract manufacturing

companies, both camps work hand in hand to make the final product happen.
For new products, an NPI is in a way an investment on the contract
manufacturing companies since profit has yet to be made. Through the NPI
process, the success/failure of a product is anticipated.

Of course, there are other factors necessary to bring out the success potential
of a product, such as timing and cost. We will dwell more on that in later
sections of this article.

In this chapter, we will walk you through the general phases of a new product
introduction process, including the requirements, tools, and documents
necessary.

2.1 Conceptualization
All production starts with conceptualization where you lay the groundwork for
all subsequent processes. At this stage, ideas for a product are born, whether
the product is a totally new one or an iteration of an existing product.
Conceptualization highly depends on research to ensure that the product
concept is marketable and/or saleable. Market research is hyper-critical for
a product to become profitable.
What is it for? Who would use it? Is there a demand for it? How will it solve a
problem? Is there an existing product of similar kind? How will yours be
different?

Your research should answer all these basic questions about your product
concept before moving forward with the next steps.

2.1.1 Product Concept Design

A product design concept presents a potential product’s requirements with a
full description of the features and functions, taking into account the voice of
the consumer (VOC). All information gathered will be converted to design
specifications, which will be incorporated into one or more design concepts. A
project charter shall be made hereafter.

2.1.2 Project Charter

A project charter may include background information, objectives, scope, key
deliverables and dates, budget, stakeholders and sponsors, potential risks,
concerns, and assumptions, among others.

2.1.3 Business Case

An initial business case identifies the market or customer and the competition.
Within the business case are benefit costs analysis (BCA), cost sensitivity
analysis, cost risk analysis, and cost contingency analysis. A business case
also contains clear definitions of success and failure, which you can refer to in
the following stages of the project.

2.1.4 Feasibility Study

Through a feasibility study, the management is able to assess the project’s
potential for success. Here the project team evaluates the product design
concepts and decides on the design that best meets the predetermined
requirements. This stage may include a boundary diagram, preliminary design
concept, process flow diagram, and bill of material (BOM), among others.
Once all these are fulfilled, the project team or the management can decide
whether or not the project or proposed product design should push through, be
redesigned, or forgo altogether.

2.2 Product Design and Development

The product design and development stage is where you use the outputs
from the conceptualization and research phase. Here you will improve and/or
advance the product design features and specifications, including dimensions
and materials. An extensive review of the chosen product design helps in
assessing its robustness, customer suitability, and performance
requirements.

In addition, the production process needs to be reviewed as well, including

the equipment, space requirements, preliminary process mapping,
and location. Where necessary, you will tap other business units to help in
supplier selection, material forecasting, and other operational concerns.
In the product design and development stage, you should be able to create
outputs like:

 3D models of the design

 Concept drawings
 Detailed bill of materials
 Design failure mode and effects analysis (DFMEA)
 Design verification plan and report (DVP&R)
 Design for manufacturing/assembly (DFM/A)
 Manufacturing preliminary footprint
 Safety/regulatory audit reports
 Preliminary engineering design freeze

A bill of materials, also known as product structure, is a list of raw materials,

assemblies, components, parts, and the quantities of each necessary to
manufacture an end product.
It serves as a reference between manufacturing partners (contract
manufacturing companies and their customers) or units in a single
manufacturing plant. Often, it comes with a production order for reservations of
in-stock components or requisitions of out-of-stock components.

Design for manufacturing is a technique used to simplify, optimize, and refine

a product design. Through this process, the manufacturing team is able to
assess how easy or difficult it is to manufacture the design.
It is an important process to anticipate issues and know how to avoid them early
on, thus reducing the overall production cost. DFM may include the selection
and review of raw materials, dimensional requirements, and packaging.

During the stage review, the project team sets forth updated information about
the design, project timeline, risk assessments, and an updated business plan or
report of financial status. From here, the management team determines
whether they should proceed to the next stage or test plan further.

2.3 Prototyping
The prototyping stage is where you produce and test a batch of product
samples commonly known as a prototype. A prototype is used to review the
actual product design, find and resolve defects or problems, and/or implement
necessary design changes. Through prototyping, the manufacturing team
would be certain that the specifications are real and the product is working.

Once the first batch of prototypes is tested, the manufacturer will then proceed
to the second build called design verification, which is intended to be close to
the final production unit. Oftentimes, 3D printed plastic and other low volume
mechanicals are used in design verification to mimic the look and feel of the
end product before spending on tooling.

Product validation is the final build in the new product introduction process.
In essence, product validation is a dry run of full-scale production where labels,
shipping boxes, etc. are included in the analysis and testing.

In the prototyping stage, you should be able to have outputs like:

 Packaging standard
 Product level drawings
 Prototype builds
 Fixture or tooling creation and build
 Process work instructions
 Process flow or mapping
 DVP&R
 Process failure modes and effects analysis (PFMEA)
 Review of supplier production part approval process (PPAP)
submissions.

During the stage review, the project team should review the outputs with the
management team. If approved, the process proceeds to the final stage of the
new product introduction process.

2.4 Full-Scale Production

As soon as product validation gets the green signal, full-scale
production commences where the final prototype of the end product is being
mass-produced.
If you are working with a contract manufacturer, it usually starts with a request
for an assembly package, which may include the following:

 A detailed BOM
 Product requirements document
 Assembly instructions
 Approved part vendors, schematics, printed circuit board (PCB) files
 3D models or CAD drawings
 Sales forecast
These are necessary for the contract manufacturer to estimate the cost of
product manufacturing as well as a requisition for unavailable components.

The product manufacturing phase is fine-tuned and validated through the

prototypes and capability studies. Additionally, process documentation and
quality controls are developed and implemented at this point.

Full-scale production may include the development of manuals, price list,

catalog and quote tool, process work instructions and standard work, approval
of supplier PPAP submissions, internal training of associates, external training
of sales, dealers, etc., production control plans, process capability studies or
statistical process control, packaging evaluations, and final safety/regulatory
review.

These are just the fundamentals on how to manufacture a product. Keep them
in mind as we move towards the more actionable aspects on how to
manufacture a product.

But before that, we will walk you through the advantages and disadvantages of
in-house manufacturing and outsource manufacturing in the following chapter.
How to Manufacture a Product: In-House
Manufacturing vs. Outsource Manufacturing
to Contract Manufacturers

Product manufacturing is not just about completion. Product manufacturing

puts consumers’ interest to the core for a product to take off.

Behind the success of every product is the product manufacturing process that
shapes it up before hitting the shelves. Is outsource manufacturing really more
beneficial than in-house manufacturing? Or does it matter at all?

Choosing between in-house manufacturing and outsource manufacturing to

contract manufacturing companies requires both a thoughtful and economic
decision. Above all, the decision should be strategic at any cost.

