What Is Outsourcing Manufacturing?
Common Outsource Manufacturing Solutions
Benefits Of Outsourcing For Original Equipment Manufacturers (OEMs)
Outsourcing Needs Analysis Checklist
What Is Contract Manufacturing?
Types Of Contract Manufacturing
What Is The Difference Between Outsourcing And Subcontracting?
Industries That Use Contract Manufacturing
Choosing The Right Contract Manufacturing Company For Your Needs
Why Manufacturing In China Still Makes Sense
Benefits Of Manufacturing In China
Problems And Solutions For American Companies Outsourcing Manufacturing To China
Outsourcing manufacturing has been accepted as the best strategy to create growth and profits now that countries outside the U.S. possess better logistics, equipment, and expertise,
When you outsource manufacturing, you gain the ability to compete in the current economic climate, increase bottom line profits and ensure long term survival in an increasingly fast moving, cutthroat marketplace.
An outsourced manufacturing system allows you to quickly ramp up production if demand increases or reduce output without laying off workers or shutting down a factory when demand decreases.
While outsourcing manufacturing can be within the US or offshore, offshore outsourcing can potentially be riddled with problems regarding ethical and sustainable manufacturing practices.
China is a major destination for outsourced manufacturing and companies around the world have come to rely on its quality products. But, unfortunately, there have been cases reported in the news about labor exploitation and serious environmental concerns.
This guide will provide detailed information about how to benefit from outsourcing manufacturing while still maintaining ethical standards and protecting the environment.
Outsource manufacturing, or contract manufacturing is contracting with a third party to produce goods or services that have earlier been done in-house by its own employees.
Strategies for outsourcing some or all of the manufacturing of specific products or components can include:
a) Contract manufacturing – this is when a manufacturer outsources some of the manufacturing that they have traditionally done in their own factory to another company over a specified period of time.
b) License manufacturing - Licensing involves getting permission from a company to manufacture and sell one or more of its products or components within a defined market area.
c) Sublease or subcontract manufacturing – The sub-contractor provides a component as an input raw material or semi-finished good to the manufacturer.
This can be done domestically or internationally, saving a manufacturer time and money.
Outsourcing can also increase competitiveness by allowing the manufacturer to focus on its core competencies.
There can be many reasons for outsourcing production but in most cases, the main goal is to reduce costs.
Since it can be cheaper for a business to hire the services of a third-party company instead of hiring their own employees, the majority of outsourced manufacturing is usually done in foreign countries where labor costs and manufacturing overheads are less expensive.
Outsourcing production can be a great strategy in the right situation. Consider the following scenarios:
1. Customers are banging on your door because your salespeople promised to deliver their order by a certain date. Even though your factory is working as fast as possible, you just can’t deliver all the orders on time.
So instead of losing orders, getting a bad reputation, and sending out poorly produced products because you were in a hurry, you can contact a contract manufacturer to help you in a pinch.
A contract manufacturer that is already set up to manufacture and deliver products such as yours can handle the excess demand for the time being.
It will give you a chance to catch your breath, hire more people, buy more equipment, etc., so you can get set up properly to meet the increased demand caused by the success of your company.
2. In a similar situation, if you know you are going to have a big demand at a particular time of year, you don’t want to be in a situation where you hire and train a lot of people only to lay them off later.
In addition to the expenses associated with hiring and training, laying off good people costs the company its reputation with potential employees and contributes to an unhealthy company culture.
Outsourcing manufacturing allows you to keep a core team of good employees and still take care of the extra customers during your peak season.
3. You need to redistribute resources to free up time – In your manufacturing process, there are some things that only your employees can do, but other tasks do not require that level of skill.
You can free up your employees to do what they are good at by taking redundant or less skill-focused work off their plate.
Outsourcing the production of parts or handling of raw materials allows you to produce a high-quality product at a lesser cost because you don’t have to use your most expensive employees for jobs that can be done by lower-cost staff.
In some cases, it might work to just hire some lower-cost employees, but the logistics of managing, training, and housing another group of people might be a headache you would rather not have to deal with.
Another company that can handle the tasks you don’t want to do would be happy to help you out.
Being able to produce a higher quality product while reducing costs and headaches is definitely worth a conversation with an outsourcing company.
4. You are a designer but not a manufacturer – Manufacturing has its own discipline. As a designer, you may not want to deal with a whole new business in terms of manufacturing.
The right manufacturing company can be an amazing asset in this case.
Unless you have a totally new product, it is likely that there are other, similar products in the marketplace. If you work with a manufacturer that has experience with products like yours they may be able to work with you to improve the design. An experienced manufacturer can:
a) Help reduce costs by suggesting materials that you may not even know about.
b) Help improve the quality of the design based on experience with how well other products performed.
c) Help reduce costs by suggesting the use of pre-made parts available in the marketplace instead of making the whole product.
d) Help improve product delivery by designing the product in a way that makes it cheaper to transport and reduces incidents of damage during transport.
e) Suggest warehousing options to make manufacturing and shipping easier, less expensive, and hassle-free.
Selling OEM parts and equipment is the preferred route for parts and machinery suppliers but there are problems. If the original equipment manufacturer is not able to address them, they risk losing their distribution channels to competitors.
OEM Problem 1: Poor or slow innovation and improvement of their products
No product is ever perfect. Your product is designed to solve a particular problem for your customer. It may solve the problem to a certain extent, but the customer is not quite satisfied. It is up to the manufacturer to provide the best possible solution to what the customer is trying to do. If you don't, the customer will find their solution with another company.
