If you are developing a new product and plan on investing your valuable time and capital to bring it to market there are a few key things you should put together if outsourcing your manufacturing.
A professional RFP (Request for Proposal) or RFQ (quotation) will immediately convey credibility and earn the respect of the firms quoting in your project. It also separates you from the hundreds of others who are asking for quotations. A well planned and prepared RFQ will speed up the quotation process, provide a much more accurate cost and be better received by a reputable manufacturer. In this. You should be able to include:
1. Write an introductory narrative
An introductory narrative about the product; perhaps some background or genesis info on what new innovation, function or unmet need your product delivers I.e. “Our product will be the first of its kind to _____”
2. Create professional 3D drawings
Professional 3D drawings call out dimensions, materials (type and brand or equivalent of resin or other), colors, specifications. This is essential for manufacturing most things and even applies to soft goods such as backpacks and apparel and not just plastics and metals.
3. Product and Safety Certifications
Depending on the product and industry there may be mandatory certification requirements. Most retailers will ask for prof and documentation. You’ll want to be sure the factory has produced products bound for similar markets and thus purchased and worked with similar materials, been audited for compliance and understands cGMP).
Fit and function and other testing requirements the production quantities will have to pass under inspection are crucial and should be well defined and documented for go/no-go for sub assemblies and pass/fail for finished goods
5. Accurate Quantities
Accurate quantities you intend to purchase. Include first six months, years 1–3 etc and she me supporting detail will also convey to the factories how you plan to scale up your business. These should be conservative and not “pie in the sky” forecasts to try and leverage better costs. In fact, you should really be looking for solid volume or tiered price consideration.
6. Request tooling costs
Request separate detail for tooling cost (molds) and whether you’d like this separately or amortized over the volume. Also, request cavitation of the tool (the number of pieces each mold will produce)
7. Indicate Incoterms
Incoterms refers to whether you’d like costs quoted Ex-Works (the price right at the factory and before it’s even delivered to a port)or FOB your city or distribution point.
These are just the basics but if you are serious about actually launching a product and have raised the capital to do so, you will be perceived much more professionally and obtain a much more credible response by suppliers. Otherwise just use the QAP (quote and pray) method which is only as valuable as the paper on which it’s printed.
China’s global emergence has entered a new phase as the nation gets serious about addressing long-term environmental safety and anti-corruption issues that have hindered China’s ability to modernize and improve its quality of life.
China is making a concerted effort to change the country’s narrative from a low-value, industrial goods producer to a high-value, innovator in advanced manufacturing. Although environmental protection and consumer safety laws have been in place for years, China is cracking down on air, water, and soil polluting industries that are damaging the health of its population and its reputation of global prominence. Incompliant factories that remained unchecked for years are being shut down with little to no warning by the Chinese government. American companies that outsource to China are facing an increased risk of supply chain disruptions as China punishes the heavy polluting facilities with illegal manufacturing practices.
On the Ground Snapshot of China’s Clean-up Campaign
The Chinese government’s environmental protection campaign has swept through the country since the Paris agreement on climate change took effect in November 2016. Since then, China has been conducting strict inspections of manufacturing facilities. Many of these inspections have led to either total shutdowns or reduced manufacturing production across the country. Thousands of companies have been found in unauthorized locations, without proper certification, and have failed to meet emissions standards.
One of the latest examples of a company being targeted by environmental regulators is Minmetals, a major Chinese metals supplier with widespread pollution located along major waterways. Like many other producers and manufacturers, Minmetals will be forced to complete a massive upgrade of its smelting facilities.
According to Bloomberg Intelligence, tougher environmental protection policies are also having an impact in other industries such as steel. High-cost mills and privately owned, small-scale producers are being driven out of the market by new regulations. Bloomberg states, “The trend has two main drivers. First, capacity closure and pollution emission reduction targets are now key performance indicators for local governments, replacing previous GDP-focused measures.” Bloomberg goes on to say, “Authorities have installed surveillance equipment at blast furnaces and steel mills to conduct 24-hour checks on their SOX and NOX emissions. That means steel mills can no longer shut down their blast furnaces during the daytime to avoid emitting visible black smoke, then produce at double capacity through the night.”