In this chapter, we will explore the advantages and disadvantages of both

in-house manufacturing and outsource manufacturing to a contract
manufacturer so that you can make a sound decision that is right up your
business’s alley.

3.1 Pros and Cons of In-House Manufacturing and Outsource

Manufacturing
In-house manufacturing conducts manufacturing and/or production activities
within a company using its own internal resources, assets, and employees.
Most developed countries choose to outsource manufacturing to a contract
manufacturer for a lot of reasons, including cost reduction.
Despite this trend, much has been written about bringing manufacturing back
in-house. And as always, the main argument centers on protecting the
manufacturing jobs of a country.
Product manufacturing in-house is a great way to refine your process
and technology, keep tabs of your expenses, improve quality, and ferret
out new applications, among other things.

3.1.1 Production Control

Having a full, unabated control over your manufacturing and production
process from start to finish is one of the primary advantages of in-house
manufacturing. This may include control over the quality, product design, raw
materials, process optimizations, packaging, and delivery.

3.1.2 Flexibility and Adaptability

As a result of your control over the process, it gives you the opportunity to
become more flexible and adaptable as and when you see fit. In particular, this
is extra helpful if you are in an industry that changes pretty quickly, or if you
have a product that is very responsive to consumer-led changes. In-house
manufacturing makes changes between design, engineering, product
development, and production a lot easier to process.

3.1.3 Communication
Without middlemen or contract manufacturing companies, it is much easier to
communicate any specific instructions. What this means for managers or
supervisors is that reaching out to all departments first hand can be done
immediately and seamlessly.

3.1.4 Intellectual Property Security

For companies with trade secrets, the manufacturing process can never be
negotiable. Keeping manufacturing in-house not only protects and preserves
the company’s unique way of production or technology but also competitive
advantage. Outsourcing product manufacturing to a contract manufacturer
puts your advantage in jeopardy by all means.

Although there are laws protecting your company’s intellectual and physical
properties, with the presence of an NDA with your contract manufacturer, as
soon as your production leaves your home turf, you cannot always guarantee
that no compromise will happen later down the line.

Intellectual property is a major consideration before choosing between a

domestic contract manufacturer and an overseas contract manufacturer. If
production costs are not an issue, it is always necessary to keep product
manufacturing in-house. You do not want someone to reverse-engineer your
one in a million product design, do you?
3.1.5 High Labor Costs

Labor cost is the primary reason why companies in more developed countries
would rather choose a contract manufacturer than doing it in-house. Apple,
IBM, and Cisco Systems, among many others, have partnered with contract
manufacturing companies in China and India to bring their award-winning
products to life. In-house manufacturing means you will pay for salaries,
payroll taxes, and all benefits that your workers are entitled to.

3.1.6 High Production Costs

In-house manufacturing also means you will buy your equipment, rent your
own warehouse or factory, and foot all maintenance and utility costs. If you are
a new brand, you are likely to spend on your overhead expenses much more
than what you can earn in the first couple of years.

3.1.7 Requires Sales to Happen

It is not ideal for small budding companies to manufacture their products
in-house if they started out with low demand. They have to make sales, yet
they need to pay taxes, salaries, utilities, and other expenses to operate. If
they do not make sales or a steady stream of revenues, the company is going
to fail and die on its feet.

3.1.8 More Legal Responsibilities

In-house manufacturing entails a lot of legal responsibilities to take care of,
including waste management. It is a critical matter that many new companies
have to look into first before venturing into in-house manufacturing.

If you have all the resources, you can have your own systems, processes, and
the right equipment to deal with it. Otherwise, contract manufacturing
companies are a great option.

3.2 Pros and Cons of Outsource Manufacturing

Outsource manufacturing is the process of hiring people outside of a company
to build or assemble a product. Cost reduction is the primary benefit when
outsourcing parts of the production line to a contract manufacturer, making
outsource manufacturing great for your margins and bottom line.

However, outsourcing product manufacturing to contract manufacturing

companies also comes with disadvantages.
3.2.1 Low Labor Cost
Labor cost is the most common reason why many companies choose to
outsource manufacturing to a contract manufacturer, especially if it is done
overseas. A lot of contract manufacturing companies rent out their factories
and its workers for you to maintain and manufacture your product.

In most companies, if not all, labor takes up the biggest chunk of a company’s
budget. Outsourcing product manufacturing to contract manufacturing
companies minimizes your operating expenses since you are not directly
paying salaries, payroll taxes, and benefits of the factory workers. Some
contract manufacturing companies offer services beyond production, such as
storage facility and shipping, that you can use to your advantage.

3.2.2 Technically Skilled Workforce

Companies in the product manufacturing business, especially in China and
other Asian countries, have technically and highly skilled factory workers who
are willing to work for a fraction of salaries in the United States.

3.2.3 Fewer Regulations

For contract manufacturing companies outside the United States, they have
fewer regulations in relation to labor conditions, right-to-work laws, use and
disposal of materials, and other aspects of manufacturing that jack up the
production costs in more developed countries and regulated countries.

3.2.4 Lower Overhead Cost

Tapping the resources of contract manufacturing companies not only reduces
labor costs but a slew of other maintenance and utility costs and taxes as well.
These might include real estate, gas, electricity and water, insurance, building,
security, property taxes, and other operating and overhead costs due to
indirect labor.

3.2.5 Focus
If you are running a mid-sized business or any complex organization,
outsourcing product manufacturing to contract manufacturing companies
allows the management to concentrate on their core competencies and
objectives or on sales and marketing.

3.2.6 Increase Operating Capital

Reducing your expenses could mean two things for your company. One, you
can use your savings to augment your operating capital, even if your sales
remain the same. Or, it could be spent on marketing, research and
development, salary increase, debt payment, and other aspects that can help
your bottom line.

3.2.7 Lower Price Levels

Two, you may opt for lower price levels or maintain it as it is with your
reduction by outsourcing product manufacturing to a contract manufacturer. As
a result, you can increase your market share and your sales, which is good
your profit margins.

3.2.8 Lack of Control

Outsourcing product manufacturing to contract manufacturing companies
means you are entrusting your product from the ground up. In case your
contract manufacturer is offshore, quality control might be uncertain, especially
if you have no idea of your contract manufacturer’s reputation.

Losing control over the quality product is not good for your branding and
reputation in the grand scheme of things, most especially if faulty goods reach
the hands of your customers. There are remedies to solve this specific
problem though.

By hiring an agent or an on-site manager to oversee the manufacturing

process abroad and perform regular quality checks, you make someone
responsible for ensuring the utmost quality you are looking for in your product.

3.2.9 Communication Issues

Communication is another issue you may face when outsourcing product
manufacturing to a contract manufacturer, especially if the contract
manufacturer is offshore. Time zone differences and language barrier are two
common downsides here.

With time zone differences, it goes without saying that response time would be
an issue between a contract manufacturer and a purchasing company who are
halfway around the world distant from each other.

