When it comes down to successfully manufacture your product in China, having ‘a good Chinese partner’ is definitely the most important factor. I often get asked How to exactly find this perfect manufacturing partner. And the answer is not always clear-cut. There are many things that determine whether a manufacturer is suitable for your project. One that often seems to be overlooked is the size of the manufacturer, and the impact your order has on them.
The case of a hardware startup
Let’s say you are a New York based bicycle company. Founded 5 years ago, you have managed to establish a solid market position by selling bikes with innovative design. Your bikes are currently in the showrooms of 70 resellers and last year your total revenue equaled USD $1.2 million. Next season, you want to bring your first electric bicycle to the market. You’re planning to place an initial order for 500 e-bikes. Therefore, you now want to find a suitable [OEM manufacturer] in China.
So what to look for in a manufacturer?
Just to remind you, there is no foolproof method of selecting a manufacturer that will always deliver without issues. However, to increase chances of a good performance, you can set three requirements your supplier needs to comply with:
Specialized in producing your product category
First of all, you want to find a factory who’s core competence it is to make electric bikes. You don’t want to end up working with a factory that specializes in skateboards and just recently started to diversify into bikes. Buying outside a factory’s core competence would only increase the risk of poor performance.
Experience in making products with similar specifications
Secondly, you want a manufacturer that has successfully manufactured e-bikes with similar specifications before. For example, your bicycles will have built-in front and rear lights. In this case, it would help to find a factory that has done this before. Because the more similar the suppliers’ successful experience is with your requirements, the more likely that he can deliver the product you desire.
Enough capacity to make your order
Last but not least, you want to know whether a manufacturer has the actual capacity to make your e-bikes. Capacity refers to the factory’s available resources – manpower, equipment and/or facilities – to successfully produce your order.
What you want to find out is how the manufacturer plans to allocate these resources to your project. Are they all currently available? Does the supplier need to wait with production of your bikes until another project is finished? Does the manufacturer need to hire more people / buy more machines to fulfill your order?
Typically, any Chinese factory will tell you that they can do the job. However, if you want to prevent bad surprises later on it’s best to inspect the factory yourself during a visit, or hire a third-party to do an audit. Also, you should always verify your suppliers’ [business license], to make sure the manufacturer is legit.
Finding the right manufacturer is never easy. However, selecting a manufacturer with the following characteristics will increase chances of success: (1) core competence in your product category, (2) experience in products with similar specifications and (3) enough capacity for your project. To make sure the factory has all three characteristics, it’s best to do on on-site visit. This you can do yourself, or you could hire a professional agent to do an audit.
Calculating the impact of your order on suppliers
Now let’s say that you have found three reputable e-bike manufacturers. You have sent them a Request for Quotation (RFQ) and all suppliers quoted about the same price for 500 e-bikes (we use USD $50,000 in this case-study).
The first supplier on the list, Manufacturer A in the image, represents Geoby. With an estimated sales output of USD 66 million per year, the company is one of the biggest suppliers of e-bikes in the world. Manufacturer C, on the other hand, represents a small family-owned e-bike factory. Factory B is in between both and has an annual turnover of USD $1,100,000.
Based on the suppliers’ sales levels and the $50,000 dollar order value, we can now calculate the relative impact of the order on each manufacturer. Order impact can be defined as ‘the percentage of a suppliers’ annual sales that is compromised by your order’. It is calculated by using the equation provided in the image above.
As you can see, the impact of the $50,000 order will be different among the three manufacturers. Because Factory A is a big manufacturer, the impact of the order is quite small. It just represents about 0.078% of the suppliers’ annual sales. For factory C, on the other hand, the $50,000 order is very important and makes up about 25% of the total sales!
When evaluating proposals of suppliers, it’s always good to calculate the impact your order will have on them. Order impact is calculated as the percentage of annual sales that your order represents. It will help you to get an idea of how important your order is for the manufacturer. Is your order relatively large or small? And how does this impact supplier commitment? Will your order be the top priority, or may there be other orders more important?
What is the ideal supplier size?
I notice that many SMEs would love to work with an industry-leading manufacturer. And I can totally understand this logic. I mean, if Geoby (or Foxconn for electronics) produces for all the well-known brands, then their quality must be good…right?
Yet, working with a large, high-volume manufacturer isn’t always the best choice. It really depends on your business, the complexity of your product and the volume you want to produce.
Most important is that you find a manufacturer that is a good fit with your company. And supplier size plays an important role in this.
On the one hand, you need a supplier who’s capacity is scalable. This means that your supplier should have the necessary workers, machines and facilities to handle bigger orders in the future. Of course while maintaining desired quality, lead-times and service levels. In addition, you don’t want your supplier to be too dependent on you. Temporary decreases in volume could then force them to lay-off resources, making it difficult to scale up again when regular demand is restored.
On the other hand, you also want to work with a supplier that is committed to your order. This means that your order is of such importance, that the supplier will make exceptional efforts to satisfy you. This is particularly important when issues arise (and believe me, they always do) during the production process. Or when you have a very complex product that needs special assistance. If the manufacturer is too big, he might decide your order is not worth the trouble of allocating extra resources to.
In general, you could say that a supplier has the right size when your order makes up 2% – 15% of their annual sales. In this case the supplier will have enough capacity to scale production when needed, while also taking your business serious.
If you compare different manufacturers, an important factor to consider is their size. You don’t want to take the risk of working with a too big manufacturer, who may not be willing to walk the extra mile when needed. On the other hand, you also don’t want your supplier to be too dependent on you. This would increase the risk that demand fluctuation negatively affect the manufacturers ability to deliver in time, on quality and at cost. To avoid both risks, you ideally should work with a manufacturer whose annual sales are about 6.5 to 50 times the value of your order.
Which manufacturer is best for the bicycle startup?
A quick recap of the case. A New York based bicycle company is planning to produce 500 e-bikes. Therefore, the company is looking for a contract manufacturer in China. After evaluating multiple suppliers, the company made a list of 3 suitable candidates.
All three candidates are specialized in manufacturing E-bikes, have experience in producing e-bikes with similar specifications and have enough capacity to make order. In addition, they all have good references and quoted nearly the same price – $50,000 – for the order.
Assuming ‘Ceteris Paribus’ for this case – the only difference between the three is their size – then the most suitable manufacturer would be ‘Manufacturer B’. The order of $50,000 order has a 4.55% contribution to annual sales, making it significant to the supplier while leaving enough capacity to scale production in the future.
As you can imagine, the situation is often not as straightforward as in this case-study. Many factors come in to play when determining the best manufacturer. Most of the times you’ll find out that different suppliers all have their own advantages / disadvantages.
However, don’t forget to include the size of the manufacturer in the equation when selecting a supplier for your next project!
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