Over the last decade-and-a-half, several global companies have benefited from increased revenues and profits thanks to the cost competitiveness that manufacturing in low-cost regions such as China, Vietnam and India brought them.
There is one kind of company, however, that has always managed to maximise the benefits of China sourcing. These are new companies that outsourced to China from the very beginning of their lives. By making the decision to outsource manufacturing to low-cost regions, these companies were able to focus on growing their businesses and investing in research and development for new products, securing the future of their companies.
If you are an entrepreneur or small and medium business owner, here’s how sourcing from low-cost regions like China can help your business grow:
- Cost competitiveness: This advantage is due to the cheaper labour and well-developed supply chains and logistics infrastructure in low-cost regions such as China. When it is cheaper to manufacture your product or component, you can price it competitively as compared to your rivals. A good quality and cheaply priced product means increased sales, which leads to increased revenues and profits that you can plow back into growing your business.
- Economies of scale: It is well known that the cost of manufacturing falls as production increases. If you have a popular product, placing large orders will lower its per unit cost. You can choose to pocket the increased profit margin or pass on the benefit to your customer in the form of lower prices to see sales rise. Either way, this is good for your business in terms of sales and profits. Using Chinese manufacturers is a particularly good way to capitalise on the cost advantages of economies of scale because several Chinese factories have huge production capacities. This, coupled with the country’s efficient transport and logistics infrastructure and well-developed supply chains, gives them an edge in terms of manufacturing efficiency as compared to their rivals in other countries.
- New product development: This is an important point. Once you finalise the manufacturing agreement with your Chinese manufacturer, the work of buying raw material, hiring workers, paying for operational costs and so on isn’t something you need to micromanage. This leaves you free to focus on developing new products for your customers, or taking your established product to new markets.
How to use low-cost production areas to your advantage?
Outsourcing to any low-cost region is risky. After all, you will be entrusting manufacturing and quality control of your product to a third party. You also face the risk of fraud, which is known to happen when dealing with global transactions.
But these risks are manageable and a little effort on your part will ensure that your China sourcing project is successful.
Here are a few things you can do to ensure that outsourcing to China is to your advantage:
- Hire a reliable supplier: Conduct research on your potential suppliers and choose the most reliable one to ensure that you don’t face any nasty surprises around the time you are expecting product delivery. For one, ensure that your supplier is a genuine company. For this, conduct a background check by asking shortlisted suppliers for their certifications and licences to verify whether they are a genuine manufacturer. Your supplier should ideally have prior experience in manufacturing for western customers because they will then be familiar with western quality control requirements.Also ensure that you choose a manufacturer and not a third party like a middleman or trading company. This is especially important if you want to get the best price for your product. A middleman will never offer you the best price because they will always pocket a margin.
- Factory verification: Once you shortlist a few suppliers, ensure you or your representative visits the shortlisted factories to verify whether they actually exist before you transfer any money to the supplier you finally pick.
- Protect IP rights: Sign a China-centric NNN (Non-Disclosure, Non-Use And Non-Circumvention) Agreement to protect your Intellectual Property Rights. China-centric means that the agreement should be drawn up by a lawyer in Chinese and enforceable in a Chinese (not western) court. A US-style Non-Disclosure Agreement will not work, according to legal experts.
- Quality control: Once production starts, conduct regular in-process third-party quality control inspections at the factory to ensure that your products are being made according to the specifications outlined in your manufacturing agreement and the agreed upon sample. This will prevent you from having to fix problems later, which can cost time and money.
- Be careful with payments: Always pay into a company account. When it comes to paying your supplier, never transfer money into personal accounts or use dodgy money transfer companies to do so. Even if you are paying into a bank account, always ensure that the name of the company you transfer any money to is the same as the name on the licences and certifications that the supplier has given you to verify their identity.
- Spell out all product specifications in the manufacturing agreement: This is a very important step if you don’t want your finished product to disappoint you. Leave no room for interpretation in this agreement. Be as specific as possible. For instance, if a product has to be painted red, give the Pantone colour code for it instead of just saying “red”.
If you have agreed upon a sample, keep a few of these approved samples with you or your representative so that you can check them against the batches that are being manufactured and flag any deviations that crop up.
If you don’t have the time or inclination to do this groundwork, you could hire a reliable sourcing agent to do it for you. Several western companies use the services of these agents to handle their China manufacturing requirements. Sourcing agents based in China virtually act as your representatives on the ground.
Advantages of hiring a sourcing agent
Hiring a reliable agent saves you the time and money you will spend to travel to China to verify suppliers, inspect factories and conduct quality control checks when production starts. They will negotiate with the local supplier and get you the best prices. They work with the manufacturer to ensure that your product is manufactured to your exact specifications. Not only that, they will keep track of production and ensure that the product is delivered to you on time, preventing the chaos that delayed deliveries can cause.
Hiring a sourcing agent who also has a local presence is also useful because they know the local language and culture and are familiar with the quirks of doing business in China unlike employees from western companies. Most good sourcing agents will know, for instance, to add a few weeks to lead times of orders placed around Chinese New Year because that is when Chinese factories close for extended periods, with factory workers heading home en masse to celebrate the festival.
A reliable China sourcing agent is likely to have an office both in China and the West, allowing you to communicate easily. The sourcing agent’s China-based team will be able to handle all the initial supplier checks and the subsequent quality checks for you, allowing you to focus on other more important matters such as sales and marketing and growing your business.