But just as previously suggested, hiring an agent can help you ease the
operations for you. Say you want to hire an agent in China, there are lots of
English-speaking agents nowadays so that should not be a deal-breaker. As
your agent, they are obliged to report to you and respond promptly.
3.2.10 Bad Reputation
It is no longer a secret these days that even the biggest companies in the world
are outsourcing their product manufacturing to contract manufacturing
companies, mostly in China, Taiwan, India, Pakistan, Bangladesh, and other
Asian countries. But there is still a stigma that comes with it, which many public
relations people and marketers use against competitors who hire contract
manufacturers abroad.

3.2.11 Cost of Logistics

Outsourcing product manufacturing to contract manufacturing companies
might be cost-effective labor-wise, it is often not the case if a company does
not make prior arrangements regarding storage and shipping very well.
Logistics can be a great expense if you will do it on your own.

Depending on your manufacturing budget, you can agree with a contract

manufacturer to take care of the storage, shipping, and even distribution of the
product. In the long run, it is much wiser to include warehousing and shipping
of your product in your contract.

3.3 When Does Outsource Manufacturing Make Sense?

Based on the aforementioned benefits of contract manufacturing, whether it is
domestic or offshore, cost reduction is the prime motivator why businesses
should start outsourcing product manufacturing.

If you are new in the business, it makes much more sense to look for the right
contract manufacturing companies to save you an awful lot of money. If you
are in the business for quite some time, there is room for you to lower your
product cost or augment your marketing campaign, which could skyrocket your
sales exponentially.

Nevertheless, it still pays to be logical about it. If the security of your

technology, production processes, or intellectual property is on the line,
staying in-house should be non-negotiable.

You can explore more of the advantages and disadvantages of domestic

contract manufacturing and overseas contract manufacturing in the next
chapter.
How to Manufacture a Product: Domestic
Contract Manufacturing Vs. Overseas
Contract Manufacturing

In the product manufacturing industry, outsourcing the work to contract

manufacturing companies can reduce the production costs. Outsourcing
product manufacturing to overseas contract manufacturing companies,
however, can drastically make cutbacks in production costs.

It is the same reason why a lot of companies in more developed countries

outsource manufacturing to overseas contract manufacturing companies. To
say the least, overseas contract manufacturing is a lot more common than
domestic contract manufacturing. Even so, it does not imply that overseas
contract manufacturing is far superior to domestic contract manufacturing in all
ways.

Manufacturing
In the last two decades, more and more American companies have been
outsourcing parts of their products or their final products to contract
manufacturing companies in China.

Recently, there have been discussions over bringing manufacturing back to

the United States due to a variety of reasons, including the rising labor costs,
quality issues, and other concerns. And the series of trade wars between
Beijing and Washington is rubbing salt in the wound.

Is it really time to bring product manufacturing back to the American shores?

When choosing how to manufacture a product, a bunch of factors comes into
play. Let’s weigh the advantages and disadvantages of domestic contract
manufacturing against overseas or offshore contract manufacturing.
4.1.1 Production Costs
In the last two decades, production costs have been predominantly the main
reason why companies in more developed countries choose to outsource
manufacturing to offshore contract manufacturing companies.

Despite the increase in average workers’ wage in countries like China and
India, getting an overseas contract manufacturer remains more cost-effective
than domestic contract manufacturer, regardless if we take into account the
other benefits of domestic contract manufacturing. Raw material cost is only
secondary to labor cost in any way.

For companies whose products have price as their competitive advantage,

outsourcing product manufacturing to offshore contract manufacturing
companies would make a lot more sense. Unfortunately, domestic contract
manufacturers in more developed countries cannot compete with unit costs
overseas.

4.1.2 Quality Assurance

In terms of quality control, domestic contract manufacturing companies give
you an advantage to a large extent. A factory that is just a few miles away from
you does not only allow you to personally perform quality checks on a regular
basis but saves you the cost of hiring a sourcing agent, flying abroad, or
sending someone from your company overseas.

For companies outsourcing products to contract manufacturing companies

abroad in high quantities, quality assurance is an important thing to consider
as well. Without having anyone from your company to oversee production
overseas, it somehow increases the chances of your customers to receive
defective goods.

Of course, you want your products to do exactly what it says on the tin can.
The practical way to make sure your offshore contract manufacturer upholds
the quality you want for your product is to hire a reliable sourcing agent or send
a representative from your company abroad, depending on the needs and
scale of your business.

4.1.3 Lead Time

Lead time is a crucial aspect of the conceptualization-to-production process
that domestic contract manufacturers have the advantage. In this fast-paced
age, the earlier you send a product to the market and address consumer
questions and concerns means the world to companies. It can make or break a
sale.
Most products run on a 30-50-day lead time, from factory to end product.
Although, lead time varies from product to product.

Earlier in the NPI process, prototypes and sample products could be shipped
back and forth for inspection and testing quite a few times. Having a domestic
contract manufacturer means you are cutting down precious hours and days
due to shipping.

However, this is not to say that offshore contract manufacturing companies

have a terrible lead time. Outsourcing product manufacturing overseas would
not be as successful as it is today if it is always the case. The key takeaway
here is to choose a trustworthy overseas contract manufacturer who you think
you can build a relationship with and can be sensitive with your timeline and
targets as well.

4.1.4 Order Quantity

Generally, domestic contract manufacturing companies have greater flexibility
than overseas contract manufacturing companies.

Domestic contract manufacturing companies can take in smaller production

runs with ease. Offshore contract manufacturing companies may also be
willing to accommodate orders in low quantities, but this might come at the
expense of shipping costs.

For just-in-time orders, domestic contract manufacturing is more beneficial

than overseas contract manufacturing. In the case of returned defective items,
the turnaround time for the goods to reach the overseas contract manufacturer
and back to the buyer might take a bit longer.

4.1.5 Communication
Communication is a key element in the product manufacturing process that
many new companies often overlook. Outsourcing manufacturing overseas,
especially in Asia, does not only present problems like language barriers, a
disparity of work ethics, and cultural differences as the main communication
hurdles.

Poor communication skills–whether on your part or your contract

manufacturer–can threaten a smooth production process. If you are doing
business with Chinese contract manufacturers, it is recommended to come to
the terms to your contract manufacturer, considering it is reasonable, of
course.
How to avoid communication breakdown with your offshore contract
manufacturer? Seek the help of a bilingual sourcing agent or company.

4.1.6 Logistics
Importing products from abroad can be an awful lot of work. The transportation,
delivery, and every single thing that happens in the shipping of products could
be quite stressful if you deal all by yourself.

Customs regulations, taxes, and a variety of fees throughout the process can
put you in an unpleasant situation. With this in mind, you have to make sure
that production costs when outsourcing abroad should not drag your product
down.

