Manufacturing Strategies in China - For the Small Business

Generally, the stereotypes for manufacturing in China are not true. Yes, there are bad factories and good factories. Those that pollute and those that do not. Those that cut corners and use poor quality source materials and those that do not. Those that make the highest quality goods and those that make poor quality goods. I submit the same is true in the USA and other countries as well.

We see everyday trash on the side of our interstates. We hear stories on the news of con artists bilking investors out of millions. Corporations who try and skirt EPA laws. The list goes on. Branding identity and the quality of our products are what matters to most. As businesses, we must do our due diligence before making any major investment decision, and manufacturing partnerships definitely qualify as an important investment decision. We must decide between pricing and quality and find a combination of both that meets our customer's demands.

Getting away from the geo-political elements that go into manufacturing in the USA vs. abroad, this article focuses instead on the presumption that a business has decided to manufacture in China. I will leave it to others to debate the pros and cons of this, but instead concentrate on how to best set up a strategy of manufacturing to a) keep product costs down, b) address scaling needs, c) increase shipping opportunities for international distribution.

Prototyping - Generally, it is expensive and time consuming to create concept pieces in China with shipping time and expense back and forth as well as limited communication due to language barriers. It is therefore advisable to use a local seamstress or one of the variety of prototyping companies (depending on the complexity of the product) to develop a handful of finished pieces from which you can with 95% or better accuracy, give your overseas sourcing agent a physical sample of what you need duplicated. I try and get away from sterotyping, but generally, China factories are very good at replication but not overly good at taking a concept to production sample. The more you can show them the better your results, pricing and speed to market will be in your overseas manufacturing efforts when starting any new product. This article presumes that you have at least 5-10 production samples in hand from these prototyping efforts.

Pre-sourcing Materials - before sourcing invest in a decent digital camera to take detail photos of your product along with any close-up images of detail work required. Also if possible, put together an RFP (request for proposal) document going through all of the specific fabrics and labor from start to finish, including packaging assembly, quality control, types of shipping cartons (wall thickness/logo printing, etc.), minimum order quantity per production (MOQ) and what port you will need it shipped (FOB). Have the factory source as many of the materials as you can for the first production, but MANDATE that they ITEMIZE each fabric / material / labor portions. If your product has special sizing requirements, be sure to include +/- tolerance that is required to accept delivery and/or expect crediting beyond. Further in the article I will show you how to further reduce your costs by separately sourcing your own materials. You will also want to source locally whatever fabrics/materials the factory will need to make a countersample.

Sourcing Factories - This article is based on my experience on the textile side of manufacturing both fabrics as well as cut/sew/assembly factories. Although it also applies to other industries, please remember the perspective this article is coming from. Please see other of my blogs about the details of sourcing. Generally, you will be best served finding a good trading company agent who will get their commissions from the final factory but will be able to help you navigate the maze of options to find your initial factory at a reasonable starting price.

I would engage at least 15 different trading companies - alibaba.com is a good source for finding these. Simply search for products similar to what you are looking to make and next to each search result - if relevant - look to confirm they are a trading company and then contact them. Of the 15, you will likely get back 10 responses that are an indication of how well they can communicate in English. This is a good weeding out method (unless you speak Chinese) as communication via e-mail is the primary way you will be working with your new partner.

Take the 10 best respondents and e-mail them your above-referenced RFP. They will all say they will need a sample to give you a specific price, but you can say back that the detailed photos and documentation should be sufficient to get an estimated price. Like with any other bidding process, you probably don't want the lowest price or the highest price, but a lot has to do with the professionalism in their reply at this point. Pick your top 5 respondents and arrange to send each of them a sample along with enough materials to make 2-3 countersamples. Generally, it is standard to have them make the countersamples for free but you will supply your shipper number (fedex, ups, dhl, etc.) and pay for shipping back and forth. It is ok to see if they will pay to ship them to you, but do not dwell on this. I would steer away from any factory requiring you to pay a sample fee, unless it is a very complex sample that requires making a mould (products with plastics, etc.) If you do have to pay a sample fee, it is customary to get them to apply the sample fee against a future order. Generally estimate about a 3 month process to get this far. Yes it is a long time, but you be surprised how long it takes to do this. I'm also anticipating that this is your first time sourcing overseas, so everything will be new to you so you will want some buffer to take that into account.