The problem for the OEM is they may not know how to design their product to solve the issues facing their customer.
Internal production teams and resources are often spread too thin. Shifting the manufacturing of certain products or parts can provide relief to the core competencies of your team.
Design, engineering, and testing can be strategically outsourced to another company.
A sourcing agent like Arcadia Sourcing can find the right fit for your needs.
OEM Problem 2: Slow response to market changes
People's needs change over time. The OEM needs to respond to the new requirements. However, since a lot of time, money and organizational development has gone into producing the current product it is not easy to respond to changes in the marketplace.
Quite often, you may not need a whole new product. A simple add-on or change in a component will be enough to respond to the new requirements of the customer. But from a manufacturing point of view, you would need to create a whole new process and infrastructure to produce that "small" new component.
OEM Solution: Outsource To Access Materials And Resources
The unique challenges of manufacturing specific components can go beyond your internal team's capabilities. A contract manufacturer can provide access to materials and expertise you may not have in-house.
Arcadia Sourcing has developed a vast network of manufacturers and supporting services over the past 30+ years. If you need a good idea or the resources to implement something that is not yet part of your process, Arcadia can help.
OEM Problem 3: Quality management - inconsistent quality
When a manufacturer tests its product, there is a certain "failure rate" that is considered "acceptable". In some industries that might be ok, but in others, customers will leave you as fast as they can since their customers will not tolerate it.
The quality of your product needs to be consistent and reliable. Getting the reputation that your product fails is not good for business.
OEM Solution: Outsource To Relieve Pressure On Your Resources
Poor or inconsistent quality can be the result of inadequate expertise, production tools, or processes.
It makes sense to outsource the parts of your production that another company can do better at a lower cost. This allows you to combine your core competencies with another company and produce a better quality product.
Arcadia Sourcing can not only connect you with the right manufacturing partner, but they will also manage the quality control so there is no added administrative burden on your team.
OEM Problem 4: Timely product development
Reputable OEM design firms have processes, methods and tools to design, validate and launch new products including parts, assemblies and systems. They need to do this quickly and efficiently, while keeping costs under control.
Investing in new product development and product development processes is important for every manufacturer but the money for experimentation is not easy to find. A tested solution is much easier to fund and integrate into existing systems.
The problem is, how do you develop new products and processes when your company assets are deeply committed to doing things in a fixed way?
OEM Solution: Less Expensive Innovations Testing
This is the perfect scenario for outsourcing manufacturing. A contract manufacturer that has the machinery, software, and other assets to produce a test product can give you the data needed to see if your facility should invest in upgrading its processes.
Arcadia Sourcing can help you find the right manufacturer to design and test new ideas.
Many organizations struggle to define their overall needs and objectively identify their core competencies. If you do not possess the internal expertise that can be brought to bear to write up good requirements, it is wise to seek outside counsel. Writing up requirements involves effort and expertise. We do not cover the process of requirements gathering in this book, not because it is not important, but because it is common to any project management effort. It is important for companies to identify viable outsourcing process candidates, and the appropriate outsourcing business model and to document clearly RFP and SOW requirements. Companies must be prepared to commit the appropriate cross-functional resources required to conduct the ever-so-important due diligence required during this outsourcing life-cycle phase. In our experience, companies that short-change the process will uncover numerous issues later down the line that can hinder or even cripple the outsourcing initiative.
Again, there is no substitute for investing the time, people, and money required to define your needs. Do not leave it up to your vendor to define your needs. That’s a high stake game you cannot afford to lose. The following key questions will serve as a checklist that you have effectively defined the needs of the outsourcing project.
- Do you understand the process you are going to outsource?
- Have you mapped out the process dependencies?
- Is there a business-value argument for outsourcing the process?
- Have you checked constraints on the process that would restrict your ability to outsource it?
- Have you conducted a thorough benchmarking analysis?
- Have you chosen between total or selective outsourcing?
- Have you chosen between going with a single vendor or multiple vendors?
- Have you considered the potential of in-sourcing the work?
- Do you have the internal expertise to conduct the requirements-gathering process?
- Have you crafted a thorough SOW?
- Have you crafted a thorough RFP?
In the normal course of business, original equipment manufacturers (OEMs) often outsource different parts of the manufacturing process to other manufacturing companies.
The practice of outsourcing parts of the manufacturing is so well established that there is a whole category of manufacturers that are known as sub-contracting manufacturers or contract manufacturers.
The term “contract manufacturing” refers to the manufacturing services that some manufacturers perform on a contractual basis for other businesses.
Not every manufacturing firm or agency has the resources, funds, or time to produce everything in-house in the manufacturing industry. Investing in equipment, machinery, and expertise can be costly.
Recognized as a form of outsourcing, a subcontract manufacturer may produce parts, components, or complete products for the OEM, to their specifications.
The manufactured products are then used by the company in its own manufacturing process or to complete its own products.
A contract manufacturing company may also perform specific services for a limited amount of time like:
- process management
- product development
- analytical development
- warehouse and distribution
- labeling and packaging development, etc.