4.2 Why China Is the Best Country to Outsource Manufacturing

China has been consistently leading the world’s top manufacturing countries
for so many years now. It is also the largest exporter of goods, way ahead of
the United States. In the last few years, many cities in China have become
significant production centers.
According to the latest report by the World Bank, China produced $4.566
trillion of industrial output in 2016, of which $2.342 trillion are exported goods,
and continued to grow by 6.6 percent in September 2017.

There is no stopping in sight for China from dominating the product

manufacturing industry. Just as what industry experts believe in, China will
continue the streak in the next couple of years as the go-to nation when it
comes to product manufacturing, despite the fact that there are so many
outsourcing destinations to choose from.

And you might be wondering: Why is China the best country to outsource
manufacturing? We have a thousand points to show you, but we will condense
them into three main reasons.

4.2.1 China has a highly skilled workforce.

Labor cost is often the main reason that drives companies in more developed
Western economies to outsource manufacturing in China. Chinese labor might
no longer be as cheap as it used to be years ago, China’s pool of technically
skilled workers maintains its competitive advantage in the product
manufacturing landscape at a still inexpensive price.
4.2.2 China has stable facilities and advanced technologies.
Although there are many other outsourcing destinations that offer cheaper
labor, China’s stable facilities and advanced technologies have also been its
winning edge, still at relatively low production costs. In comparison with its
product manufacturing counterparts in Asia, China can deal with common
problems that directly affect the product manufacturing workflow, such as
power interruptions and unstable supply lines, among many others.

4.2.3 China has healthier political stability than its counterparts.

Political stability is another important aspect that product manufacturing
companies in China can be proud of. There are no other product
manufacturing destinations in Asia that have a strong political stability as
China. As long as national laws and government regulations are met, product
manufacturing companies and their partners need not worry.

4.3 Challenges of Outsourcing Manufacturing in China

Outsourcing product manufacturing to contract manufacturing companies in
China is not without some challenges. China may be the world’s biggest
product manufacturing country, there are lots of things you must reckon before
finally deciding to outsource product manufacturing in the country.

Most of these challenges, however, are not exclusive to Chinese contract

manufacturing companies. Companies may face the same circumstances in
other product manufacturing destinations.

The good news is, these hurdles can be preempted if you do your part. One
way you can meet these challenges head-on is to wrap your head around the
process on how to manufacture a product that we laid out earlier in Chapter
#2.

By understanding the NPI process and how to manufacture a product and

meeting all relevant outputs first, you get to anticipate and prevent the cost
overruns and other bumps later down the line.

By becoming aware of the process, product manufacturing (and the supply

chain in general) can run like a well-oiled machine. It is important to note that,
in supply chain management, the succeeding links are highly dependent on
the preceding links.

In this chapter, we will present to you the major problems that you may face if
you decide to work with contract manufacturing companies in China. Of course,
we will not leave you battling challenges out without some recommendations.
And finally, in the next chapter, you will learn all the ropes of contract
manufacturing in China–how to find a manufacturer that is truly capable; how
to manufacture a product with the right contract manufacturer; how to request
a quotation from your supplier; generally how to deal with contract
manufacturing companies in China.

4.3.1 Lack of Capable Service Providers

While it sounds a little contradictory to what makes China the best product
manufacturing destination, it is not. Let us explain why.

China is home to thousands of product manufacturing companies and millions

of skilled factory workers. They know how to manufacture a product, of course.
In spite of that, not all contract manufacturing companies in the country
are dyed in the wool when it comes to quality control, prompt delivery,
and customer service.
Many contract manufacturing companies in China have factories with fairly old
equipment, processes, and workflows. And because of the pressure to lower
production costs, some contract manufacturing companies would resort to
substituting lower grade materials or assigning the product manufacturing
process to a lower caliber factory where no quality control is done.

Failure to find the right contract manufacturer in China could mean less than
expected service quality and even passing on the expected cost reduction or
capital investment reduction.

In terms of quality control monitoring, you can leverage your ERP or any
cloud-based business intelligence and analytics software to feed you with
real-time or up-to-date feedback on your product before it reaches the
consumers.

4.3.2 Lack of Interest in Small-Scale Production

You might have perfectly ticked off your checklist in finding the right
manufacturer in China, it is not always a guarantee that the contract
manufacturer will do business with you. In most cases, contract
manufacturing companies are more interested in the revenue they will
get rather than the amount of business you can offer.
Contract manufacturing companies determine this through volume projection
alongside your product specifications and bill of materials. Often, contract
manufacturing companies would gladly consider compromising short-term
revenue gains if they see that your product will let them enter a new market
with strong growth potential.

The lack of interest in small-scale contracts is not always the case. When
finding the right contract manufacturer for you, make sure your business’s
scale is on a par or in proportion to the contract manufacturer’s. This way, you
are likely to pique the contract manufacturer’s interest.

4.3.3 Possible Assignment to Subcontractor for Smaller Production

In the selection process, contract manufacturing companies would always
present to you that they have the best support team to make your product
design happen. While it is hard to determine how many clients contract
manufacturing companies are attending to at the moment, it is often more than
you think of.

In most instances, contract manufacturing companies manage multiple

demand streams, so they are more likely to accept whatever projects that
come their way as long as they make money off them. In which case, they
might have to assign your project to another contract manufacturing team or
factory, which has less experienced or competent personnel.

Small-scale product orders and bare minimum order quantity (MOQ) are
usually an easy target to get assigned to another contract manufacturing team.
The same holds true when the contract manufacturing companies accept new,
larger customers.

Be critical with contract manufacturing companies who present the best

support team to you. Knowing that they have the best contract manufacturing
team is not enough to guarantee that your product design is in good hands.
To avoid these kinds of scenarios, it is also important to start building a
relationship with potential contract manufacturing companies right off the bat
by making a positive impression.

4.3.4 Loss of Control

As the world’s biggest product manufacturing country, you can expect China to
serve thousands of companies around the world. Product manufacturing
delays is a common issue in China due in large part to the number of
companies these contract manufacturing companies are serving.

Production delays are caused by a lot of reasons. A contract manufacturer

could bump your order to give way to a larger client. Perhaps, a subcontractor
failed to meet your contract manufacturer’s deadline, thereby affecting your
timeline. Manufacturing errors are also possible. The list goes on.

These things, along with inconsistent service quality and communication

issues, are inevitable and sometimes beyond your control. That is why it is
ever so important to know the process how to manufacture a product and find
the right contract manufacturer–one that suits your needs–and set boundaries
and expectations first.

4.3.5 Minimal Commitment to Environmental Protection

When it comes to environmental regulations, new companies who are looking
to outsource manufacturing to a contract manufacturer in China might know
that a contract manufacturer is responsible for the compliance to the
requirements of the government. It is true, but it does not necessarily mean
that the hiring company is free from responsibilities.

Many existing companies have been slapped by complaints and violations

either due to the fact that their contract manufacturers do not meet the
environmental requirements set by national laws or they themselves failed to
comply with them.