Generally, the 5 respondents with countersamples should give you a final price with the MOQ you required ahead of sending you the countersamples. If any of these are far off from the original estimate price, it is a good indicator to drop them off the list. Presuming they are all close to the estimated price, you really should only be worrying now about comparing quality of one countersample to the other along with the communication quality which is your service expectation.

This is where strategy comes in.

You will likely select one factory to make your goods. TRY AND GET THEM TO COMMIT TO A PRICE TERM GUARANTEE as a condition to proceeding. Your first production run will ideally have all materials sourced by the factory and everything shipped to the US (or whatever your destination country is). If you do not have your own import and export agents for ocean shipping, you will probably be best served having them manage the shipping for you. You can either negotiate a CIF rate (where they deliver to your destination port) or FOB and then separately pay the shipper that they use to manage your initial run.

You will want the initial order to be the smallest MOQ. If possible try to negotiate an even smaller than the MOQ test run, as you will likely get a different quality in piece #843 than you did from the countersample which was perfect. Generally payment terms are 30% start of production, and 70% upon completion. Prior to paying the 70%, you can have either a few units or a carton of units air shipped to you (at your cost to ship) so that you can test the quality. When the shipment is complete, get a consumption report from them regarding the meters per unit per fabric to make your product, along with the roll widths per fabric (as a different roll width will change the meter/fabric figure.

Once you receive your shipment, it is a good idea to break it down and spot check the units (correct assembling, sewing lines look good, labels all in the right place, etc.). If everything looks good, you start increasing your orders.

Stage 2 strategy - you will VERY QUICKLY want to get more than 1 factory online as the Chinese are known to be very crafty in pushing for higher pricing, regardless of the price guarantee. Inflation is crazy there now and with the dollar/yuan price changing by the day, pricing will always be your unknown moving forward - yet your customers will expect pricing to be consistent.

What I like to do is to immediately find a second and third factory that is competitively priced
to split my orders between them. Let each know that you have other factories that make your product as they do and so long as they all remain competitive with one another, you will split your orders between them. If pricing or quality drops significantly, you will split orders with the other two factories while you find a replacement for them. This would not be a threat but a mantra for you to actually follow. It is not unfair, but good business.

Stage 3 strategy - This step would only occur when you start working with international distributors and have order sizes large enough to warrant your efforts to further tweak out your pre-unit costs. You can save a lot of money here, but it requires much larger investment costs and overseas logistics.

You will know the itemized costs for each of your materials, so the factory should be fine with you sourcing the materials yourself to further reduce the costs. Unfortunately, all fabric and materials come with different MOQ themselves - fabrics should be 1,000 meter minimums + mould costs per color if printed fabrics. Also make sure that you are getting roll width and quality specification consistently with each quote as a shorter roll width is an easy way to quote you a lower price. You should already know the specifications from your prototyping company but you can also get them from your cut/sew factory who presumably has already sourced them for the initial order.

Go through the same sourcing techniques as you did with the cut/sew assembly for each of the materials. It usually takes about 4 weeks from start to finish once you have gotten to the point to wire them start of production funds. You ALWAYS want to spend the additional cost of having them ship you a 1 meter full roll width sample to confirm the roll width size is correct. They may look to cut corners by lowering the quality, or there are errors in the pattern printing, etc. Your best leverage is prior to paying the 70%.

You will need a place to ship them. As you will have left over fabric for any production run, you don't want to ship to your cut/sew factory more than you require to do any production run.

Option 1 - negotiate deals with each factory you source materials to keep remainders at their location to ship as needed to each factory. That way there is not left over at your cut/sew factory for them to use as leverage for future orders (not that they would hold it from you, but they would know it would cost you to get it shipped somewhere else which they can factor into a price increase later on). Also, you do not want one factory sending materials to another factory making the same product as they could conspire to set prices with each other. Better to have a more neutral 3rd party keep the remaining materials. Your consumption reports from the cut/sew factory would be used to determine exactly how much of each material should be sent to the cut/sew factory order to order. The problem with this option is that you will likely have more than one material to make the product and multiple locations with different remainders of inventory. Depending on your US general liability insurance, it is unlikely that you will be able to get this inventory insured so it is at risk. That said, you can usually get each factory to do this at no additional cost to you other than shipping (which you can have them do or have the factory do as a pick up).

