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.
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 firstname.lastname@example.org
Many companies go it alone when embarking on an outsourcing project for the first time. Commonly, purchasing personnel will rely on web and email correspondence when initiating a sourcing project in China. Small and mid-sized businesses do not necessarily have the resources or personnel required to successfully launch a manufacturing outsourcing project in China.
Commonly, people will seek out a “sourcing agent” or other types of representative in China to act on their behalf. Baysource is different in that our team has been working with a select group of factories for over a decade and with that comes the required credibility to negotiate price, terms, and ensure products are manufactured to our customers’ specifications and expectations. Baysource doesn’t “sell” anything. What we do is get our clients exponentially closer to their project goals accomplishing in one month what would usually take a company one year.
We have all heard about or seen the Tip of the Iceberg illustration, illustrating what makes up Cost of Goods. When one considers the costs of overseas sourcing, often enough he/she does not place enough value in what goes into overseas sourcing. The expenses of travel, shipping back and forth of samples, and of course employees’ time out of the office are huge components to take into account. But what is the cost of failure? Out of spec product? What is the true cost of not having your product available for months at a time?
This is where having an organization such as Baysource, acting on your behalf and with only your interests in mind pays off in spades. Few companies will work on a no-obligation basis such as Baysource, side by side with your key decision makers, to help you accomplish your goals.
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.
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
Importing from China is a daunting task. There are hundreds of thousands of factories throughout China whose quality and capabilities cover a wide range. Finding the right supplier is crucial and most people underestimate the time and resources required to set up a successful operation. Quality and trust are the #1 concern for professionals working with low cost country sources.
Options for Establishing China Sourcing Partners
1. Trade Shows
- Opportunity to talk to potential suppliers face to face about their companies, products, productions capacity, quality-control procedures, and other key business areas
- Direct interaction helps in evaluating suppliers and verifying their abilities
- See product samples first hand
- Requires international travel
- May be limited to a small pool of potential Chinese suppliers (many of them don’t attend these trade shows)
- Not all representatives attending trade shows are actual manufactures (some are brokers or wholesalers)
- Many Chinese exhibitors have limited spoken English skills
2. Online Resourcing (Alibaba, Global Sourcing)
- Simplest, least expensive method to identify suppliers
- Huge range of factories (more than a trade show)
- Tolls and information provided; easy to use
- Ability to contact multiple suppliers quickly at once
- Good for small, low value items
- High-risk sourcing method
- Risk of fraud (some businesses may not be what they seem)
- Hard to distinguish actual factory reps vs. brokers
- Outdated information
- Takes a lot of time and effort to communicate back and forth by email
- Details lost in translation; lack of clarity
- No personal relationship
- Must conduct your own due diligence; no on-site factory audit
- Help identify and verify suppliers and facilitate communications
- Someone is on ground to conduct quality checks
- Lots of agents can be found online
- Fees range from 3 to 10 percent of purchase price
- After working with sourcing agents a few times and becoming familiar with process, you can eventually manage deals without their help
- Lack of ability to know true cost
- Hard to regulate performance and commission – no incentive to keep costs down
- Might be hard to find trustworthy agents – difficult to check references
- Lack of familiarity with specific industries (but may not admit so up front)
- Agents not staffed equipped or sophisticated enough to manage production and quality control or offer support
- Won’t necessarily have clients’ best interests in mind (usually operate based on personal relationships)
4. Full-Service Project Management Firm
- Most convenient and risk-free sourcing method
- Scale – have leverage with factories with volume of other clients
- Handles entire sourcing process from beginning to end
- Provide wide range of services: supplier identification, price negotiation, supply management, quality control management, logistics and shipment management, and other sourcing matters.
- Can respond quickly to urgent matters
- Have only clients’ interests at stake (not beholden to specific factories)
- Cost savings from avoiding international trips
- Relieves hassle of identifying and verifying suppliers, productions inspection, product quality control, and logistics
- Allows focus on existing U.S. sales and opperations
- Front end fees for managing relationship
- No opportunity to learn about Chinese Markets
Nobody has an ugly baby. The same goes for new product developers. Whether an independent entrepreneur or seasoned marketing team, once a new product concept is developed and months, even years in some cases are invested, our babies become prettier every day. The same unconditional love and support that builds as our children mature and develop transfers into the professional mindset of innovators.