China has also ordered shutdowns of downstream plants that produce polyolefins in the plastics manufacturing industry. This leads to supply concerns for plastic materials, particularly, high-density polyethylene (HDPE). According to east China-based traders, China’s eastern province of Shandong experienced hundreds of downstream plants shutdowns in late July. China’s Ministry of Environmental Protection is moving fast to crack the whip on companies found to be illegally discharging waste from plastics production.
Another motive behind the campaign is to weed out small-sized producers, which may not have means to make investments to make their production process more environmentally friendly.
Supply Chain Impact for China’s Greener Growth Initiative
What does this mean for American businesses that outsource to China? Upgrades for major factories will affect the output of manufacturing resources in addition to having an impact on downstream manufacturing operations. In some cases, production may halt altogether during upgrade work. Severe environmental violators and companies with the most expensive upgrades could result in supply output losses for months. The likely result is an upward trend of importing demand to fill production gaps.
MNC’s will need to embed change across the entirety of their operations while working closely with Chinese partners. Keeping a license to operate will depend on a manufacturer’s ability to safeguard their reputations and respond to peer and market pressure to implement sustainable business practices.
Six Things Your Business can do to Mitigate Risk of Supply Chain Disruptions
1. Check with your agent or China business team to see if suppliers are located in region of factory shutdowns
2. Contact suppliers to see if they are being affected by China’s environmental regulation inspectors
3. Find out which manufacturers may be receiving goods from afflicted regions
4. Partner with an agent to conduct an environmental regulation audit
5. Closely monitor all manufacturers that could be potentially affected on a regular basis
6. Leverage this increased visibility to secure supply chains and find new manufacturers if need be
The Chinese government’s greener path to growth is creating shockwaves throughout global supply chains as the grace period to deal with air pollution comes to a close. China’s enforcement of environmental laws will ultimately be good for not only Chinese nationals, but for local and multinational companies as well. Companies that are slow to respond to change will be at risk, but businesses that embrace change and support sustainability may gain a competitive edge. At the very least, locals will be able to walk the streets of Shanghai and Beijing without wearing pollution masks.
Wondering how your business will be affected by these latest changes to regulations?
Baysource Global can help you answer your questions before it’s too late.
There is one reason and one reason only that decision makers elect to have products manufactured in China and that is cost savings. Assuming that manufactured costs are lower in China due to labor savings, there are many other cost levers to consider when manufacturing offshore in China. Here are the top five:
1. Freight Costs
Freight and logistics should not exceed 10-12% of your total cost of goods. In other words, if you ship a 40 foot container to the U.S. this will cost on average $5,000 including import fees, duties, tax and drayage (overland transportation to/from a shipping port). So if you can’t move approximately $50,000 of product, that should already be 20-30% below existing manufactured cost, you need to re-evaluate whether it makes sense.
2. Carrying Cost of Capital
Cash is king in any business. It is critical to produce inventory that will move once it gets to the U.S. otherwise each month that inventory is tying up capital and not producing top line sales revenue, you are eating into your cashflow.
3. Warehouse Space
Every square foot of a warehouse used to store products has a fixed cost. Unless you have excess space available, you need to be certain you are allotting this valuable real-estate to products that are generating revenue. Otherwise the savings will be offset by the additional cost of warehouse space.
4. Due Diligence
For items #2 and #3 it is imperative that analysis be given to not only finished goods but also raw material and components. Often overlooked is the advantage of using China to absorb the financial burden of not only managing but paying for commodity purchases, raw material, components and works in progress. Every month of financial responsibility taken on by your China producer is a month of cashflow freed up for your business.
5. Start-up Costs
Your China factory will absorb many intangibles associated with start-up costs including learning curve, purchasing coordination, and in many cases tooling not to mention infrastructure such as plant, property and equipment.
Quality, consistency and timing should only be the “cost of admission” and no sacrifices should be made in these areas.
Interested in learning more? You can right here.
As the #1 manufacturer in the world China now produces nearly $2.5 trillion of goods. While this is around 28% greater than the U.S., manufacturing makes up an astounding 30.5% of China’s GDP vs. 12.3% for the U.S. One thing experts acknowledge is at $2 trillion in manufactured output the U.S. produces more with less labor. It also indicates that low value added jobs with less profit margin have gone and remain overseas. So what does that mean for us? It means that China is still the factory to the world and if operations decision makers haven’t developed a competent model to outsource redundant, high labor and low value add processes, they are tempting fate. There is a cost to and not to doing business in China. and the time has come for most organizations to analyze synergistic offshore-onshore manufacturing & distribution strategies.