Option 2 - This is a better overall option, but it comes at a price. It is also the only recommended option if you are looking to provide FOB China shipping services to international distributors. Presuming you ship bulk to international distributors, if you do this from the USA, you are paying to ship the goods twice, including the costly expense of customs entry into the US and an expensive US warehousing/fulfillment rate.

Find a warehousing and fulfillment company in China - ideally based out of Shanghai which is the least costly, fastest, and most commonly used China port to 3rd party countries. They will likely also provide shipping services that will likely be less than your factory's shipper, so get quotes for this as well as your primary destination countries where you distribute (LCL - less than container load minimum at 1 CBM - cubic meter). You will also want price per month per pallet along with pick-pack rates (will be different depending on how custom you ship international). Generally, I require my international FOB distributors to take by outer container which limits my inventory tracking and fulfillment costs. This warehouse will take possession of your raw materials, will ship those materials to each factory and will receive (warehouse and fulfill) any finished inventory to international distributors, not otherwise bound for your US home destination.

Make sure you are specific on all fees so that you can incorporate them into your international FOB pricing to distributors. Also get at least a 1 year price guarantee (ideally a 2 year) which you should be able to do.

You should find a significant price savings doing it this way than doing it from the USA which will make your goods more cost effective to distribute abroad. If you select a warehousing company that also has offices based in the USA, it may be possible to insure those goods against loss (fire, theft, etc.). Depending on your comfort zone, it may be more cost effective once this is up and running to keep most of your inventory in China and then ship them to the USA in 3-4 month inventory requirements.

For us, we keep just enough for international needs and spot orders to the US (in case we move more of one product than anticipated) with the rest going to the US. I used to place orders and shipments once per quarter, but given the price instability in both labor, commodities (cotton, etc.), and shipping (price of oil), we are now producing 10 months year worth of inventory per production run and split those between 2 factories with a 3rd and 4th factory vetted, sourced and ready to take the place of one of the main factories if I have any problems. I keep only the amount needed for international orders in China as the shipping savings going FCL (full container load) offsets my higher costs of inventory warehousing in the US and it is less expensive to insure it when it is in the US.

Stage 4 strategy - You should be doing the same thing with the warehouse solution in China that you did with all other sourcing protocols, by finding a 2nd and 3rd go-to location in the event that your warehouse starts raising prices or quality changes. That way you can immediately ship the goods from one port address to another. If you are required to ever do this, make sure you negotiate into the new deal that the new warehouse pay the costs to move the inventory to their warehouse. It is close for them and they should want your business enough to agree to this.

Stage 5 strategy - Find your own export and import agent. Start looking and get detailed quotes for both the export out of china side and the import side to your destination address. It is almost always most cost effective to have a separate export agent from the import agent and they will work together to hand the goods off once they reach port. That is why you want a detailed quote, as you will do the same thing you did with your raw materials for your shipping. Shipping is usually a large percentage of your cost of goods sold, so you should find significant savings doing this, but it does increase your logistics oversight and the number of wires required to get the goods to your destination address. You may want to look into finding a wire-friendly bank for international business - I like HSBC. They have a low cost, 0$ balance account with 5 free wires in and out a month. As with the other sourcing requirements, check your prices each time you ship and always look for new shippers. At a minimum you can use these quotes as a means to lower your current shippers fees, and at a maximum it provides you with an alternative to use in the event you have to.

Stage 6 strategy - relocate your US fulfillment to Long Beach California area. As with Shanghai, Long Beach / Los Angeles is one of the most frequented destinations in the US - especially from Shanghai. The combination is the most cost effective and fastest shipping route - usually 10 days including customs for FOB and 3 weeks including customs for LCL. Note that customs has been increasing the number of "random" container scans which gives you a surcharge + a delay of 2-3 days. I would take that into account when estimating the delivery time line just in case. But I digress. Most other destination in the US from China will still land in LA and then either train or truck (depending on the distance and location) to the final destination. This cost can be as much as double the cost of ocean shipping the goods. You can almost offset the entire warehousing and fulfillment cost from the US by simply filling doing away with the second leg of the rail/trucking cost. Also, labor in the LA area is relatively low so I have also found savings in just the warehousing fulfillment portion alone.

So that was pretty exhaustive but theraputic for me to get off my chest. Hope it can help some people out there looking to make the leap or to make their current efforts more cost effective.