For new product developers who have identified the need to outsource their manufacturing, there are some key steps to take to ensure success.
1. Do a Market Study Analysis
It is essential to do thorough product research to be sure your innovation hasn’t already been patented or produced by another party in the past several years. Be prepared, as if you were speaking to investors, to support why your product fulfills an unmet need, at a better price than anything that is on the market today. You must demonstrate you understand the distribution channels where the product will be sold, why retailers will carry your product and that you completely understand and have proficiency in penetrating these markets.
2. Design for Manufacturability
Developing a MVP or Minimal Viable Product is essential for your proof of concept phase. Granted, there may be several revisions after the first generation of product, it is essential to design with the lowest manufacturing costs in mind. There are professional design firms who can assist with the mechanical fit and function of your product as well as identify the right materials.
3. Prepare a Professional RFP
The first is to prepare a professional RFP otherwise known as a Request for Proposal. This 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.
4. Do Your Research
There are hundreds of resources on the internet for finding competent outsourcing direction. A simple Google search of “Outsourcing Manufacturing” yields tens of thousands of results. You will want to select a firm who demonstrates an interest in your project, competency with your products and has a good track record. Spend the time and compile a checklist list of these companies, their websites, contact information, the date you reached out and date they responded, whether you have sent your RFP. Follow these Six Steps to Finding a Manufacturer as a guide to take you through the process.
5. Develop a Budget
It is critical to understand how much capital will be required not only to launch your product but also to finance the first and ongoing orders. Product cost is not Project Cost. Marketing a product and getting it to market requires detailed forecast and an understanding of the required funding. Here is what you’ll need to know about financing your project as well as supporting your brand’s growth. The real question is how many widgets will you need to sell to break even on your investment.
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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.
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.
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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?
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
In our four part series New Product Development and the Adaptation Curve dedicated to new product developers, innovators and inventors, we explore the Top 8 considerations when developing a new product. Whether a seasoned marketing professional or first timer, these 8 critical components include aspects related to product design, positioning, manufacturing, and distribution.
Product Development Costs
Most inventors underestimate the cost for designing a manufacturing ready product. Tools and molds can easily run into the five to six figure range and can dwarf first year profits. Most any product requires both two dimensional (2D) and three dimensional (3D) engineering drawings that specify material requirements, accurate measurements and tolerances which are very minute, allowable thresholds or variances in gaps, thickness, or practical limits without significantly affecting function of a component. These are the physical requirements of a product. There are also electromechanical tolerances which measure allowable ranges of energy output or resistance.
2D & 3D drawings are computer generated or Computer Aided Designs (CAD) are then used for creating the tooling for parts whether metal, plastic or other materials, even cut and sew projects. The first commercial applications were in the automotive and aerospace industries. Through the use of some of the most common software such as Solidworks and AutoCAD, two of the more widely used platforms, designers create the physical properties of a product. Depending on the complexity of the part and the actual quantity of components this cost can range from the low to tens of thousands of dollars.
Some products are ideal for Big Box retail but unless you know how to navigate this space, most category managers are not going to take a chance with a single line item vendor. Determining how to sell your product comes down to the “4-P’s” or Product, Promotion, Price and Placement. Entire marketing strategies are built around this. How you position your product will dictate your brand strategy. From there it is necessary to determine price, sales tactics and a marketing campaign and budget.
Products are sold through single or multiple channels. Often and most overlooked by new product developers is the benefit of working through wholesale/distributor channels. These organizations have years of traction and relationships with retailers and can be the best avenues for introducing your product. They have sales teams in place and assumedly the category expertise for not only implementing your programs but also helping positioning and building your brand. Your distributor is your customer and investing the time to work with and support this resource will pay off tenfold.
Think about all the valued functions that are fulfilled by a strong distributor partner. They have the infrastructure in place that includes:
- Sales: category expertise and feedback
- Warehousing; the ability to handle large single shipments
- Customer service and support— activity based interface with multiple customers
- Inventory reporting; purchasing and replenishment
- Shipping and logistics
- 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