Manufacturing tasks that can be performed by a subcontractor can be:
- Complex or complete assembly
- Die casting
- Computer Numerical Control (CNC) Machining
- Machine control assembly
- Sheet metal formation
- Forging metal
- Metal shaping through either broaching, grinding, or milling
In a normal manufacturer-supplier relationship, the outsourced product is handed off to an outside company. But in contract manufacturing, the subcontractor may, in effect, become a part of the company from concept through to manufacturing. The process requires collaborative input from both the customer and the supplier as if they were one company.
The three main benefits of contract manufacturing are cost savings, better quality control, and increased production. Depending on the situation, a company can employ one or more of the following techniques to achieve its goals:
1. Lease The Contract Manufacturer's Equipment Or Facility
It may not be cost-effective to buy all the equipment, then pay for setting everything up in a facility if the need is short-term. Manufacturers often have extra capacity or unused equipment in their facility that can be leased at a reasonable cost. This provides a win-win for both the contract manufacturing company as well as the OEM.
2. Contract A Labor Force
Many companies don't have the trained people to run a full-scale production process efficiently, while other companies have the people but not enough work to keep them busy. Bringing the people into their facility makes sense if the need is temporary.
This is also a good way to bring in the staff for products that are being tested in the marketplace. If the test is successful they can hire and train permanent staff. A trained workforce employed for a short term can be a cost-effective way to get the job done.
3. Producing Parts Of A Larger Whole
If a contract manufacturer specializes in the production of a certain part, they may be able to produce better quality at a lower cost. It makes sense to outsource the manufacturing of that product or component rather than trying to make it in-house.
4. Full-Scale Production
A contract manufacturing company can be hired to make the entire product in their facility, but the production is managed by the OEM. Management by the OEM can be more of a collaboration if the contract manufacturer has a solid team of people employed full-time. This is called "private label manufacturing".
5. Contracting Specific Manufacturing Processes
Many contract manufacturing companies specialize in providing specific expertise or equipment such as:
machining, assembly, milling, sawing, planing, tapping, drilling, turning, boring, and grinding.
New technologies with growing demand among contract manufacturers include electrical discharge, ultrasonic and electrochemical machining, and more.
While outsourcing and subcontracting (or contract manufacturing) both involve allocating jobs outside of an OEM, there are some important differences.
It is considered outsourcing when an OEM allocates entire jobs or departments that are normally performed within the company, to an outside firm permanently. It is considered a comprehensive cost-cutting strategy by a business.
Subcontracting involves hiring an outside firm or individual to complete a specialized task that cannot be done internally and is usually temporary by design.
Contract manufacturing is widespread in the production of health supplements and pharmaceuticals.
Pharmaceutical companies may do some or all of the research in-house, but the production is usually outsourced in order to cut costs and, in some cases, go around the laws in their own country.
Contract Pharma is a big part of this overall corporate strategy of doing as little work as possible in countries where the cost of employees is high.
Contract Manufacturing Is Also Referred To As:
- license manufacturing
- private label manufacturing
- sublease manufacturing
- concurrent manufacturing
- hollow manufacturing
- product Licensing
Many industries can use contract manufacturing profitably. The following industries are known to outsource manufacturing often.
- food and beverage
- military and defense
- medicine and healthcare
Consider the following when selecting a contract manufacturer:
Are the facilities large enough to handle your job? Do they have the equipment to deliver what you want?
2. How Long Have They Been In This Business?
The last thing you want is for the contract manufacturer to go out of business in the middle of your job. Assess the financial stability of the company before committing.
3. Quality control
What type of quality control systems do they have? Do they have visual and non-destructive testing procedures they can verify? Will they guarantee they will use the raw materials you specified in the contract and not substitute them for cheaper materials?
4. Access To The Factory
What kind of access will they provide for you to inspect and review the process and product? Will they allow inspections at any time? Will they respond to improvements and changes mid-production if required?
How is the company regarded in the industry? Can they provide several references you can talk with? Have they won any awards, mentions in industry publications, blogs or forums, or other public recognition for quality?
Ideally, you want a company that utilizes lean manufacturing techniques, which use materials conservatively and in a manner that is environmentally friendly.
Is the quote significantly higher or lower than competitors? Are the deliverables clearly defined? Are there safeguards in place so the price doesn't suddenly go up after signing the contract?
Have recalls been made on products they manufactured? Was their component related to the recall?
9. Delivery On Schedule?
Can the company offer proof that they meet deadlines? Check their delivery metrics.
When you are satisfied with the answers to these questions, consider getting at least two more similar quotations. Comparing companies and quotes will give you further insight as to what you should be looking for and ask more relevant questions.
The firm you hire for contract manufacturing, assembly, and other production duties is essentially a partner in your enterprise, so you should be satisfied when you entrust them with your product.
In 2018 20.7% of all goods produced in the world were manufactured in China. The next closest was the United States at 16.8%...China was 81% higher than the United States. All other countries are far behind China.
The manufacturing industry in China is a global powerhouse. The Chinese economy thrives as a manufacturing hub for the world. Made in China products seem to be everywhere.
Some may think companies around the world choose to manufacture in China because of the abundance of cheap labor that brings down the production costs.
Economists have wondered if China will lose its status as "the world's factory” as other emerging economies offering cheap labor enter the market.
However, the availability of cheap labor is just one of many factors that have kept the "Made in China" label on so many products purchased by consumers around the world. It will take more than low labor costs for emerging economies to set up a business ecosystem that can compete with China's. For some time to come, China will continue to be "the world factory”
Though outsourcing to China is attractive to many companies, it is not a good option for every business. There are pros and cons of doing business in China, and whether it is a good move depends entirely on the industry and business model.