Assume for a moment that you are the SVP of Operations for a U.S. firm in Des Moines that manufactures some sort of metal and plastic assembly. Sales have been flat and finally in that Monday morning meeting the inevitable question arises. “What are we doing about China?” your boss asks. You have a solid team of purchasing professionals, none of which can point to Hong Kong on a map. However, through the internet one of your go-getters, Bill, has begun to put a spreadsheet together of die cast and injection molding companies in the Guangdong Province, which he’s researched as being a hotbed for these industries. Since Guangzhou is a FTZ (Free Trade Zone) Bill with his Operations Management degree, has identified this as the logical place to start. He’s shared a couple of months of emails with “agents” posing as direct factory managers and is ready to take his associates to China. Just say the word.
Assuming that Bill and the others now have passports and visas in hand, they begin booking flights, hotels, trains, and ferries to venture out into the Middle Kingdom. In all they’ll be gone for just under three weeks. Since this is the company’s first sojourn to Asia, you’ll undoubtedly accompany them on this exciting new foray into the land of the dragon along with your Ops VP. Now you and your four valuable employees will be out of pocket the majority of a month leaving yours and their day to day responsibilities to others or to simply take a break from existing projects. How much time and capital do you think this will require? You may be surprised.
The following lists conservatively typical expenses by line item for a 2 ½ week trip to China.¹ Remember, you’ll require a full 24 hour day of travel to and from and a day of recovery once you’ve arrived.
The good news is there are competent firms in place to assist in your project management initiatives. In a poll on Linked In, 150 Supply Chain professionals weighed in with their response to the question, “What is the best way to manufacture outsourcing in China?” (See diagram below). 57% of respondents chose “Establish a trusted partner in China.” Perhaps a good portion of the voters had already been through the trial and error process. Or it could be that those who have succeeded in tandem with a firm watching out for their best interests can easily quantify the decision to engage a reputable partner for monitoring manufacturing, quality control, packaging, labeling and logistics.
In his article https://baysourceglobal.com/10-tips-to-better-china-sourcing/ William Atkinson of Purchasing Magazine explains that regardless of their China story, those who have enjoyed a successful relationship with China have done so through proper guidance and preparation. In this critical juncture of global commerce, fluctuating currencies, and competitive pressure, it is imperative to select a reliable partner whom you can trust, knows the local governments and regulations, has engineers on staff who understand your products and who can help you gain a foothold in this valuable region of the world.
¹Airfares, four star accommodations and RMB exchange rates as of September, 2014
Baysource Global President, David Alexander can be reached at email@example.com
As companies weigh the pros and cons of working directly with a factory vs. dealing through an agent for their China sourcing needs there are many points to consider.
Top 10 Pros and Cons
1. The scale or dollar volume purchased annually. (I published an article in M&A Magazine which argued it requires $40-$50MM in throughput for any ROI on a direct sourcing office.)
2. The number of varying categories and SKUs being sourced.
3. The complexity of products being sourced. Cotton socks are a lot less difficult to make and package than electromechanical items with sophisticated firmware and specialized components.
4. Experience levels, competence and proficiency with the language of the country with whom they’re dealing.
5. The sheer number of factories the buyers/agents have worked with including access to the owners or very least factory bosses and relationships with those individuals; the length of time and history with those factories and dollars of business placed with them; the ability to get production bumped forward in the schedule; the ability to receive favorable payment terms which impacts cash flow of any business.
6. Competency with provincial government regulations and requirements. (How would a New Yorker fare in an Alabama factory or vice versa?)
7. Ability to travel to/from factory within one day for urgent matters, product/packaging changes, and production oversight.
8. Quality Control-Generally considered the most critical. The standard process for measuring QC and the depth of practices such as random and in production sampling, testing equipment and facilities, reports, photos, and now video.
9. Experience with logistics, freight terms and all export documentation and activities.
10. Does the agent or factory (for direct) share your sense of urgency and same philosophies and principals? Are they vested in the outcome and long term success of the business?