Ignorance of environmental laws could result in a great trouble that could lead
to your company’s closure. Pressuring your contract manufacturer to provide
proper product documentation and comply with laws and regulations is not
enough. Note that you are also liable when your contract manufacturer screws
up.

4.3.6 Lack of Overall Post-Production Review

If you become familiar with how to manufacture a product, you should be
familiar with the post-production evaluation too.
Some brand owners and contract manufacturing companies are used to
downplaying product evaluation, and they think they can get away with nasty
consumer reviews. In fact, in the new product introduction process, this is the
most neglected part.

There are so many contract manufacturing companies that do not take

post-production assessment seriously. And it comes as no surprise to see the
same bad product reviews over and over again.

Evaluating your production manufacturing allows you to know if the entire

process is working or if there are holes in it. It allows you to identify areas of
improvements and changes.

4.4 Hidden Costs of Outsourcing Manufacturing

Most decisions to outsource product manufacturing to overseas contract
manufacturing companies are fueled by the expectation of big labor cost
savings. Considering the rising wages and other production expenses in
developing countries in the last few years, labor savings have become a thing
of the past in some way.

Companies that have failed to revisit their past outsourcing decisions today
might be shocked to learn that a lot of things has changed since 10 or 20 years
ago. For emerging companies, the opportunity of learning the trends and best
practices of outsourcing product manufacturing presents itself.

Pricing surprises are the second most common cause of dispute between a
client company and a contract manufacturing company. In most cases, the
client company takes the demerit because they fail to read the fine print before
sealing a deal.

As soon as the client company sees the bottom line pricing, the deal looks
pretty good on the surface since there is a significant cost saving in sight. Little
time is spent on getting a solid grasp of the unexpected costs, whether or not
contained in the contract.

We are talking hidden costs of outsourcing product manufacturing, not only in

China but wherever there is product manufacturing. These costs are “hidden”
because they might not be clearly stated or agreed upon on paper.

These hidden costs are mostly opportunity costs that you lose due to oversight
or the lack of nitpicking over minute details of the entire product manufacturing
process. Note that these costs are difficult to calculate since they depend on
factors like product type, purchase order, etc.
4.4.1 Inventory Liabilities
Often ignored at the outset of the process, inventory liabilities are a common
cause of burned bridges between a client company and a contract
manufacturing company when no party is willing to take responsibility for them.
Inventory liabilities many a time is a repercussion of the client company’s
failure to meet the forecasted demand against, say, actual sales.

Before signing any contract agreement, make sure to know and understand
your liability profile and negotiate them as much as possible. Be clear with your
contract manufacturer where your liabilities begins and ends. Will they be
based on a purchase order, stocking level, forecast, etc.?

4.4.2 Fluctuation Costs

A lot of companies think after getting a quotation from contract manufacturing
companies, the quoted price is final. While it may be true for the most part, the
price of raw materials, oil, and other resources fluctuates over time. The
currency exchange rate is another concern subject to fluctuation that you need
to assess.

With all these fluctuations, a contract manufacturer might see it necessary to

increase the price on your end. These fluctuations are beyond the bounds of
your control, but what you can do is to prepare for foreseeable events like this.

4.4.3 Storage and Transportation Charges

In the supply chain involving outsourced product manufacturing overseas, it is
imperative to learn what Incoterms are. Incoterms, or International Commercial
Terms, are a set of three-letter codes used as the standards of international
shipping.
Incoterms guide the client company and the contract manufacturer overseas
regarding their responsibilities over the shipment of goods. These codes
dictate where your responsibilities as a purchaser begin and where the
responsibilities of a contract manufacturer end.

Without knowledge about these terms, you are likely to shoulder additional
expenses in warehousing and transportation charges or penalties. Add to
those the various customs fees.

4.4.4 Indirect Costs

Indirect costs are not your typical overhead expenses, which can be both fixed
or variable. Indirect costs are not normally stated in the contract, but contract
manufacturing companies offset these costs through other means.
They are not illegal to any extent. You as a client company should be wise
enough to calculate how much your contract manufacturer is imposing on you
based on your BOM, etc. In some cases, these have markups to make up for
the contract manufacturer’s other production and maintenance expenses.

Know that beyond the cost of raw materials, labor, transportation, etc., contract
manufacturing companies have to maintain their factories, facilities, equipment,
floor space, etc. and hire support services of IT, handling, record-keeping,
inspection, accounting, and other personnel.

4.4.5 Warranty and Returns

These costs are often associated with out-of-the-box products. Warranties for
faulty products, including repairs and replacements, can be a huge blow to
your bottom line. In most cases, you as a brand owner will have to shoulder the
full or a fraction of the shipping, repair, and replacement costs.

Customer returns or salvaged goods are another pain in the neck to brand
owners. You are not only losing sales for these, but you are most likely going
to pay for the shipping costs as well.

Lastly, for unsold goods and items that do not meet your quality standards, you
might be forced to sell them at a discount. Otherwise, you might not be able to
recover the costs of making these products.

These events are inevitable. One way to decrease your returns and
replacements is in quality control, which something you may or may not have
depending on the terms of your agreement with your contract manufacturer.

After learning how to manufacture a product and the ropes of product

manufacturing, we are finally down to the final chapter where we will break
down the steps on how to find a manufacturer, how to choose a contract
manufacturer, and more.
How to Find a Manufacturer and How to
Choose a Contract Manufacturer

You have a product idea, but you have no idea how to manufacture a product.
That is fine; every new company that intends to establish its own brand has
been there.

Hold it right there. We know how eager you are to learn how to manufacture a
product, distribute it, and make money off it

In this chapter, you will learn a ton of things that will be instrumental in a
product’s success. These include the process on how to find a manufacturer,
how to choose a contract manufacturer or supplier in China, how to outsource
manufacturing in China, how to calculate manufacturing overhead, how to
request a quotation from suppliers or contract manufacturing companies, how
to ensure product quality and lead time, and how to protect your intellectual
property from your contract partner.

5.1 How to Find a Manufacturer in China

How to find a manufacturer is one of the most important steps in your business.
But after reading all the pros and cons of outsourcing product manufacturing to
an overseas contract manufacturer, you might have no idea right now how to
find a manufacturer in China to get your product off the ground.

There are a couple of proven and tested methods on how to find a

manufacturer in China. An online directory is one of them.

Due to the demand in the e-commerce business today, a lot of online

directories have sprouted boasting to have “direct” connections with product
manufacturing companies in China. You want to avoid them because more
often than not, most connections of these online directories are just trading
companies and distributors.

Although, not all online directories are bad. As a brand owner, you would want
to reach out directly to your contract manufacturer. Not only it is cost-effective
since no middlemen are involved, but it also gives you a direct and clear line of
communication with the manufacturer.