1. Services And Skills
In addition to manufacturing, industries are benefitting from outsourcing a wide variety of services to China including:
- Business process services
- High-end IT services
- Virtual employees outsourced to China
- Customer service
- Back office administrative work
- Knowledge management activities
- Software development
All these services contribute to the value offered by Chinese manufacturing companies.
When a company outsources manufacturing to China they are increasingly employing talented, creative and resourceful Chinese people to make the whole process so much easier and cost effective.
2. Lower Labor Costs
Cheap labor has been the bedrock of the Chinese manufacturing sector. Despite rising labor costs, production costs in China remain orders of magnitude lower than in the West.
As a result of China’s burgeoning population, there is plenty of low-cost labor. Few countries in the world can produce merchandise more affordably than China.
Even when you factor in freight and shipping costs, it’s often far cheaper for countries around the world to import Chinese products than it is to make them locally.
3. Closer Proximity to Resources
In manufacturing especially, outsourcing to China can mean easier access to additional resources, which in turn leads to lower costs and lead times in production.
4. Overhead Costs Are Also Much Lower
These costs can be extremely high, particularly for entrepreneurs. By outsourcing those functions, overhead costs are eliminated.
China now has a well-formed ecosystem that places many organizations within reach of their downstream distributors.
An outsourcing arrangement in China can create close proximity to those intermediate goods that might be needed and that can lower overall capital costs by a large amount.
The readily available physical infrastructure that reduces the time and therefore cost associated with the production of goods creates a favorable environment for economies of scale and cheaper production in China.
5. Cheaper ancillary services
Facilities and services like warehousing and shipping, and significant savings on inputs like labor and real estate dramatically reduce overhead costs.
Many downstream distributors have found themselves placing a base of operations in China because it is more effective for their bottom line as well.
6. Readily Available Cheap Products
China houses the world’s largest manufacturing sector. This means your business in China doesn’t have to import these products, helping you avoid import tariffs.
The business ecosystem in Chinese cities has enabled manufacturing companies to build products at lower costs.
These cities have cultivated a system that supports the China manufacturing supply chain.
A Chinese factory can easily access component manufacturers, low-cost workers, technical workforce, assembly suppliers, and customers.
This arrangement reduces the cost of production, enabling manufacturers to sell products at lower prices.
7. Access to Expertise and Technologies
Outsourcing manufacturing to China gives business instant access to increasingly sophisticated and competitive technology, research, and science.
While many large companies already have access to these, outsourcing to specialist vendors in China gives smaller companies access to these resources as well.
8. Easier Access To Mass Markets in Asia and Europe
With a base of operations in China, it can be easier to introduce products to Asia and even Europe.
Since China is geographically situated between the Asian and European markets and is an active participant in world trade, outsourcing through China gives you easy access to profitable markets.
Expansion into these markets allows the possibility of being able to grow beyond home markets using proven targeted demographics so the business can expand aggressively.
Even these expansion efforts can be outsourced through China for greater ease, especially if there is no one locally who is experienced with these markets.
9. Faster Service
The sheer volume of workers available in China is what can result in a fast manufacturing turnaround. Even considering the time factor associated with freight and shipping from China to the US, Europe, and Australia, merchandise that is produced in China can still arrive at its destination faster than if produced domestically.
The advantage of different time zones further enhances the ability to reduce the turnaround time significantly and provide a better service that can transform ideas into products faster.
10. Quality Of Products And Services
The ‘Made in China’ label has been associated with cheap and poorly made products, and often with good reason. However, this reputation isn’t entirely accurate. High-end companies like Beats by Dre, Apple, and Sony also manufacture many of their products in China.
The key over here is to rise above the mass of high-volume, low-quality producers and seek out the right manufacturing partners that will do justice to your products. Choose wisely and you will reap the benefits for years to com
11. Readily Available Resources
Since China is a major manufacturing hub numerous companies have sprung up that offer products and services commonly need to manufacture products.
China has the talent and resources to handle IT, customer service, manufacturing, accounting, and more. This means that you can outsource almost any part of your business confidently to the country.
If you lack the necessary resources in-house for completing a better job, this is a good way to gain an advantage in materials or expertise in a specialized area.
Readily available resources from other established companies mean the risks are equally shared with a partner company.
Operational risks like employee turnover are also shared so you can keep going if key personnel leave the company.
The main benefit of outsourcing is you can move not-so-crucial tasks or parts of your operations out of your company so the extra time can be utilized towards the more value added objectives.
By outsourcing, you’ll have more time to concentrate on expanding your business or optimizing current business processes.
Your in-house team can focus on core competencies, like team building, leadership, and product development, instead of doing paperwork or other mundane tasks. An increase in performance in core competencies can help you increase your competitiveness and profits.
China has the talent and resources to handle IT, customer service, manufacturing, accounting, and more. This means that you can outsource almost any part of your business confidently.
13. Support From The Chinese Government
A further advantage China-based CMOs offer is that the Chinese government welcomes any foreign company that shows an interest in outsourcing. Many Chinese agencies are allowed to offer benefits for outsourcing.
Officials have recognized the benefits of having companies come to them to outsource. It is not unusual for companies to receive initial incentives to come to China that can be quite lucrative.
By taking advantage of the economies of scale that can be provided, a business can quickly grow with this one decision.
