We’re often asked how to qualify a contract manufacturer or component supplier.
In this episode, Renaud explores the best practices importers could follow when sourcing new manufacturers or suppliers in China, or beyond. This includes sourcing options (who to use), the typical sourcing process, if the lowest prices are always best, IP protection, manufacturer types, and CM sourcing tools and steps.
The purpose of this episode is to give you the awareness of risks that await you, suggestions on how to qualify better supplier/CM options, and an understanding of the different types of manufacturers you may encounter and what their expectations may be.
Hopefully, you’ll find a CM or supplier who better aligns with your needs.
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✅ Who should be doing the sourcing? Is working with a sourcing agent necessary? – This is a personal decision. Buying direct from a supplier may have its advantages, but businesses who aren’t experienced in sourcing may get a lot of benefits from working with a specialist who already knows how to qualify a contract manufacturer or supplier and may have a trusted network.
Renaud explains the different sourcing options and some of their pros and cons:
- Commissioned agent. Finding someone who will do the sourcing online, such as Upwork, who is a commissioned agent and will do the search for free is a loose and more risky way to source. A ‘free’ search might not turn up the highest quality suppliers possible and, since they get paid after the supplier gets paid, their interest is to make the sale happen even if the supplier isn’t very good. If the supplier is also paying them a percentage (finder’s fee), too, this could be added into the price you pay on top of the agent’s fee. In general, they’re a quick and cheap option.
- Third-party sourcing agency. These companies have a sourcing process they follow and will provide a list of deliverables and a set cost for doing the work. Their work is fully transparent and they won’t hide a supplier’s identity from you. If you choose not to use the supplier/s they source they get paid anyway which can also reduce the temptation to take a ‘backhander’ from suppliers. While they are a more professional choice than a standalone commissioned agent, due to the fact that they get paid regardless a drawback could be that in some cases they might lack the motivation to find perfect-fit suppliers for you, and paying them is an up-front cost that businesses need to account for. (This the model Sofeast’s supply chain management team follows when sourcing suppliers).
- A trading company. The agent will work as an intermediary and introduce a ‘great factory’ to you without letting you know much about them and saying you can’t speak to them as they don’t speak English. In fact, they purchase from the factory and sell it to you so they are the supplier! They have little incentive to stop a bad shipment as this will affect them being paid. This is probably the riskiest option as you have no supply chain visibility and the costs could be higher, but if you find a good trading company they could be convenient and quick for less-experienced buyers.
- Buy direct from a factory yourself. Use your own team to speak to a number of suppliers to get an idea of the market rates for your components/materials, visit them in China, get a feel for the place and people and you will gain experience and make better decisions. If you’re able to handle this alone you have more control over your supply chain and can get cheaper prices if you’re buying larger volumes. You can always use specialists as and when you need to, to handle product inspections, factory audits, logistics, etc, on the ground in Asia.
✅ Exploring two typical sourcing process ‘templates’ that can generally be followed by most buyers.
- If you buy standard off-the-shelf products…in this case, you source the product first and when you find products you like from a couple of suppliers you talk about pricing, customization options, and then perform due diligence on the suppliers. The need to ‘protect IP’ is not critical here due to the product type.
- If you develop your new product with confidential IP…in this case, you source the supplier first. Look for those experienced in this niche. They need to be the right size, understand the quality standard and needs of companies like you, they may have specific certifications your industry needs, etc. After the supplier and their manufacturing facility has been qualified you start to disclose a little IP as and when needed for suppliers to understand if they can help you, but until you have decided on a final shortlist of one or two suppliers you don’t disclose the full IP in order for them to give you a quote.
These two approaches are quite different, but they both share a starting point which is searching online for suppliers. After going through a thorough and careful sourcing process you can end up with a preferred supplier and keep one in reserve as a backup factory, too.