So, how to find a manufacturer in China via online directories without getting
scammed? In this chapter, we will discuss the most common and effective
ways on how to find a manufacturer in China.

5.1.1 Alibaba
Alibaba.com is the world’s largest e-commerce platform where you can find
millions of products and thousands of suppliers from China. Alibaba has
become the most comprehensive online directory of manufacturers, traders,
and wholesalers, connecting them to all buyers from around the world.

Is Alibaba safe to use?

Alibaba is a marketplace. Like any other real-life marketplaces, there are bad
and dishonest ones lurking around. Nevertheless, Alibaba is safe to use if you
know what you are doing and how to find a manufacturer correctly.

When searching for product suppliers on Alibaba, you can filter the search
results according to:

 Trade Assurance
 Gold Supplier
 Assessed Supplier

Your goal is to get the safest suppliers to appear in your search results, so you
tick all three of them. Let us explain how these filters work.
Trade Assurance suppliers accommodate an escrow, which means a third
party holds your payment to the supplier until the conditions in your
transactions are fulfilled like the goods are delivered to you correctly. This is
the most secure of them all.
Gold Supplier is an exclusive membership to select suppliers on Alibaba.
They should earn it. One of their perks is visibility on the platform, meaning
their products are a priority for exposure.
But not all Gold Suppliers are good and honest. So when choosing a Good
Supplier, be sure to note how many years have they been rated as such. The
longer, the better.

Assessed Supplier is the most important filter. It basically means that a third
party has inspected the supplier and its facilities.
Assessed Suppliers have often solid company profiles, robust sales
performance, and active participation in trade fairs.

Above all, you ought to validate all these things for yourself. You still need to
check company profile and read reviews and feedbacks on forums before
dealing with a prospective supplier from China.

In terms of transaction details, make sure to take note of the MOQ, price per
unit, and payment terms of a supplier for a certain product. As much as
possible, avoid middlemen or traders.

5.1.2 AliExpress
Owned by Alibaba Group, AliExpress is the retail version of Alibaba.com. It
operates at the consumer level where you can purchase products in lower
quantities at factory prices.

AliExpress does not have a vast pool of manufacturers as Alibaba. Instead, it

teems with traders and smaller distributors. They might know how to
manufacture a product, but they are not the right people if you are looking to
produce goods in large quantities.

If you are a small business or someone who wants to venture into the
e-commerce business without having to deal with MOQ requirements,
AliExpress is a great alternative.

5.1.3 Trade Fairs

There is no other classic way how to find a manufacturer and be sure how to
find a manufacturer correctly than trade fairs. Chinese trades shows are
becoming a force to reckon with as the economy and technology levels are
boosted.

Thousands of businessmen from around the world show up at trade shows in

China in the hopes to buy or sell products and products that have an
exponential growth potential.

If you want to attend trade shows in China, you should be looking at the top
events happening around the country, including the Canton Fair (China Import
and Export Fair), China Yiwu International Commodities Fair, Bauma Fair, and
Shanghai Import and Export Commodity Fair.

 Canton Fair. Held twice annually in Guangzhou, the Canton Fair is

China’s biggest national fair that features over 60,000
booths offering almost every conceivable product, from electronic
products to automobiles. Hundreds of thousands of visitors from 200
countries visit the fair every year.
The Canton Fair’s spring events usually happen from April to May, while
the fall season events happen from October to November.

 Yiwu Trade Fair. A permanent trade fair that targets small buyers from
all over the world who are searching for wholesale consumer goods at
low prices. Yiwu Trade Fair has over 70,000 booths accommodating
over 100,000 sellers from thousands of Chinese manufacturers. Yiwu
Trade Fair happens annually in October in Yiwu City.

 Bauma Fair. It is the world’s largest trade fair for the construction
industry where construction machinery and equipment and building
materials are displayed. China has the world’s largest construction, so
the Bauma Fair is really important. Bauma Fair takes place in Shanghai
twice every two years in November and attended by over 200,000
people from around the world.
  Shanghai Import and Export Commodity Fair. It is the largest of all
regional fairs in China that features clothes, textiles, gifts, art, and other
consumer goods. It is attended by over 35,000 buyers around the world.
The fair happens every March of the year.

5.2 How to Choose a Contract Manufacturer or Supplier in China

After learning how to manufacture a product and how to find a manufacturer,
choosing the right contract manufacturer should be your next agenda. You
might know how to manufacture a product and how to find a manufacturer,
looking for a contract manufacturer to partner with can take a lot of time and
effort on your part.

Like any other facets of a business, outsourcing the product manufacturing

work is more than just an economic decision. It is a strategic decision that puts
the future of your product and your brand on the line.

Gone are the days of cost reduction and cost savings as the main criteria when
choosing the right contract manufacturer. Thousands of product manufacturing
companies offer the same categories of products. You must select the
manufacturer that will best serve your interest, your budget, and your needs
without sacrificing quality and timeline.

Before sealing a deal, make sure to perform background checks. But the
question now is: what should your criteria be in the selection of a partner
contract manufacturer? Here is how to choose a contract manufacturer or
supplier in China.

5.2.1 Communication and Customer Service

Your presence and visibility on the production floor is something you need to
give up when outsourcing abroad. This makes communication one of the top
priorities when looking for a contract manufacturer.

You cannot guarantee how contract manufacturing companies muddle through

communication with foreign clients. Getting a contract manufacturer’s email
and phone number is not enough.

The best thing you can do to ensure a contract manufacturer responds to your
queries is to ask for their customer service hotline. These days, many Chinese
contract manufacturing companies have English speaking staff that supports
their business.
As a client company, you are entitled to access any information relating to your
product, including real-time storage temperature date, shipment confirmation,
assay results, etc.

In the selection process, one good way to discern whether or not contract
manufacturing companies are likely to have a good, open line of
communication and customer service is if they will highlight or encourage you
to request status reports, quality reports, and real-time updates.

5.2.2 Price and Minimum Order Quantity

A minimum order quantity, or the lowest amount of stock that product
manufacturing companies are willing to sell, is a huge setback among
small-scale companies, particularly in the drop shipping business. Usually,
high-ticket products have lower MOQ, while low-ticket products have higher
MOQ.

Depending on which product you are going to outsource, look for contract
manufacturing companies that have lower MOQ. But do not be fixated on low
MOQ alone. If you are negotiating MOQ, note that some product
manufacturing companies would sometimes charge buyers at a higher price
per piece for smaller purchase orders.

Most Chinese product manufacturing companies operate on razor-thin profit

margins, usually as low as 3-4 percent. For products with low-profit margins,
product manufacturing companies have to produce them in large quantities in
order for them to break even. Otherwise, they will have to price the products
higher.

For instance, CM 1 manufactures towels that cost $1 to make. The MOQ set
for the towels is 1,000 pieces. If you buy 5,000 towels, the price of the towels
per piece is $2 only. The towels become $3 a piece if you buy the bare MOQ.

