6 best Practices When Working With Contract Manufacturers In China

As we’ve written before, importers have a choice of supplier types when sourcing a manufacturer to outsource production to in China. Let’s assume that you’ve discounted working with an OEM or ODM, and your focus is on finding contract manufacturers in China to work with.

What are the best practices you should be following to have a productive relationship?

Why choose a contract manufacturer over other supplier types?

Importers who prefer to keep tight control over their supply chain like working with contract manufacturers (or CMs) as they provide a “blank slate”, in a way.

Unlike OEMs and ODMs, there usually isn’t any assumption that they will own IP, tooling, supply chain info, etc. In fact, they basically do what you pay for and don’t offer to do, say, product development work with the secret intention of keeping the product IP they work on, thereby holding you hostage.

You’ll benefit because:

• You own the product IP, tooling, etc, because you paid for it.
• You’ll also own the list of component suppliers because, again, you paid for it. This is relevant if the CM helps you source components suppliers, or if you did some of that sourcing work, for example. 
• Since you own your product and supply chain info, you can switch suppliers relatively easily as they will not hold on to the information (provided they have been paid for the work done).
• You are more involved in the R&D and manufacturing process, and you have more control and visibility over the project’s progress, costs, quality, and estimated delivery time.
• Working with a CM is more collaborative in the sense that they will share more details about what they do and some customers get very involved in working along with them, although this isn’t essential.

A word of warning about Western trading companies claiming to have a factory in China…

Many buyers feel more comfortable dealing with a Western-owned contract manufacturer in China. However, a word of caution: even when talking to a non-Chinese rep, you need to do your due diligence. We have come across a number of Western-owned trading companies that pretend to own a factory. Their whole website may show details of a manufacturing facility…which is actually wholly-owned by Chinese parties.

Then you’ve got the same problem you wanted to avoid in the first place, a lack of control over your own supply chain.

The good news is, that this untruth can be easily and quickly uncovered by performing a legal records check on the potential supplier as it will show whether they are legitimately a manufacturer or a trading company to be avoided.

What might entrepreneurs and SMEs find challenging about working with a CM?

New product developments that start from scratch tend to be more expensive than with ODMs who are prepared to take on some of the initial costs (although lower costs to you in this case often come with strings attached). 

The delivery time also depends on you to a degree, so it may be a slower process than leaving an experienced ODM to get on with things. For example, if you raise a lot of issues with the manufacturer this will necessarily stop them from progressing while they’re addressed, whereas an ODM will probably just be carrying on in ‘their own bubble’ with less involvement from you.

Because working with contract manufacturers in China can be a more collaborative relationship, less experienced customers might have a steeper learning curve, although it must be said that an experienced CM can usually be left to deal with most elements of the development and production without heavy involvement from the customer.

How to get more out of working with Chinese contract manufacturers?

The following best practices will help you have a fruitful relationship with contract manufacturers in China.

1. Be prepared to get involved with project management

When working with a CM a customer will often work with them rather than leaving them to ‘work out all the details,’ as would commonly be the case with ODMs. 

Working in partnership with them will often provide better results down the line, but there’s a learning curve as you’re probably going to be involved in the following:

• Reviewing design files and storing them as a backup
• Reviewing and signing legal agreements outlining everyone’s responsibilities, your expectations, and who owns the IP (you may need a lawyer’s assistance here)
• Reviewing a risk analysis on your new product design (ideally in the format of an FMEA)
• Understanding the material and process flow (fabrication, surface treatment, assembly, packing, testing) and the related control points, if you want to feel more at ease with the whole process
• Helping confirm the measurement and testing systems, if needed
• If that’s applicable, reviewing the Cpk index of certain CTQ values and the plan to get it higher (for better consistency in production)
• Creating and/or reviewing a quality standard (checklist used, testing protocol used, putting golden and boundary samples in place)

Obviously, these documents and activities have to be defined with and by the CM. Extra bonus if you can do some of that work in preparation, and go to a CM with a great package that they can review and adjust. 

2. Vet your supplier shortlist thoroughly

If you do product development work before working with a CM, you will need to pick some components or materials, and you will need to qualify their ability to produce at the desired quality level. Typically, this involves sending a factory auditor to perform the audit for you.

Now, if you are working with a CM along the way, they will usually suggest that some of their long-standing suppliers be considered since that comes with considerably lower risk.

Oh, and what about qualifying the contract manufacturer themselves? Listen here for advice: How To Qualify A Contract Manufacturer Or Component Supplier

3. Don’t underestimate how much work goes into product design, development, and validation before manufacturing starts

If your product is really new and isn’t very simple, the product R&D and process validation phases of your project are likely to be lengthy. And that’s often absolutely necessary — for example, a more thorough NPI process results in fewer defects and reliability issues down the line.