The Chinese government directly invests significantly in Chinese companies. Outsourcing companies often locate their operation within these organizations so they become an extension of the business at a fraction of the cost of investing elsewhere.
China continually amends its outsourcing laws and works towards improving its infrastructure to ensure smooth outsourcing.
In addition to investments in infrastructure like bridges and railways, the country has also successfully developed digital infrastructure, particularly broadband and digital payment systems.
14. Access To Super-Competitive Startups
China's dynamic business culture gives rise to many startups. Startups offer business agility, access to new technology, insight into target markets, and customer-centric innovations.
When you outsource to China you have access to tons of startups with resources that can help you overtake your competitors.
Startups often offer services and products at lower costs when compared to established companies.
15 City-Based Manufacturing Hubs
Chinese cities like Hong Kong, Shanghai, and Chengdu help high-tech startups flourish. They do this through initiatives that improve infrastructure and by giving access to top talent.
Additionally, these cities are politically stable with an open culture due to globalization. Such an adaptable and friendly environment makes outsourcing convenient and pleasant.
The ability to quickly access additional workforce for the temporary requirements is a huge benefit when outsourcing to China.
When companies outsource manufacturing, production, bookkeeping, and other non-core business processes to contractors in China they can instantly scale up or down, depending on their needs.
This is because contract manufacturing service providers usually have more than one client so they can arrange additional products or services whenever you need them.
Similarly, they can manage excess production by manufacturing less for the next order.
The ability to quickly scale up or down gives you the flexibility to efficiently manage demand and supply without creating problems within your own business.
17. Rapid Prototyping
Economies of scale in large CMOs help companies achieve proof of concept faster through rapid prototyping processes using state-of-the-art techniques like CNC prototyping to bring your products to life exactly as designed and envisioned.
18. Specialist Manufacturers
Due to the size of the manufacturing industry in China, many factories specialize by industry or manufacturing type. Many companies have access to specialist skills and equipment needed to manufacture products.
19. Quicker Scaling
If your product is a success, a big advantage of getting it made in China is that it is usually easy to scale up production. An abundance of labour and manufacturers with years of experience makes it easy for you to grow.
Once you go into full-scale production, the ecosystem in China is well suited to expanding the scale of your output as demand grows. This model can be quite flexible and, with a well negotiated minimum order quantity, it can also help you weather downturns in demand.
20. Fast-Paced Innovations and Research
The GII says Chinese companies are on par with the best Switzerland, Sweden, and US companies when it comes to innovation.
This is because China houses tons of innovative companies, including high-tech startups like Weltmeister, Huawei, Alibaba, Lenovo, Tencent, and Xiaomi.
Outsourcing to a country with huge research potential, like China, can give you quick and easy access to technology. This will provide you with a competitive advantage over your competitors from other countries.
21. Access To A Large Pool Of Well Educated, Skilled Specialists
China has a solid commitment to developing its talent. CMOs in China graduate a lot of Ph.D. chemists and others across all their universities. These are top-notch schools and top-notch students.
CMOs in China have a heavy recruiting process where they are willing to shut down a project for a week while they send their top VPs and project managers to universities to recruit the best graduates before they graduate.
China saw 7.6 million students graduate from its universities in 2018, which is almost double of all degrees earned at American universities.
On top of that, China established a Thousand Talent Program, which aims to attract scientific talent to the country. This plan recruited over 7,000 scientists to the country, further increasing their research and talent pool quality.
22. Easy Market Expansion Opportunities Within China
The Chinese economy has been growing consistently for the last three decades, and more people live in China than anywhere else in the world.
With over 1.3 billion potential consumers, you get the promise of good returns. This is a big advantage if you plan to sell your product abroad.
When you have products made in China, chances are you can also market the goods to the local market.
Companies that outsource production often follow up by establishing a supply chain and adding local marketing efforts. They hire local employees and acquire equipment to support their ventures.
Though accessing the Chinese market can be challenging, having an outsourcing agreement in place can dramatically reduce this difficulty. There is no need to ship the goods from overseas because the factories are already in China.
As in any long-distance manufacturing relationship, there are real problems companies have experienced when outsourcing manufacturing to China.
While there are some great benefits associated with choosing a Chinese factory to fulfill your order, there are some disadvantages.
If you talk to someone who had a bad manufacturing experience in China they will be able to give you a long list of problems.
But, if you are talking to someone who has had a successful experience manufacturing in China, they know the value of using a sourcing agency that has the right experience and contacts.
This is the key to managing or even totally avoiding many of the issues that can jeopardize your project.
Following are some common problems offshore manufacturing companies have encountered and what you can do to have a better experience.
1. Finding The Right Factory
Finding a local manufacturing partner is a better way to look at it.
The factory that is going to take on the manufacturing tasks you want to outsource is a real company that has to deal with all the management issues you have in your factory or business.
If you develop a good relationship with them with clear communication and understanding, you will have a good, reliable 'partner'.
As in any relationship, if you don't see eye to eye, you are likely to be disappointed.
You are going to this company because they can produce the product or part of the product in a way that will benefit your business.
Your manufacturing 'partner' is interested in working with you as part of their business.
While the factory will do its best to satisfy you as a client, especially because you are dealing with a different country and culture, it is also your responsibility to develop a good relationship.
The factory management will really appreciate your interest in having a good relationship and future communications over long distances will be so much easier.