- Product Development Costs
- Distribution Channels
- Inventory and Startup Financing Capital
Educating the Masses
How will you announce the arrival of your new product to the world? Magazines? PR campaign? Put an ad in the paper? Direct Response Television (DRTV) is a great but often expensive form of advertising and one of the best ways to demonstrate a new application or use as well as building brand equity. It’s great to have a video on your web site but again, how will you drive viewers and a following?
For Part Three we turn to renown and widely respected author and expert, Jim DeBetta, who has led firms such as TV Goods, Rymax Marketing and Carson Optical. As one of the foremost authorities in helping inventors and consumer product entrepreneurs develop and launch their products through infomercials and retail store placement, Jim is widely sought as a guest speaker at many nationally recognized events.
BaySource Global: What are emerging methods, tactics and strategies for introducing new products in the public domain?
Jim DeBetta: “DRTV can be effective to quickly brand a product but the costs are very high. Internet marketing techniques offer the least costly and potentially most effective way to introduce new products – whether your own or on other’s sites. Its also critical to have a comprehensive social media campaign that can include Twitter, Facebook, Pinterest and others. This can be a fast and effective way to reach many people while allowing them to provide instant feedback.”
BSG: What are overlooked tactics for getting a product into retail distribution?
JD: “Using a broker or rep is always a good idea as they have the contacts and experience to get products introduced to retail buyers. Again, it’s also a good idea to start by marketing your products online. Having a powerful internet marketing plan is a great way to start and often not seriously pursued. Also, using distributors to sell your products to mom and pops and even larger chains can be effective as they already sell other products to their customers and can offer yours as well. You may make less working with a “middle man” but the sales you achieve more than compensates for it.”
Price vs. Value
In the initial phase of a product’s life-cycle there will likely not be the scale (volume) to drive down production cost. Unless you can convince consumers they should pay a premium price point at retail break even may be longer off than you expect. Plus, buyers will tell you whether your SRP (Suggested Retail Price) is in line with their category.
BSG: Where do inventors miss the mark on price vs. value, either in over pricing or under estimating suggested retail price? (Retail sometimes dictates a cost not attainable in the startup phase due to lower initial volumes at manufacturing)
JD: “Many inventors often feel their products are worth more than they are and so they price them at too high of a retail. Also, they often do not offer enough margin for the retailer…So instead of them offering a cost of lets say 10.00 to a retailer when the MSRP is 20.00, they offer them a price of 12-13 dollars which does not give the retailer enough margin. It’s critical for inventors and startups to make money but they cannot get too greedy and have to understand the margin requirements of big retailers
Jim DeBetta is President of DeBetta Enterprises and is a mentor, coach and consultant. He is the author of The Business of Inventing and offers Group Coaching courses for inventors. Jim can be reached at firstname.lastname@example.org Facebook-Get Retail Ready or 770-826-2606.
David Alexander is founder of Baysource Global specializing in contract manufacturing, new product development and distribution. David can be reached at email@example.com or 813-251-4184.
In our 4 part series dedicated to new product developers, innovators and inventors, we explore the 8 top considerations when developing a new product. Whether a seasoned marketing professional or first timer, these eight critical components include aspects related to product design, positioning, manufacturing, distribution and financing.
What You’ll Need to Start: Ample Capital
Beyond personal savings, innovators look to family and friends, explore small business loans and even tap into retirement accounts to raise money for their startup products. The initial outlay of inventory capital—that which could be tied up for months is often the greatest obstacle to overcome. Minimum order requirements (MOQs) by factories usually cause a lump in the throat for the first time product developer. Even if you have the greatest gadget in the world, how do you plan on financing that first big P.O.? You’ve likely invested significantly to develop your innovation—a figure that has hopefully been taken into consideration for ROI and overall budget. While established corporations have ample cash flow for typical starting inventories, this may be the greatest initial hurdle for those new to the process.
Inventory Financing / Purchase Order Funding / Factoring
There are a half dozen inventory financing groups (IFGs) in the U.S. who provide bridge capital, purchasing and taking title to inventory which goes to a third party distribution warehouse. You then pay the IFG as for the cost of goods plus any in and out fees required by the warehouse as you sell merchandise. Purchase order financing is a new twist on Factoring, an older practice in which small businesses sell invoices at a discount for faster recovery of cash, providing the factoring company with a substantial fee. The caveat is that the invoices must be to reputable clients, i.e. Walmart to be considered.
