Contract Manufacturing in China – Not as Easy as You May Think
Contract manufacturing has become increasingly popular for large organizations that don’t want to own factories, machinery, etc. and focus their efforts on product innovation and marketing. Large companies, such as Apple, hire contract manufacturers like Flex to make their phones, HP to make printers, and Motorola to make phone systems. Contract manufacturers are attractive because they often have all of the functions under one roof and can help with everything from Product Design to Prototyping, Sampling, and Production.
Outsourcing to a contract manufacturer can be a great move for a large company with significant volume, good leverage, and relatively mature products. For smaller companies that are earlier in their product development cycle, there is risk of limiting your options too early. Once you select a contract manufacturer, you are bound to their factories and equipment, as well stuck with their pricing and terms. With smaller volumes than the bigger companies, you will have little leverage to negotiate price and other terms.
While China is considered the best place to produce products, particularly more complex products, contract manufacturing in China is not for everyone. You can still source from China or other global manufacturing hubs, even if you don’t go directly to a contract manufacturer. You will need internal experts in product design and development, as well as in supply chain management to be able to find, evaluate, negotiate, and manage the factories.
For many small companies, these resources and expertise are not the payroll. An easier option is to leverage the power of a managed marketplace model – one that brings the benefits of contract manufacturing without all of the drawbacks, giving you full control of the product development process.
The Managed Marketplace Model
There is a new model that represents a powerful alternative to the traditional contract manufacturing approach: the managed marketplace model. The managed marketplace model brings the best of both worlds to companies that do not have deep product development expertise or supply chain expertise. This model allows companies to maintain flexibility and control while still outsourcing product development with trust and confidence in the process. Instead of trying to learn as you go, which can be a frustrating and expensive path, you partner with a company like Gembah to help you with contract manufacturing in China or any other country that makes the most sense.
From a design perspective, the managed marketplace model can help you find the ideal designers and engineers for your specific product instead of being limited to only the designers working for the contract manufacturer. Your designer has experience designing products in your product category, bringing fresh insights and saving time with revisions so you can begin production much faster.
In regards to the supply chain, the managed marketplace gives you flexibility in finding the best factory anywhere from around the world with the ability to switch factories if needed. Sourcing factories is a critical aspect of the production process, one that takes skill in negotiating a good deal and overseeing production to ensure the contract manufacturer in China is doing exactly what they promised. Few small companies have this expertise or the local-level staff to develop a personal relationship with the manufacturer and manage production.
The Steps Before Sourcing a Manufacturer
Before you can begin sourcing a contract manufacturer in China, there are several steps that must be completed beforehand. Keep in mind that if you leverage the managed marketplace model, you will partner with a company that will provide you with all of the resources and expertise to do the following much faster and with greater confidence. They will also be there to answer questions and provide best practices along the way. A contract manufacturer will be motivated to get you to make products that fit in their wheelhouse, whereas an independent partner is not incentivized to steer you in any specific direction.
Research is critical before you begin creating any product. Product development, no matter how you approach it, is an investment in both time and money. Making sure you are going after the right product opportunity is essential, especially for smaller companies with limited budgets that cannot afford to make the wrong bet.
By spending time in the research phase, you will know if you are investing in the right products at the right time. You have to understand your customer and what they want, as well as whether there is an opportunity to fill a niche that the competition has ignored or isn’t doing as well as you could. Here is where you will find if there are opportunities to build market share, improve on an existing product or create a new product from scratch that meets or creates demand.
Research includes market research, competitive analysis, trend tracking, keyword search, margin and profitability calculations, and finding the right people to partner with to bring your product to life.
Design is where the rubber hits the road – where your product ideas go from concept to actual designs. With the managed marketplace model, you will be able to work directly with a team of industrial designers and various engineers that have been matched to your specific product based on their history of designing similar products.
The exact design deliverables will vary depending on the type of product you are creating but typically include design includes sketches; CAD, 2D renderings; 3D printed prototype; materials and component details.
Files and Measurements
Whichever manufacturer you choose, they will need your final designs files with precise measurements. Like architectural blueprints help builders with precise details, this information will help your manufacturer understand exactly what you want so that they can accurately price, source and build a product that meets your specifications. Again, working with a contract manufacturer can help you with some of this, but be careful to retain legal ownership of any design or tooling that is created. If not, you may find yourself paying for someone to create a product that you no longer have control over.
Types of Chinese Factories
When looking at contract manufacturing in China, ideally you want to find one with lower minimums and high scalability. Depending on your product, you may need one of the following factories:
Raw Material Factory – This type of factory produces the basic materials you will need for your product. These parts are then sent to one of the other factories below.
Component Factory – This factory will produce a part of your final product, often incorporating the output of what your raw material factory produced.
Assembly Factory – This factory is the one that will take all of the materials and components from the other factories to put together your final product that is ready for market.
Make sure you know the capabilities of any factory you work with. At first glance, it may seem like they have all of these capabilities in house, but more often than not, multiple factories are involved in the process.
Sourcing a Chinese Factory
Finding a contract manufacturer in China can be as easy as Alibaba or a sourcing agent, but it doesn’t mean you end up with the best factory. In fact, many companies, e-Commerce businesses and entrepreneurs who use Alibaba and sourcing agents discover later that they should have spent more time sourcing. It is not uncommon that sourcing agents often are in kahoots with factories and some factories do not have your best interest at heart. They know how to work the system to their advantage and are banking on the fact that they know more than you.
Instead, the managed marketplace model ensures you have a partner on your side – one that has a vetted factory network and enough leverage to keep factory partners on their best behavior. Instead of hoping you got a good deal and your product is made with quality, you only have access to the most qualified, reputable factories in China and around the world who have the experience manufacturing products like yours. These factories have proven themselves time and time again, working hard to maintain their reputations as they build long-term relationships with you and your team.
They are more apt to negotiate fair deals and produce a quality product that meets your precise specifications at the volume and in the timeframe specified in your contract. They will also put compliance and safety first. With a reliable manufacturer in your supply chain, you will have greater peace of mind your money is well spent.
Understanding the Chinese Culture
Keep in mind that contract manufacturing in China is different than in the United States. There will be a language barrier and cultural differences, making it important to have a local representative who understands both. This person will be your eyes and ears on the ground, helping you build a good relationship with your factory partner(s). Your liaison will know exactly what you expect and ensure those expectations are being met. Since COVID-19 has made international travel challenging, it is important to have feet-on-the-street wherever your product is made, making sure it is being done correctly.
Before you give the green light for mass production, you will want to see production samples your product. If you aren’t able to travel to the factory yourself, your local representative will sample the product on your behalf and send you photos and anything else you may need to get a better idea of the product construction, design and quality.
When you are happy with the samples, it’s time for mass production and quality control. Again, it is highly beneficial to have a consistent, local presence to oversee production and conduct Quality Control, which should always include monitoring the Accepted Quality Limit (AQL), the internationally agreed-upon standard for the allowable number of defective products in each product run.
Compliance, Import & Logistics
Finally, once your product is produced and packed, you’re ready to bring your product to the U.S. Here, you also want to make sure you have an expert in your corner to ensure your product arrives safely and on time to your warehouse, avoiding any delays in shipping or customs. On the compliance side, you must ensure that product standards, substance regulations, labeling requirements, testing requirements, and documentation requirements are followed. Next, you will work with a freight forwarder to select the right mode of transportation and port, as well as help you with the importing bond.
As you can see, the product development process is lengthy and complex, even more so when dealing with contract manufacturing in China. If you want to do it right from start to finish, the managed marketplace model is your best bet.