It is important that you do enough research and due diligence to know that you will receive good service, and also make sure that the facility you’re considering is reliable and above-board. Once that is settled, take time to get to know the people who will become an extension of your business.
It is highly recommended that you make at least one trip to visit the factory in person.
A sourcing agent will help you find the right factory for your needs and take care of everything, including building the relationships.
But, to have a really good relationship, send someone or a small team to meet the management at the factory.
Finding The Right Factory For Your Needs
You can look for companies online or visit tradeshows, but this involves costs, stress, and time.
You will find that most companies you will see in tradeshows and online are interested in very large manufacturing relationships.
If your project is more about outsourcing a small part of your manufacturing process or you just want the contracting company to take up the slack during busy periods, it can be difficult to find any factory that would be willing to work with you.
In a worst-case scenario that, unfortunately, is very common, a factory will agree to take you on as a client, but because they are typically dealing with multi-million-unit orders, you barely register on their radar at all, and your product order is delayed and neglected.
The process of selecting the right partner can be time-consuming, tiresome, and expensive process.
Hire a sourcing agency that is familiar with your business and is located in China.
The right sourcing agent in China will have the connections to find just the right China manufacturing company for your needs.
They will do the due diligence and provide all the information you want.
Even more than that, the right sourcing agent will guide you to ask the right questions and help you draft an agreement that ensures you will get exactly what you want.
2. Language And Cultural Barriers
China is a large, diverse country. There are many languages, dialects, and ways of doing things. If you are not aware of or if you don't know how to work with the culture, you will be at a disadvantage.
The language barrier combined with cultural differences can make it difficult to get certain messages across.
You may think you communicated clearly, but what they understood may be completely different.
Most Chinese students learn English in school, but in practice, English language skills are generally poor when doing business in China - less than one in 100 Chinese people speak English.
Cultural barriers, such as the legalities of child labor in China, may also be a problem in some industries.
Overcoming Communication Problems
Use clear diagrams, photos, and easy-to-understand instructions during the design phase. Never assume the producer knows what you want.
Always ask for a sample of the product so you can check there hasn’t been a communication breakdown.
If you are finding it hard to communicate with your supplier during the early interactions, chances are it will only get more difficult from there.
Most Chinese manufacturing companies don't have people with sufficient proficiency in English to work with overseas companies, but in many cases, these are the companies that can produce the cost-efficiency, quality, and quantity of products you are looking for.
Outsourcing to such service providers can make it difficult for your employees to communicate with the outsourced company. You are very likely to encounter problems.
In addition to the language barrier, business cultures can differ greatly between China and the West.
Well-intentioned gestures can be completely misinterpreted by the other party without proper context.
Learning to bridge this gap is essential for any successful partnership in China.
Hire a local sourcing agent that is completely fluent in English as well as the local language.
They will represent and communicate with the factory in a way that helps you establish a good relationship.
If you want them to handle the communication entirely, a good sourcing agency can provide that service. But in many cases, it may be enough that you or the factory representatives can turn to someone that understands both perspectives.
The right sourcing agent can help you get the product you want, at the right price, on time, without undue delays.
3. No Respect For Copyright And Intellectual Property (IP) Risks
Historically, there has been a general lack of respect for designs and international copyrights in China.
This should be carefully considered before deciding to outsource overseas.
Not every factory in China is looking to steal your IP, but the reality is there are plenty that will.
You have to be diligent in protecting your intellectual property.
If you don’t have a solid relationship with the manufacturer and they think your product is valuable enough, they may rip it off to produce themselves, or even sell it to someone else who will. This is the reality of life, not just in China, but everywhere.
IPR (Intellectual Property Rights) laws differ from country to country.
You’ll need to do some research on China’s copyright and trademark system, especially when the service provider has access to your products, designs, and more.
But there is good news from the Chinese government.
Following pressure from the United States, the Chinese government agreed to crack down on IP theft in late 2018. They have introduced tough new penalties, but the risk still remains.
Even though the Chinese government and most outsourcing companies adopt strict IPR measures, manufacturers could make and sell copies of your new products at lower prices.
The country has made improvements in recent years, but some issues remain.
But there are still challenges. With long-standing issues in terms of uneven enforcement, trade secrets, and procedural barriers, it’s important for companies to be aware of the level of IP protection that they will need and to develop corporate protection strategies to combat these risks.
Factories still exist that would like to steal your company’s IP and either copy or slightly modify your product and then compete with you.
a) A good relationship with the factory manufacturing your products will certainly play a role in whether or not they steal your IP.
b) If your company represents a good profit for the manufacturer, it will further help in protecting your interests.
c) If your product uses IP that’s worth stealing, use a sourcing agency that has a long, established relationship with the factory where they frequently send contracts to the company.
A factory is far less likely to steal your IP if they are risking the loss of several lucrative contracts by losing the trust of the China sourcing agent.
The potential of losing years of work from multiple businesses is likely enough to prevent the theft of your IP.
A Chinese manufacturer may consider stealing from one company but if there is a risk of losing many contracts they will likely take the honest route.
d) If you feel your IP is worth stealing an NNN agreement (non-disclosure, non-use, non-circumvention) is a good way to go instead of the traditional NDA (Non-disclosure Agreement).
An NDA focuses only on preventing the service provider from releasing your trade secrets to the public.
An NNN agreement prevents your employees from disclosing, using, or selling your trade secrets.
