- September 9, 2019
- Category: News
By outsourcing manufacturing to low-cost locations such as China over the years, several companies in the UK, Europe and the US have saved costs, increased production capacity and profits. They have then invested these profits into expansion and innovation, which has led to further growth.
Businesses commit time and financial resources to identify reliable suppliers and then pay them to manufacture their products. Outsourcing manufacturing therefore carries with it a number of risks – such as fraud, of quality not being up to the mark, or of delivery delays that drive up project costs, result in irate customers and lost sales opportunities that hurt revenue.
There are also challenges such as the difference in language, business culture and the time zone. But none of these challenges are insurmountable, which is why many businesses that once were preoccupied with how to find a manufacturer in China have been successfully sourcing from China and other low-cost regions for decades. These orders helped China beat the US to become the world leader in manufacturing by output in 2011, a position it has retained since.
All the success stories, however, usually have a few things in common: they follow best practices that ensure their project succeeds not only at the beginning but for many years after that. As a China sourcing agent who has assisted customers in the UK and US to manufacture in China, India and Eastern Europe since 2006, Niclas Bengtson of Sourcing Allies has some insights.
What can businesses do to ensure their outsourcing project is successful from the word “go”:
Choose the right component
Businesses with a large catalogue of products must pick one that will make a perceptible difference to their books – one that sells in large volumes. It should be a well-designed, well-tested product, and not a prototype (save these for future manufacturing orders). Picking such a component will allow businesses to benefit from the cost competitiveness that manufacturing in large volumes provides, and minimise the chances of any problems cropping up during production – all of which are important for the initial manufacturing order to come through successfully. The cost savings of manufacturing such a component will quickly show in the business’s financial statements, motivating employees.
Even if you don’t have a large catalogue of products, ensure that the product you pick has up-to-date drawings and you’ve ironed out any problem areas. This is because any problems you have faced while manufacturing in your home country are unlikely to disappear on their own at a facility halfway across the globe from you.
Don’t contract a supplier only because of price
While negotiating the price with shortlisted Chinese manufacturers, businesses that have a large order to place and those that intend to be repeat customers, may be tempted to beat the suppliers down to their lowest price. But you must remember that each supplier also has a price threshold. If they are forced to go below that, it will have consequences elsewhere – either in product quality, work conditions or quality of packaging – all of which have the potential to affect the buyer’s reputation and brand.
On the subject of suppliers, since hunting for a manufacturer in China can be tedious work, you can cut short your search by asking companies you longlist if they have manufactured for a western company before. If they answer in the affirmative, bump them up into your shortlist as these firms will be acquainted with western quality control standards, which is desirable. You could also ask them to provide you with references that you can use to verify your supplier’s credentials.
Define your requirements clearly
The language difference poses a challenge to communication, but it is possible to rule out any misunderstandings if you spell out all your requirements and specifications clearly in the manufacturing agreement/purchase order. This is also important if you want to avoid upwards revisions of the price at the last minute.
For instance, if your product drawing says that the product needs to be “heat treated to hardness XXX” and you don’t spell out this requirement to your supplier while negotiating with them and/or in your purchase order, it is likely that they might not read it. When this happens, midway through production, the supplier is likely to turn to you and say the cost of heat treatment wasn’t included in their quoted price and they will charge extra if you require it to be done. By this stage, it is usually too late for buyers to back out of the deal because they will lose money. This is why it is best not to leave any space for assumptions.
Businesses must also encourage their suppliers to ask questions. In many Asian countries, asking questions is considered a sign of weakness. Some Chinese employees would rather give you the impression that they know what you are talking about than “lose face” by asking questions. Make sure you emphasise that you will be happy to answer any questions.
Additionally, to ensure your order meets all specifications, you or your representatives must also conduct regular quality inspections. These can be done in three stages for every production cycle – before production (to check raw materials and machinery), during production (to flag any problems early on) and pre-shipment (to check if all specifications have been met).
Link payment to milestone
In many developing countries, suppliers keen on bagging an order promise prospective clients that all their requirements will be met. But it often does not work like that on the ground. It is no different in China. Often, buyers find out too late that quality standards have not been met, and lead times have gone haywire. All this leads to increased costs and stress for the buyer.
One of the best ways businesses can protect themselves against this is to link the release of any payment to milestones in the manufacturing agreement. For instance, a 30:40:30 configuration for the release of money means 30% of the order value will be released as a down payment; 40% will follow after a pre-shipment quality inspection, and the remainder will be paid upon delivery. Payment terms vary – so the configuration can also be 30:50:20. While negotiating with your supplier, you need to come up with a mutually acceptable configuration.
Linking payment to milestones protects both the buyer and seller from risk. From the point of view of the buyer, the supplier will take pains to ensure that the product meets all specifications in order to receive a chunk of the money before the consignment is shipped. The supplier is protected because they would have received 70% of the order value by the time the goods are shipped.
Draft strong NNN agreements
In the West, it is common for businesses to sign non-disclosure agreements or NDAs with their suppliers. But businesses that want to protect their intellectual property rights when sourcing from China use the NNN or non-disclosure, non-use, non-circumvention contract. This contract must be drawn up in Mandarin by a lawyer, and be enforceable in a Chinese court. It must have a contract damages clause specifying monetary compensation if the supplier breaches any clauses. This acts as a deterrent to copying by your supplier.
Companies that follow these best practices along with basics such as thoroughly verifying suppliers before working with them will ensure that their China sourcing project does not only start well, but will be successful in the long run.