These can be good options that allow you to purchase greater quantities thus commanding volume discounts. Another benefit is that you don’t have to give up equity to outside investors. Many times the factories’ terms require money down at the time of placing the purchase order. IFGs make it possible to abide by these terms. These companies will want to know:
- Your sales and marketing strategy (refer to Part I of the series) and about your team
- The quality of the products produced
- Your margins
- Inventory turns
- Your credit worthiness and track record
Personal guarantees and background checks are almost always standard protocol which usually means demonstrating some form of net worth whether savings, retirement funds, property, creditworthiness and no criminal records. They may also not take a chance on a new client—one who has no real balance sheet to speak of. Another downside is that these lenders charge interest rates that can be as high as 40% annually. Lastly, there is always a time requirement (term) for making good on these loans which are usually around 60 days. If you are unsuccessful in meeting your sales plan, stiff penalties may be imposed.
In just the past few years companies like Kickstarter have created tech based forums which bring creative projects to life and are open to investment by the general public. To date, over five million people have pledged over $800 million and funded more than 50,000 projects to date on Kickstarter in categories such as films, music and the arts, video games and inventions.
Crowdfunding is catching on and becoming more accepted as a means of raising capital. Investors do so at their own risk and there is little to no governance or regulation meaning no reporting or other administrative overhead. Crowdfunding is really an eco-system for philanthropy and those playing in this space have an entrepreneurial spirit. Mostly, investors do not generally require any form of equity or preferred stock so your ownership is not diluted. On April 12, 2013 the JOBS (Jumpstart Our Business) Act, was signed into law and is designed to increase job creation and economic growth. The good news is that it eases fundraising regulations imposed by the SEC enabling more entrepreneurs to raise capital.
Because blocks of investments can be minimal—as low as $1,000 or less, investors may be less motivated to provide insight or contribute to the long term success of a project.
Seed Capital / Angel Investors
The difference between Seed Capital and Venture Capital is that Seed money comes from individuals vs. institutional investors. Most angel (seed) investors have a wider appetite for risk and a savvy track record for assisting startups with building their businesses. These professionals are also versed in providing feedback on pro-formas (financial targets for top line revenues and margins; cash flow models and debt. Generally seed investors are less hands on in the day to day running of the business once they have a sound idea of your business plan. Seed investments are less administratively complex with less formal corporate contracts and governance.
Seed capital usually comes at a cost—Equity. There is risk on both sides. The investor may never recover their investment or you may give away too much ownership. Usually the latter results because it is just so tempting for the inventor to commence their dream.
Many have asked me what it’s like doing business in China. I’ve always said that if you are doing it by yourself it can be as dangerous as swimming with croccodiles. I finally came across a photo that captured the essence of this concept.
What is something you can think of that can’t successfully be outsourced in China?
Think long and hard about this. Resist the temptation to veer toward intangibles or time sensitive services with obvious geographical barriers such as a haircut or plumbing repair. What product theoretically cannot be manufactured in China? How about a portrait? I have an acquaintance that has connected with amazingly talented artists who will take a family photo and reproduce a framed, hand painted, oil on canvas likeness taken from a photograph.
It will have the same level of detail and quality as those done by artists in the U.S. costing a minimum of $1200-$2500 just for the painting itself. This does not include the frame which can be another $350-$500. The exact quality portrait from China can be delivered to your doorsteps for $450 or about a quarter or less that which someone would expect to pay here. Why is this?
If you said labor cost you are only partly correct. There are many more factors that play into “the China price” for which Westerners have had an insatiable appetite since the Wal Mart effect took hold in the early nineties. Yet now writers, politicians and economists say the tide is turning. Many assert that currency fluctuation, labor shortages near China’s coastlines, and a rising middle class, are quickly narrowing the cost gap between China and the West. They might be forgetting one thing though according to Mike Bellamy, author of The Essential Guide to China Sourcing , “there is no Next China.”
Rising Labor Costs in China
In a Roya Wolverson interview published in Time, May 16, 2011, Pin Li, President of the Wanxiang America Corporation stated that “rising labor costs in China will only cause inflation and not necessarily jobs returning to the U.S.” He further explained that what this means is “instead of paying $1 for latex gloves the price may rise to $2 and will still represent the lowest cost available in the world.”