It is certainly possible to protect your IP when manufacturing in China but the process does require painstaking attention to detail and familiarity with the (sometimes inconsistent) legal system in China.
This is where your China sourcing agent can play a big role.
An experienced, well-connected sourcing agency located in China will have the connections to set you up with the right people who can draft the proper agreements.
Your sourcing agent can connect you with manufacturing companies that have a reputation at stake and help you build-in processes to help protect your interests.
Other Ways to Counteract Intellectual Property Risks:
a) Patenting is a simple way to reduce the risk to your IP. Prior to manufacturing, you should register your IP with either a trademark, brand name, copyright, or domain.
This prevents copycat manufacturers from stealing IP without consequence, as well as preventing someone else from patenting your IP.
You don’t want to be in the position where you have to buy the rights for your own IP in order to continue manufacturing.
b) Changing the value chain of a product’s development can help protect IP.
One way to do this is by splitting research and development tasks between departments in the US and China.
Compartmentalization can help keep critical components of the manufacturing process out of China and reduce the risk of copycat manufacturers from reverse engineering tactics.
If no one compartment has the full picture, there is far less risk of losing your IP. Crooks are usually lazy so if they don't have the complete design they are unlikely to make the effort to try to fill in the blanks of a partial design.
c) You can also set up a Chinese research and development department to strengthen the relationship with Chinese partners.
By creating a level of trust with your manufacturing partners, there is a greater incentive to avoid leakage.
Of course, developing a good relationship between your company and the Chinese workforce is important. If employees feel secure and want to develop a long-lasting career with your company, they will be more loyal, therefore reducing risks to IP.
d) Companies should register their trademarks with the Chinese Trademark Office in both domestic and Chinese language spellings.
e) Invest in IP protection tools to monitor possible infringements. If you have valuable intellectual property, this should be a core component of your business strategy.
Something important to keep in mind is while protecting your intellectual property is important, if you have an established business, it can be far more important to protect your reputation by preventing fakes and poor-quality knock-offs made by companies that have stolen your designs.
4. Shipping and logistics
After products are manufactured, proper warehousing and transportation to the final market can become a challenge and can increase costs dramatically if not handled correctly.
Special care must be taken with this process in order to ensure the product reaches its intended market in a cost-effective, timely manner.
These challenges, while significant, can definitely be overcome.
If you have the time, money, and connections in China, you can certainly take the initiative to proactively manage the shipping process.
Considering the cumbersome details and the number of hands the paperwork has to go through, you will need someone physically located in China or there will be delays and problems.
It is much more cost and headache efficient to hire a local sourcing agency to do all the work for you.
The right sourcing agency would have experience dealing with all the stakeholders in the shipping industry for many years. They would have the connections needed to facilitate the process and get your paperwork through 'when' problems arise. Problems arise often, by the way.
Shipping and logistics require foreign companies to take the initiative in educating themselves and be proactive throughout the manufacturing process. Working with the right local partner (sourcing agency) can greatly help in this.
With the right precautions, manufacturing in China can be the step that takes your business to the next level.
5. Long Lead Times
Starting up outsourcing processes in China can be a lengthy procedure.
It takes time to line up supply chains and do the due diligence to find the right manufacturing partners.
Longer lead times can also be needed to manage shipping delays, worker strikes, or energy shortages.
Frequently visiting the factory is a very important role because regardless of how thorough your instructions are, there are always questions to be answered and decisions to be made.
A sourcing agent can play a big role in reducing lead times by frequently visiting the factory and making sure everything is going the way it should.
Your local sourcing agent acts as your eyes and ears on the ground to make sure the manufacturing project runs smoothly.
If there are any issues, your sourcing agent will work with you to resolve them with the factory just as you would if you were physically present.
A good sourcing agency that provides quality control follow-ups all the way from manufacturing and through the shipping process is the key to a happy result when outsourcing manufacturing in China.
6. Large Minimum Order Quantities
Chinese factories love big orders. And they are very good at it.
The ability to make available a large factory workforce means they can manufacture big quantities quickly.
Getting large orders is how they keep staff busy so many factories set high minimum order quantities and won’t consider small orders.
If you are manufacturing a new product or your business is not that big yet, you may find it hard to find a good manufacturer in China.
However, if you look at the Chinese manufacturing landscape in detail, you will find there are hundreds of thousands of very small manufacturers providing services. These factories are very specialized and act as subcontractors for larger companies.
A sourcing agent will be connected to these types of manufacturing companies and will help you get a quality product at a great price even if you are not a large volume company.
When your company is big enough, you may consider doing business with the larger manufacturing companies, but in the meantime, there are several good options to manufacture your product in China.
7. Not Knowing Who You're Doing Business With
One of the biggest problems you can encounter is not having control over additional outsourcing.
Companies will often take your order and subcontract it to other manufacturers. They continue to act as the middleman, but in reality, since you are not dealing directly with the factory making your product, you lose control of the entire process.
There is a high risk of ending up with a low-quality product if your project is subcontracted to an anonymous manufacturer.
Losing control over the process of manufacturing could also lead to unmanageable logistics and end up with a PR nightmare.
This is a common problem:
When you are working with a manufacturer online, you may think you are dealing with the factory directly but often you are only dealing with an independent agent that has no direct relationship with the manufacturer. They are just a middleman (it's often a woman) that is there to close the deal, then they take their commission and walk away.
