With the current political climate in the US aside, and taking into account recent reports that manufacturing in China seems to be slowing down, many companies continue to leverage China-based factories for contract manufacturing. With manufacturing costs between 30 and (a staggering) 80% cheaper than in some other countries, historically strong government agency support, and lower capital costs, China is extremely attractive to startups and mid-market brands alike.
Unfortunately, it’s not all sunshine and roses. Companies around the world still struggle with manufacturing issues like poor quality and manufacturing delays—both which impact the bottom line for international brands and manufacturers looking to grow their businesses.
If you’re considering contract manufacturing, you should be aware of the pitfalls, and understand how you can address them. First, let’s take a look at what constitutes international contract manufacturing.
What is International Contract Manufacturing?
As defined by Dan Harris, Legal Expert on international & emerging market outsourcing, international contract manufacturing occurs when one company leverages at least one other company to provide a good or service, AND when at least two of the companies involved are located in difference countries.
Essentially, whether you’re in France contract manufacturing t-shirts to China, or in the US outsourcing code to India, you’re involved in international contract manufacturing. Why is it important to make this distinction? While contract manufacturing with your own country can be a viable solution, it’s not typically the “go to” for many companies, as you won’t achieve many of the efficiencies (or see exactly the same challenges you face) when dealing with an international vendor.
What Types of Companies Benefit from International Contract Manufacturing?
In the thirty-something years since China opened up to the world, manufacturers have been falling over themselves to sell and manufacture in the market. In 2014, China’s contract manufacturing market was growing at 30%, and according to Michael Evans at Forbes, “bringing product manufacturing to China allows you to create a higher volume of product for reasonable cost.”
Many people think that it’s only the large companies like IBM, Walmart and Honeywell that outsource to countries like China, Mexico and India. Recently, smaller and mid-sized brands have been taking advantage of the competitive environment, and leveraging international manufacturing. Industries that have benefited include tech startups, fashion apparel, toys, and light consumer goods.
What Are the Benefits of Contract Manufacturing?
There are a number of benefits to outsourcing your manufacturing to China.
Labor Costs Are Cheaper.
This has been the main argument for contract manufacturing to China in the past. Fortune Magazine reports that, “The low labor costs that fueled Chinese growth have more than quadrupled since 2006, and labor unrest has also been growing.” While western companies compete on productivity, Chinese factories are behind current western standards, and those jobs require little to no training. Because the workers aren’t skilled, they require little in the way of pay. As the quality expectations begin to shift, this will need to change.
Capital Costs Are Lower.
Because labor costs are so low, “Chinese manufacturers benefit from building, equipment, engineering and overhead costs that are substantially lower than those for their Western counterparts,” says Jack Perkowksi in Forbes.
What Are Some of the Pitfalls and Problems with Contract Manufacturing?
Typical factories in China have dated equipment, processes and workflows. This means that quality control isn’t on par with many manufacturers in other, more developed countries and can result in poor customer service, slow delivery times, and poor quality.
One way of handling poor quality is to provide insight into quality control data at the source. Leveraging the strengths of your ERP software, or leveraging a cloud-based business intelligence and analytics platform, can give you quality control data from suppliers and can help you get a handle on quality BEFORE you’re sitting on cases of poor quality products.
Another way to manage quality issues is to leverage a Chinese factory that has already implemented a transparent, cloud-based quality control solution for self inspection. This will not only give you insight into their process and controls on the floor, but it will help give you piece of mind that you are dealing with a reputable factory that takes production quality seriously.
Chinese manufacturers are constantly facing pressure to keep costs down. One way to do this is to produce your first product run at cost, and then increase price once you’ve started developing a relationship.
To avoid this, make sure that you have very strict and clearly documented quality control specifications at the beginning. This will set the tone that you mean business, and make it difficult for them to change price later due to “misunderstanding” or misalignment.
There are any number of reasons for production delays from your factory in China. Maybe a larger client came along and bumped your order. Perhaps a delay with a cheaper, third party manufacturing partner or vendor has held things up. Sometimes errors in the manufacturing process can add to delays. Regardless, if you’re sourcing product overseas, you’re bound to experience delays that can impact your bottom line.
Once again, a factory that has implemented a digital self inspection process with a cloud-based solution will give you insight into quality issues sooner in the process, giving you more time to solve problems and minimize the negative impact on your schedule.
Cost-Reducing Your Product.
Renaud Anjoran of QualityInspection.org defines Cost Reducing as “Substituting cheaper materials (either thinner or of lower grade) and placing production in a cheap factory (usually a small workshop with no quality control whatsoever) are very common ways of reducing costs.”
Basically, when you negotiate a deal with a factory in China, they are pressured to keep costs down, and rather than become more efficient, they sneak poor quality materials, or outsource the work to a cheaper factory. Neither of these is good for you.
Your agreement may not consider other factors that impact your cost. What does the supply chain look like? How do they handle engineering change orders? Are all transportation and delivery charges included?
Fluctuation cost issues are handled by being clear, explicit and extremely detailed at the beginning of the process. Leave no questions or ambiguities, and leverage technology wherever you can.
Pivot88 Can Help You Avoid the Common Problems of Contract Manufacturing to China.
Do you currently source manufacturing to China, or are you considering it? At what stage are you in? If you’re experiencing quality issues or production delays, contact us for a free demonstration of Pivot88’s easy to implement, cloud-based quality insight tools, contact us. Or, download our case study on how we helped increase inspection efficiency today.