You’ll need to, roughly, go through the following before anything is mass-produced:

• Finalize product concept, and that often includes a feasibility study and/or a ‘proof of concept’
• Perform market research to assess the need for the product and its place on the market 
• Get the industrial design of the product done, typically using a freelance designer or a design house at this stage
• Document product requirements and a few other documents required by the manufacturer
• Complete engineering design of the product, with a design house and/or with a contract manufacturer
• Perform reliability, safety, and quality testing on prototypes, as well as pilot runs before you ramp production up (in consumer electronics, that process validation work is called EVT, DVT, and PVT). Numerous product samples will be produced and tested here and the rounds of testing may go on for some time before you have arrived at a product iteration where all can be locked and you are safe to manufacture it.

On this topic, read this post for more warnings about going to a manufacturer too soon: Why You Need Mature Product Designs BEFORE Working With A Chinese Manufacturer!

To get an idea of the scale of the pre-production phases, read this post where an experienced product designer explains: A Product Designer’s Tips For New Product Launches

4. Hold the contract manufacturer to account by inspecting quality during production

Even if you have found a great contract manufacturer to work with, the risks of not picking up issues early enough during production are huge. What would you do if you received a container of products, at great cost in money and time, only to find that they were defective and couldn’t be sold? You can’t return them, reworking in your country could be extremely costly, and you’re going to have awkward conversations with your disappointed customers. Could your business cope with this?

Product inspections are a valuable ‘safety net’ you can use to pick up issues before it’s too late. Supposing your product has been validated properly and is tested as reliable, it’s not impossible for production errors to cause quality, safety, and reliability issues in products, hence sending in inspectors to keep the manufacturer on their toes.

As long as they’re informed in advance and it’s in your manufacturing agreement, a contract manufacturer should not have any issues in accommodating an inspector.

Popular inspections include:

• Inspection during production
• Final random inspection
• Off-site inspection (useful when covid restrictions block access to the factory)

5. Remember to protect your IP

This tip isn’t specific to importers who work with contract manufacturers in China. In fact, IP protection should be a key concern regardless of who you outsource to as, by necessity, you have to divulge a lot of critical product IP to your manufacturer.

This may include product designs and drawings, your BOM, supplier information, and much more…basically, everything required to create your product at your standards.

So, when working with a new contract manufacturer, consider taking the following steps:

• Register trademarks in China to prevent third parties from registering them for themselves and producing similar products using them. Depending on your budget and product type you may possibly consider registering patents, too, but this is usually out of budget and, arguably, not as important at an early stage for many entrepreneurs and SMEs.
• Sign a product development agreement that outlines who owns the product IP (particularly relevant if they are helping you to develop the product before it’s manufactured)
• Sign an NNN agreement that will protect your IP against being used without authorization, such as being shared with third parties, being used to produce your product without your consent, and being used by the supplier to circumvent you and deal with your own suppliers.
• Sign a manufacturing agreement that outlines who does the manufacturing and your relationship with the supplier, including exclusivity, deliverables, agreed costs, penalties, IP ownership, and more.

Learn more about the risks to your product IP and how to mitigate these risks. 

6. Maintain visibility over the CM’s activities

Some contract manufacturers will be assisting you with pre-production product development and validation, some only handling the assembly side of things. Either way, make sure that you’re going to be given full visibility over whatever it is that they’re doing for you.

A credible CM should be providing you with access to the suppliers they source for you, their internal testing regimen for your product, and their internal NPI processes that will be used as milestones to get your product from development into mass production.

The point of working with a contract manufacturer is for you to have the advantage of their expertise and facilities at your command, with the control over the project as if you own factory and staff in situ, so if the information is being left vague that’s a red flag. As ‘project principal,’ it’s also on you to guide them as to what you want to be kept informed of, too, though.

Conclusion

Contract manufacturers in China could be a great supplier option for entrepreneurs and SMEs with a new product that needs to be developed and manufactured, especially if they’re fairly complex products (such as many electronics devices).

If you’re expecting a good amount of sales and have the funding, the initial investment you make into working with a CM pays off as you’re provided with far more control over the project and transparency over your supply chain.

If a CM sounds like it’s right for your project, don’t forget that there are best practices for working with them, such as being prepared to collaborate with them, having realistic expectations about the work involved to take your product through the NPI process, IP protection, product inspections, and more.

It’s worth remembering that many contract manufacturers in China (and elsewhere) are working with a ‘Western’ business model. What does this mean? That cooperating with them will be a more similar experience to working with a local company from, say, the USA or Germany, despite them being in China. Another reason why they’re preferred over other types of manufacturers who may be working to a ‘Chinese’ model. We recently discussed the differences between these two models in this podcast episode: Sourcing Chinese Manufacturers: Western Or Chinese Model?

Do you work with contract manufacturers in China or OEMs or ODMs? What have your experiences been? Share your thoughts by commenting, please.

P.S. you may also like…

• IP Protection in China when Developing Your New Product [Importer’s Guide]
• How To Qualify A Contract Manufacturer Or Component Supplier?
• From Prototype to Production: 7 Pitfalls for Tech Products
• How to Avoid Inadvertently Gifting your IP to your Foreign Manufacturer
• The 3 Hallmarks Of Capable Manufacturers

Disclaimer

Here at Sofeast, we are not lawyers. What we wrote above is based only on our understanding of the legal requirements. We do not present this information as a basis for you to make decisions, and we do not accept any liability if you do so. Consider consulting a lawyer before making legal decisions.

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