But you would not want to risk buying 5,000 towels because you are not sure if
the towels will sell within a set timeline. So, you opt to buy the towels at a
minimum.

Do you think the price is fair for your bottom line? If not, you can either
negotiate or look for better options.

5.2.3 Quality Control System

Does the contract manufacturer capable of meeting your quality standards?
Can the contract manufacturer maintain the quality standards if you increase
your sales demands? Does the contract manufacturer have the required
manufacturing authorizations to operate?

These questions will help you choose a contract manufacturer who takes
quality seriously. But go beyond asking.

All technology used in a product manufacturing facility should also have the
necessary registrations and certifications to make sure the equipment is
leveraged without errors.

If applicable, look for authorizations from Food and Drug Administration, Better
Business Bureau, and other regulatory agencies. A raft of websites and digital
resources are available for you to inspect reputation of contract manufacturing
companies, from governmental to nonprofit websites that accommodate their
legal and compliance histories.

Check if the product manufacturing company is ISO-certified to ensure that

they have clean, safe, orderly, and well-maintained production facilities. If you
are dealing with medical equipment, for example, all the more you will have to
double check the machines. You cannot afford to risk precision.

The best way to assess the quality procedures of contract manufacturing

companies is to personally perform a factory audit. A facility tour enables you
to evaluate the skills of the production personnel and check the equipment.

Another transparent method to manage quality issues is to know if the contract

manufacturing companies have a cloud-based quality control solution. It allows
you to do an inspection on your products and gain insight into their processes
without crossing borders.

The last thing you might want to do is to hire a sourcing agent who you can pay
to inspect the quality of your products as they happen.

5.2.4 Experience and Scalability

In addition, work with contract manufacturing companies that understand your
business. It is important to check if the contract manufacturer has the
experience in manufacturing products that are similar (or almost similar) to
yours. Experience validates the legitimacy and capability of prospective
contract manufacturing companies.
Do you think the contract manufacturer can scale up production themselves
should you need it? Does the contract manufacturer have fluid resources and
proactive production management capabilities?
Avoid contract manufacturing companies that have questionable resources.
You do not want your company to drag on their inability to keep up with your
demands, do you?

5.2.5 Performance Metrics

We have mentioned that experience matters when choosing a contract
manufacturer. Gauge the short- and long-term practicality of an outsource
contract manufacturer.

If you can see performance metrics (safety, cost, quality, and delivery) of
contract manufacturing companies against industry standards, that should give
you an idea of how these companies fared in the past.

Reputable contract manufacturing companies can deliver on your specified

timeline and quality standards. In terms of deadlines, one of the dangers of
contract manufacturing, however, is the lack of precedence.

If a contract manufacturer has multiple clients in a given industry, you need to

ask for their turnaround system to make sure they meet your deadlines no
matter how many clients will they serve.

As much as possible, do not operate on a first come, first served basis. Instead,
ask the contract manufacturer if they have a sufficient amount of equipment
and qualified workers to meet multiple clients at the same time.
5.2.6 Financial Stability
Knowing that a contract manufacturer is in good financial shape is a must. Why
is this so?

As a client company, you will be looking for possible disruptions in the course
of the product manufacturing process during your risk assessment. Risk
factors like natural disasters, raw material shortfalls, inventory
mismanagement, market fluctuations, unrealistic expectations, equipment
failure, subcontractor delays, and more are the real stress test in the product
manufacturing industry.

Without a solid financial reserve, the chances of your product to be affected by

these circumstances are so high. Worst case, a contract manufacturer goes
out of business.

5.2.7 Location
If you are outsourcing product manufacturing in China, knowing the location of
your contract manufacturer can help you streamline your costs. Exported
products from China have a value-added tax, and it varies by province.

Product manufacturing companies producing hi-tech items are usually located

in Southern China while metal and other industrial items in the north.

5.2.8 Value-Added Services

A contract manufacturer that has value-added services is not always a
necessity, but they may prove helpful to you in the grand scheme things.
Expertise in planning support, market and demand forecasting, sophisticated
reporting, and more is a huge advantage to be used as part of your contract.

Can the contract manufacturer test and pack your products? If you are in the
drop shipping business model, drop shipping capabilities to send the product
directly to customers is a good way to save lots of money.

On top of that, the contract manufacturer’s willingness and ability to modify

their quality control systems and production process to meet your demands
and requirements is something you would benefit in the long run.

5.3 How to Calculate Manufacturing Overhead

Manufacturing overhead, also known as manufacturing support costs, factory
overhead, factory burden, is the indirect costs incurred when a product is
manufactured.
Manufacturing overhead expenses, together with direct labor and direct
material, are normally assigned to each product or unit manufactured in order
for the cost of goods sold and inventory are valued and reported to generally
accepted accounting principles.

Manufacturing overhead may include factory utilities, depreciation of factory

equipment and building, production personnel (other than direct labor), and
production supplies. These factors and how they are imposed upon a product
affect its profitability.

A profitable product should have a selling price greater than the sum of the
product cost (direct material, direct labor, and manufacturing overhead),
expenses, and nonmanufacturing costs or administrative overhead.

5.3.1 Manufacturing Cost per Unit

Here’s a hypothetical sample of manufacturing cost per unit of a towel when
manufacturing the product on your own:
Here’s a hypothetical sample of manufacturing cost per unit of a towel when
outsourcing the production to a contract manufacturer in China:

5.3.2 Direct Material, Direct Labor, and Manufacturing Overhead

Direct material is the cost of all materials needed to manufacture a finished
product, such as circuit boards, TV monitor, and anything that is integrated into
a finished product. Indirect material refers to minor materials used in the
production process, such as strands of wire, solder, etc. Indirect material is
considered to be a manufacturing overhead.

Direct labor is the gross wage paid to all workers who physically and directly
work on the manufacturing of the products. Indirect labor refers to the wages of
other factory employees, such as supervisors, maintenance personnel, guards,
etc. Indirect labor is considered to be a manufacturing overhead.

Manufacturing overhead is the total costs of manufacturing other than direct

labor and direct material. Aside from indirect labor and indirect material,
manufacturing overhead also includes utilities, maintenance, property taxes,
insurance, repair, and factory-related depreciation.
Accountants refer prime costs to the components are direct in nature, that is,
direct material and direct labor. Conversion costs are the components to
transform raw materials to end products, that is, direct material and
manufacturing overhead.

5.4 How to Request Quotation From Supplier

A request for quote (RFQ) is a standard process that companies use when
preparing to buy products from a product manufacturing company. It is another
important part of the process to avoid common pitfalls that you might
experience when in the procurement stage.

We will walk you through the steps on how to request a quote from a supplier
in China. As for the template, you can download free templates out there and
modify them according to your needs.

Normally, a company creates and issues an RFQ to product manufacturing

companies or contract manufacturing companies. The product manufacturing
companies or contract manufacturing companies, in turn, offer price quotes.

