China manufacturing represents a huge advantage for a large number of companies in terms of cost reduction, production times and large variety of manufacturing techniques sometimes hard to find in other manufacturing destinations.
But tasks that seem easy to complete, such as Sourcing products from China require certain steps and considerations to be addressed in order to ensure a successful China manufacturing venture.
Here we enlist the key aspects needed to be addressed when Sourcing from China:
1) Identify the main reasons for outsourcing manufacturing to China
As we mentioned before, majority of the reasons that engage companies from all over the globe for manufacturing in China are based in the cost savings that come along with this decision.
The main cost reductions can be split into three categories:
Labor Costs
In majority of the cases this is the first and sometimes the main reason that convinces companies to outsource manufacturing to China. Although salaries are rising in China compared with what it used to be 10 years ago, manufacturing in China still cheaper than doing it in the west. We ought to mention that these cost include salaries not only for the production line workers, but also others related to other employees, e.g. in a new product development project, the designer and engineer’s salaries should be included in these costs.
Raw Materials Costs
In spite that the most used raw materials are commodities such as aluminum or oil just to mention a few, and their prices are relatively the same no matter the location. There are some other occasions when materials such as fabrics or plastics are needed for manufacturing a product, and buying them from China will save you money.
Factory Burden Costs
This is a category sometimes not taken in count as some people think that these are included in the labour costs, but for getting a bigger picture and analyse in an appropriate way the advantages of Manufacturing in china, it is important to identify the cost difference between running a factory in the west and the cost of doing it so in China, where utility bills and other running costs are significantly lower.
2) Quality Level
This is an issue that is sometimes misunderstood when talking about manufacturing in China, nowadays Chinese manufacturers claim themselves as ISO 9001 certified, but let’s be clear on this. Having a certificate does not represent in some of the occasions the truth in terms of quality.
Never trust about quality, the best way to make sure that your products will be manufactured according to your needs and quality expectations is to establish your own Quality Control system over the production, this includes from auditing the factory prior the start of the production, to conduct several quality inspections throughout the production and prior the shipment of the goods in order to ensure that sure everything has been manufactured following your requirements.
The best way to do this and save you money is by contracting an experienced 3rd party Quality Control services provider, which will allow you to have eyes and ears on the ground, and in spite that you’ll need to pay for these services one way or the other, the overall costs will be lower compared to the west.
3) Shipping the Goods
It seems an obvious task as the products have been manufactured 1000’s of miles away from the final market. But sometimes some people forget to add the costs related to the transportation of the goods to the final price, and this forgotten expenses can result in the rise of the final cost.
The transport mode to be used will depend in several different factors such as the nature of the goods, the value and the quantity. Below we review the important factors related to using a vessel to transport the goods, as this represents the most common practice and the cheapest option.
This is important to be addressed from the quotation stage due that normally the prices of the goods manufactured in China are quoted based on 3 Incoterms, EXW (Ex-works): at the doors of the factory, FOB (Free on Board): meaning that the manufacturer will deliver the goods above the vessel of your choice, and CIF (Cost, Insurance and Freight): this includes all the prices related to the transport of the goods until the desired delivery port.
I’d normally advice FOB as majority of the companies who are looking to manufacture in China understand the procedures related to the transport of the goods across the borders. But if it’s your first time dealing with products manufactured in China CIF would be a wise choice as it includes all the related costs incurred until the discharge of the containers in the destination port.
It is important to mention that these are not the only Incoterms and there exist some other alternatives for dealing with the costs of the shipment of the goods, but here we mention just the most common ones. Secondly we ought to mention that except for DDP, none of the Incoterms include the payment of any taxes or cost of usage of the destination port, please have in mind that in spite of the large trade agreements involving a big amount of nations which have for aim to eliminate trade tariffs, there are still some products that need taxes for entering a market.
If you are new with manufacturing in China and have no experience on importing goods, we strongly recommend to hire an expert to help you with this task.
4) Distribution Channels
This includes not only the distribution method in your final destination, but also depending on the country some labels or packing methods will differ and this is something that needs to be discussed with the manufacturer in the production stage. Having your products in the right place at the right moment represents a recipe for success. And having in mind that normally that manufacturing and shipping goods from China sometimes takes 6-8 weeks is something important to be addressed for Designing the Distribution Channels.
5) Production Management
No matter if the products are manufactured in China or in your home country you need to keep a close eye to the production, not only speaking about quality but also to avoid any other issues such as delays or problems with your NDA agreement.
The best way to avoid this is to have a close communication with the supplier, but this is only effective when you know already the capabilities and flaws of the factory. Our advise here is to hire an experienced project manager preferably based in China, who can have a close eye and solve the issues as quick as possible to avoid any delays or disruptions in the manufacturing process.
Final Word
Yes, Manufacturing in China represents a huge advantage in terms of cost reduction as we mentioned above, but also as we’ve mentioned there are some key factors needed to take in count before making the final decision of Manufacturing in China.
And having a close eye on them will ensure the best for your Sourcing or Manufacturing venture.