✅ Is chasing the lowest price the best strategy? – choosing the lowest price comes with risks. Experienced buyers will be suspicious of the cheapest suppliers as the supplier will potentially pay less attention to your specifications and will need to raise the price later, this is a huge issue if you’ve already sent a deposit as they won’t pay it back and you’re forced into paying more. A small manufacturer may try to undercut the competition to win the trade, but they are not very qualified. A supplier who accepts a very low price demand from you will try to claw back the costs later, perhaps through poor quality materials, etc.
✅ Tips to protect IP when sourcing manufacturers or suppliers – don’t send designs, etc, to 20 potential suppliers, as you are leaking it yourself. Don’t assume that your local NDA will protect you in China, it won’t. The danger is that not using a manufacturing agreement and NNN agreement that is enforceable in China pins you as inexperienced which opens you up to the risk of being taken advantage of or at least being a low priority. You also need to understand the type of manufacturer you’re working with, as an ODM, for example, will take customer ideas and develop products to later sell – are you OK with giving away your product idea in this case?
🤔 Explore further: We spoke before about manufacturing contracts/agreements here.
✅ Which of the different types of manufacturers is suitable for you? ODM, OEM, or CM? – as mentioned, part of learning how to qualify a contract manufacturer is to understand your manufacturer options, so Renaud talks through the features and pros & cons of each of them:
- ODMs might work with you to develop your new product and it’s fast, but it’s risky as you will effectively be their distributor as their business model is to develop their own products and sell them to multiple buyers, perhaps to be white-labeled or with at least minimal adjustments.
- OEMs in Asia usually can help develop a new product and may subsidize sourcing, engineering work, tooling, etc, as they have the expertise to handle that. This can be helpful and faster for buyers who lack experience in product development. However, all of this usually doesn’t come for free. OEMs often make the assumption that if they subsidize the development that they will own all or some of the IP. If you choose to leave them and switch suppliers this could lead to issues with obtaining your BOM, product designs, molds, etc, which could be expensive or leave you stuck.
- Contract Manufacturers, like our own CM subsidiary Agilian Technology, provide a higher quality of service, including advanced process engineering, in-house product development staff who can work with you on your product designs, etc, and are usually willing to sign a fair manufacturing contract where they carry out the work you expect and pay for with no hidden assumptions. They generally will not seek to keep supply chain info secret or retain your IP for themselves. Working with them could be more challenging for less experienced buyers as you would typically need to be involved in the product engineering and design work, sourcing, obtaining tooling, etc, yourself, and then use their manufacturing capabilities.
🤔 Explore further: We covered OEMs, ODMs, and CMs in detail in this episode.
✅ What kinds of tools and steps might buyers follow when sourcing a CM? – if you develop a new product you need to consider the following tools and steps:
- The latest design files to serve as a backup
- A legal agreement outlining who owns the IP
- To do risk analysis on a new product design, such as by using an FMEA
- Have an idea about the material and process flow (fabrication, surface treatment, assembly, packing, testing)
- If volumes are large measurement and testing systems of the manufacturer are aligned with yours and accuracy is verified
- Be on top of engineering change requests
- Start to put statistical process control in place (choose and prioritize CTQ variables)
- Calculate the CPK index to confirm most are within limits
- The quality standard is really critical – what checklist is used, what testing protocol is used by you or the manufacturer, approve a golden and boundary samples, and make sure everyone is aligned
If a supplier is not aware of the above this is a red flag, as they are clearly not used to working with organized customers and perhaps can’t reach your quality expectations.
Do you have any tips and experiences to share on how to qualify a contract manufacturer or supplier? Please share them in the comments to help our community.
- How to switch to a new Chinese manufacturer [eBook]
- Which suppliers are the right fit for you if you’re developing new products?
- OEM, ODM, CM: Which Chinese supplier to choose?
- Producing Private Label Products From Existing Products In China: 3 Supplier Options
- IP Protection For Manufacturers. Keep Component Suppliers In The Dark
- How To Create A Valid Manufacturing Contract In China To Protect Your IP
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