The company selects the preferred contractor often based on the lowest bid or
the contractor that can provide the best value for the buyer. A quote from
product manufacturing or contract manufacturing companies is not final and
cannot be used as a contract or formal agreement. Whatever is contained in
the quote is subject to change.

There are different types of RFQ, namely:

 Open bid. The RFQ is open to all contract manufacturing companies or

suppliers. Price quotes may be divulged to other suppliers, often
helping drive down pricing.
 Sealed bid. The buyer discloses all the bids simultaneously after the
set deadline. It is often used among government agencies.
 Invitational bid. The buyer specially asks specific contract
manufacturing companies to join the bidding process. It can either be
open or sealed.
 Reverse auction. In contrast to auctions where the buyer with the
highest price gets the desired product, the reverse auction is where the
buyer selects the lowest price.

5.4.1 Preparation
Decide what requirements you would want to include in your RFQ. This will
allow you to review bids in a well-organized manner. If you have a project
manager or other relevant people in your organization, work with them to
ensure you have included all the needed requirements.

The RFQ may include the following details:

 Specifications of products and parts with detailed descriptions

 Order quantities
 Delivery requirements
 Payment terms and options
 A request to itemize costs
 RFQ timeline and review process
 A timeline for delivering the product
 A system for comparing bids
 Selection criteria
 Terms and conditions
 Submission requirements

At this point, you need to emphasize the type of bidding you intend to do. In
your RFQ, include documents like a pricing template and draft contract with
terms and conditions.

5.4.2 Management
Once your RFQ is ready, distribute them to all candidate product
manufacturing or contract manufacturing companies. Wait for them to respond
with a quote.

You need to be ready to answer some questions regarding your RFQ. It is

important to take note of them for future references.

To make sure you are transparent and fair in the bidding process, treat
everyone equally with little to no preconceived ideas about them. Refrain from
giving more information to select vendors over the others.

Once you have the quotes, acknowledge it and maintain the confidentiality if
they are a sealed bid.

5.4.3 Awarding
Review the quotes you received from the product manufacturing or contract
manufacturing companies based on your selection criteria. Choose the winner
with the lowest price at the best terms. Then, create a contract or purchase
order to finalize the deal.
5.4.4 Closing
Do not forget to thank the product manufacturing or contract manufacturing
companies who participated in the bid. Other concerns that you might raise
with the winning vendor include packaging, delivery schedule, changes in
pricing, etc.

5.5 How to Ensure Product Quality and Lead Time

Quality assurance (QA) and quality control (QC) should go hand in hand to
prevent untoward circumstances during the product manufacturing process.
Through quality assurance and quality control, your product is guaranteed to
reach the hands of your consumers without defects.

Quality assurance is process-oriented, so it makes sure you are doing the right
thing. Quality control, on the other hand, is product-oriented, so it tests the
product quality.

From the selection of raw materials up to actual production, both principles are
significant for the success of your product. Every step of the production
process should have a set of procedures to monitor and control the progress.
Here are some steps you can do.

First, evaluate the quality of technology, procedures and processes, and the
labor of your contract manufacturer. This will allow you to detect, anticipate,
and amend any quality and delivery issues.

If the contract manufacturer fails your quality standards, create testing

methods with approved tolerance limits. If any event that the contract
manufacturer goes beyond the set tolerance limits, you need to evaluate and
address it.

To ensure product quality and lead time, most companies create a weighted
decision matrix analysis to help you prioritize your needs and score each factor
against your prerequisites. For example, your manufacturing decision should
be based on cost, quality, time, and technology.

All product manufacturing or contract manufacturing companies have their own

sets of strengths and weaknesses. By using a weighted decision matrix
analysis, you can ensure the right company that can meet your standards and
requirements.

Of course, nothing beats an on-site factory audit to ensure product quality. You
can do regular factory checks, depending on your arrangement with your
contract manufacturer. Audit reports should be compiled, including photos,
videos, and timing updates, for references.

5.6 How to Protect Your IP From Your OEM Partner

Intellectual property can be a source of competitive advantage. If you have a
technology that is exclusive to you or a kind of product that has never been
seen in the market yet, you should protect your intellectual property at all cost.
But how would you do that?

People who have been in the product manufacturing business for quite some
time know to protect one’s intellectual property or trade secrets from overseas
contract manufacturers, protect them legally and operationally. No ifs and
buts.
One without the other does not guarantee you protection. A good contract and
a good IP registration should go hand in hand to increase trust between you
and a contract manufacturer.

Legally, companies who outsource manufacturing in China should make sure

that they have all their legal documents prepared through patents and
trademarks in both China and home country as well as supplier agreements
like non-compete clause.

To protect your product early on, require the contract manufacturer in China to
execute an appropriate agreement before giving out any information about
your product. Use an NNN (non-disclosure, non-use, non-circumvention)
agreement that is China-centric. Otherwise, it will not be valuable in China.

In order for the NNN agreement to be enforceable in a court in China, the

exclusive jurisdiction is in a Chinese court with jurisdiction over the contract
manufacturer, Chinese law is the governing law, and Chinese is the governing
language.

On the operational side of things, use several anti-counterfeit technologies. If

possible, operate in a way that even some of your intellectual property is stolen,
all of it cannot be. For instance, keeping your software within your country.
However, this is not foolproof at all.

On top of those, companies should be aggressive about monitoring the market

for possible counterfeits of their technology, or regularly visit factories in China
to reduce the risk of copied products. To monitor the market means attending
trade fairs, scanning Alibaba and other online directories, and making mock
purchase calls on your suppliers.
Conclusion and How China Source link
Can Help

Product manufacturing, as you may have known by now, is not just about
coming up with a final product or finding a supplier. It entails pretty complex
processes from the ground up.

The new product introduction process in the beginning hugely helps in reducing
cost brought by unforeseen revisions and design changes and in determining
whether a product concept is marketable and/or saleable.

But as to manufacturing onshore or overseas, both have their own sets of

advantages and disadvantages. Manufacturing products domestically is a great
way to refine and protect your process and technology and take control over
quality. Manufacturing products overseas, meanwhile, could very well help your
overall profit margins and bottom line.

According to the Centre for Economics and Business Research (CEBR)

forecasts, the Chinese economy will take over the United States as the world’s
largest economy, and this can be directly attributed to China’s rapidly
increasing output.

China currently has the world’s largest industrial output, which has been
propelled by strong factory output, stable retail sales, and an export market that
is constantly growing.

Outsourcing manufacturing in China means you get to take advantage of the

highly skilled workers at a reasonable price, factories with stable facilities and
advanced technologies at relatively low costs, and a better political stability.
In the following years, China will surely continue to be the center of product
manufacturing industry, despite trade wars with the United States, emerging
competition among developing countries, and the soaring labor and production
costs, among other factors.