Calling All Product Developers
Creating a viable and robust market for a new product takes enormous resource, planning and resolve. The sheer capital to unveil and furthermore generate brand equity is often the most overlooked aspect of getting a product to market. Take the Segway for instance. This emission free, efficient mode of personal transportation has been around for over a decade. With some quick, simple training even children can master riding this marvel. Reaching top speeds of 12.5 mph it has a range of up to 24 miles on a single charge. Still commercial acceptance has been scant. Why wouldn’t every warehouse and airport have a fleet of them?
Recently two Swedish designers have developed an entirely new concept for biking safety in the form of the Hovding, an airbag which deploys vies-a- vie algorithmic intelligence protecting riders from head trauma in the event of a fall or crash. This revolutionary “bike helmet” is worn around riders’ necks and actually becomes a stylized accessory. At $520 prospects for commercial distribution of any scale in the next five years may be slim. However according to Forbes writer Jeremy Bogaisky this startup has already taken in $13 million in venture capital. He cites bicycle industry analyst Gary Coffrin who gives a great summation stating “The adaptation curve for such a unique product at this price point is not likely to be rapid.”
Taking the tech factor down a notch, in my own gym sits a clever form of a door stop called “James the Doorman.” I would imagine the designers, Black+Bum had their “Eureka” design moment and the wheels started spinning. Honestly I have never seen such a cool variety of a door stop and without knowing much about how they developed this unique version of an age old application, I can’t comment on what lengths they went to in commercializing their product. I do know that the one in my club is the only that I have ever seen.
Every week we hear from inventors and product developers who have put great thought into products which offer unique solutions to every day needs. Often though there are many missing pieces to their overall strategies. Below are the Top 8 Hurdles to Successful New Product Launches. In the coming months, I will be writing a series which individually expands on each of these, why they are often overlooked and how they are important for taking new products to market.
1. 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. Developing engineering drawings—those that translate into production and material specifications require time and money.
2. Distribution Channels
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. It creates additional administrative work for the system, and most inventors don’t have the capital to market their products. Specialty and on-line retailers generally are better proving grounds for a products’ acceptance but you still have to generate interest and traffic. Oh, and did you get a UPC code yet?
3. Inventory Capital
Minimum order requirements (MOQs) by factories usually cause a lump in the throat. Even if you have the greatest gadget in the world, how do you plan on financing that first big order?
4. 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?
5. Price vs. Value
In the initial phase of your 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 retail price, 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.
6. Regulatory and Testing Requirements
With your product in the public domain, most retailers will require some sort of regulatory or product safety testing and compliance with groups such as the Consumer Product Safety Commission (CPSC), Underwriters Laboratories (UL) and others. Depending on what industry you are in, your item may require testing and certification by default. To you this means additional time, red tape and money.
7. Patent and Intellectual Property Protection
This is perhaps the most critical and misunderstood area of product development. In many cases developers could have saved themselves months of work simply by doing some basic research and analysis. The United States Patent and Trademark Office site has become more navigable and efficient thanks to improvements in their search functions. There are three ways to begin your inquiry using key words, designs or a combination to see if someone else has registered a similar product. Even if they have you may be able to make some functional changes to distinguish yours but again, many underestimate the time and capital required to protect the investment of your innovation.
8. Aftermarket Sales and Support
Now that you’ve got a patent pending, finalized your business plan, raised early stage capital, have product on the warehouse shelf and are starting to generate traction don’t forget the basic administrative requirements. If you hit the lotto and are selling to Wal Mart, using retail link is a requirement. This entails sending a staff member for training and ultimately using their on line tool daily or weekly. Is someone manning the phones for product questions and concerns? How robust is your web site? Oh, we haven’t even discussed how much this will cost to build.
While these hurdles aren’t surmountable, it is critical to factor in all the critical and time consuming elements of bringing a product to life. Even this list is not comprehensive enough to account for the unexpected turns in the pathway to new product development. If it were easy, everyone would be doing it.
David Alexander is president of Baysource Global and has a decade of experience with new product development and contract manufacturing.
- 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