In other words, assuming material costs are consistent globally, even doubling or tripling the average monthly wage of Chinese factory employees still does not bring total cost of goods in line with U.S. workers.
In a recent conversation, Bellamy, Chairman of the Advisory Board for China Sourcing Information Center begins to make the “No Next China” case with the notion that China’s economy is still vastly lopsided in its dependence on exporting. The Chinese and its neveaux riche’ have created the world’s second largest economy that many predict will be bigger than the U.S. within the next decade. The only fuel to keep this burning is the demand for cheap(er) exports. A growing middle class also means bolstered domestic consumption, particularly as brands become more prevalent with Chinese consumers. But to sustain economic growth, exports have to remain a big chunk of the equation.
A Shift By Coastal Manufacturing Regions
The question may not be so much about “Made in China” as it is “What will be Made in China?” Sure there is great capacity and infrastructure in coastal regions but there may be a shift developing with the evolution of improved skill sets and wage increases. Dr. Eric Thun , lecturer in Chinese Business Studies at the University of Oxford China Center, says “pushing manufacturing into high value-added activity is very much what the government wants. This kind of cost pressure stimulates upgrading.”
Bellamy adds, “because China’s economy is still heavily export dependent at present, over the past years there have been concerns about the China government promoting the interior too fast at the expense of the coast. This could have major side effects on the much needed revenue stream gained by supplying product to overseas buyers. But, as April data demonstrates to policy makers, the development of the interior is not having a major impact on exports. “
The Role Of Appreciation In Chinese Currency To U.S. Job Creation
Since June, 2010 when currency truly began floating, the RMB has appreciated 6% against the US dollar. Depending on whom you talk to however, the RMB is still undervalued by as much as 25%. Add to this CPI inflation and productivity growth rates (Chinese worker productivity is growing faster than U.S.) and the RMB will continue to be undervalued for five years or more.
Pin Li argues that “currency can help but it also can hurt. Structural issues are more fundamental for the U.S. and China. This is more of a political question than any economist can even measure. Politically we have to pretend it’s an issue. But the reality is that jobs from China won’t come to the U.S. They’ll go to Mexico, Korea, and Indonesia. And that means the imports that came from China will now cost more which also doesn’t solve the deficit issue.”
Bellamy claims “we can expect that the US government will probably use the April export record to put pressure on China to allow their currency to appreciate. The China government has a plan in place for a slow but steady increase as opposed to a dramatic adjustment as desired by the US. Don’t expect China to change their plan just because of this April data and any related pressure from the USA.”
China as a Market
Li’s passive reference to the deficit is interesting and should not go unnoticed. While many grip about jobs, only a small percentage of Western companies have invested in growing market share in China.
In an October 6, 2010 Bloomberg Press report it was estimated that China market was valued at $150 billion in potential goods and services or a top ten global opportunity for U.S. companies. “U.S. companies have experienced tremendous commercial success in China’s market and the prospects for future growth are significant,” said Erin Ennis, vice president of the U.S.-China Business Council.
Beijing has a $145 billion trade surplus with the U.S., more than its deficit with the next seven- largest partners combined. But is this solely due to undervalued currency and cheap labor? Could it be more the apathetic or myopic strategies of only selling into North American and European markets and not breaking from traditional business models?
Pin Li makes a bold statement when he asserts, “Firms’ access to Chinese should be their more of a concern than an unbalanced currency.”
The Next 5 Years
China remains a factory to the world. Government subsidized infrastructure has ensured overcapacity of manufacturing availability. One needs to simply travel from town to town; cranes as far as the eye can see. Staggering development continues in all sectors such as transportation, industrial, housing, recreation, hospitals, shopping centers, and resorts. Innovation and branding are now woven into the next generation’s mindset with Beijing’s full support. There is no next China. Whether as adversary, trading partner, or ally the future will depend on setting priorities and building mutual trust.
David Alexander is President of BaySource Global www.baysourceglobal.com
- Resource Center
- Beginner’s Guide to Outsource Manufacturing
- The Beginner’s Guide to Doing Business in China
- China Product Sourcing
- China Contract Manufacturing
- China Manufacturing Consultant
- Plastic Manufacturers China
- Pros and Cons of Outsourcing to China
- Shipping from Chinese Manufacturers to Your Market
- Case Studies