Once the middleman has been paid, they lose interest in you and there is no communication with the manufacturing company. You don't know if you will ever get the product and if there are problems, there is no one you can talk to address your concerns. You may not even know which company is supposed to be working on your project...and even if you do, no one there may be able to communicate with you in English.
a) Find a manufacturer you can deal with directly.
b) Use a factory that has reliable recommendations from reputable companies.
c) Check references in detail. Do your due diligence on the referred companies you have been provided.
d) Work with a reputable sourcing agent that is located in China.
A reputable sourcing agent has something to lose if they make a mistake. But likely, they won't make a mistake because they would only refer you to companies they know intimately.
Sourcing agents make their living by providing ongoing services to their clients so they would not risk losing your trust.
8. The Need For In-Person Supervision And Oversight
Onsite presence is important because of the very wide range of manufacturing plants in terms of size and condition – from factories with the latest equipment to ones that have been around for 20 to 30 years and have just been repurposed as they change hands.
It’s also important to be physically present to build connections and relationships.
Being onsite also ensures the project gets the attention it needs from the CMO and its senior management.
It helps to have someone physically present to deal with some of the cultural nuances that can jeopardize plans.
But your contract with the factory won't include the cost of sending your representatives to check and monitor the project.
This could be a significant cost depending on how often you have to send people to China and how long they have to stay there to get the job done properly.
Then the question arises if they have the necessary language and cultural skills to be effective.
If there is a problem, would your team have the connections to resolve it?
At a very practical level, a local sourcing agent can handle the entire process of frequently visiting and monitoring the work at the factory.
A local sourcing agent would be familiar with the language and culture and would be able to develop a good relationship with the management of the factory.
If there is still a need for you to send your people, the sourcing agent can help them by translating and explaining cultural nuances so you get the result you want.
This saves you time and money while ensuring you get a quality product delivered on time.
9. Poor Product Quality
Sometimes Chinese products are considered lower quality, but in fact, Chinese manufacturers produce good products more than they do bad ones.
Another issue is, the final quality of products manufactured in China may not always be up to international standards, especially without strong oversight.
What might be considered safe in China doesn’t always align with what is considered safe in other markets.
Without strong oversight, this issue can bring many problems to a company, especially if product quality is variable.
A reputable factory in China is not likely to produce poor-quality merchandise, particularly if they are governed by strong quality control measures.
How to Overcome The Risk Of Poor Product Quality
a) Make sure to routinely check the factory for quality. When you work with a Chinese manufacturer, connect with a sourcing agent who can ensure the factory is always following best practices and that the goods are being produced accurately and on time.
b) Stay vigilant to ensure the materials used in your products are of high quality. You can do this by conducting regular quality control reviews or hiring an agent in China to run inspections for you.
c) List product specifications and inspect frequently.
d) Clearly state the quality of components you want to use during the manufacturing process.
e) Frequently audit the actual production line in the Chinese factory to identify any cheap raw material, worker negligence, or other manufacturing issues during the production phase itself.
This early intervention will allow your outsourcing manufacturing company to deliver goods as per your specifications and expectations.
f) Figuring out the shipping logistics is critical to successful manufacturing outsourcing so work with a sourcing agent that has the expertise to monitor and manage logistics.
Many American companies have turned to logistics providers to transport their manufactured goods and improve supply chain efficiency in recent years. You can hire third-party service providers to ensure that your goods are safely delivered to your warehouse right from the production factory.
10. Choosing The Right City For Manufacturing Your Product
Each Chinese city has a different technical and outsourcing potential. The wrong outsourcing destination can lead to a lengthy setup procedure and a long supply chain.
That being the case, you need to consider the strengths and weaknesses of cities before you outsource. For example, you should know how far your service provider is from your target market, the availability of required talent, the cost of resources, etc.
For example, it’s best to start your company in Dalian (a port city) if you want to export products overseas. Setting it up in a city like Beijing will cost you a lot of money in transportation.
A sourcing agency can help you work through the details of finding the right city and the right manufacturing company.
11. Complex logistics
While the landed cost of an item made in China and shipped to the US can often be cheaper than a domestic product, you still have to deal with more complex logistics.
Products can take a long time to get to the end user— up to 30 days by sea. You may want to have a distribution hub on home soil, but that adds to your cost.
Also, if you sell out of a certain item, your next shipment may be 30 days out. That can be disappointing for customers. You can always ship items by air from China, but you’ll have to figure out the cost of that as well.
A sourcing agent can arrange a warehouse in China at a fraction of the cost you would be able to do it locally. If warehousing is required to maintain a steady supply of your product, consider doing it in China.
There will always be complexity in international outsourcing. Working with a good sourcing agent can take the entire responsibility off your shoulders.
12. Scammers and Fake Companies
In China, every manufacturer claims to be the best. But it's all up to you to decide who is telling the truth and who is not.
The thing is, there are many scammers and fake manufacturers in China who are just looking to make a quick buck.
The best way to avoid falling prey to such scammers is to visit their factories, meet their team, and see their manufacturing process for yourself.
If you are offshore, you should hire the services of a local sourcing agent to verify and make sure you are dealing with a good contract manufacturing company.
13. Low-Quality Materials
Don’t rely on low-quality materials just to keep your cost in check. Regardless of the amount of manufacturing you plan to do, using low-quality materials is not encouraged because it’s going to impact the overall reputation of your business.
Your sourcing agent will be able to sort through the many options available locally so you can have a quality product at a great price.