Thousands of high-quality consumer products are manufactured in China every day. Chinese suppliers use advanced processes and technologies that are often unavailable in Western countries, especially at the scale required, and the growth of innovation is tremendous. Today, product developers work with Chinese suppliers not because of the low cost of labour, but to gain access to superior technology, scale, and manufacturing and production knowledge and quality.
How to choose a supplier for your business
When choosing a supplier in China, you should perform the same stringent due diligence when working with a supplier in any other part of the world. You should ensure that the supplier has the capacity and ability to meet the product requirements. It is also essential to consider the total cost of production, the quality, and the logistics of the wider supply chain. The more niche and unique your product, the more questions you should ask your suppliers before deciding.
In a nutshell, there are three key issues (plus a bonus one!) that a company needs to tackle to find the right supplier in China:
- Use a Product Requirement Document to list the key requirements for suppliers
- Shortlist multiple possible suppliers for each key process/part
- Speak directly to the suppliers to understand their REAL capabilities, capacities, quality systems, strengths, products and arrange a visit to validate further
- Cost is always a key factor and speaking to multiple factories is essential so that you can understand the trade-off is in price and supplier ability
How to create a supplier selection process outline
Once you have established the need for a supplier, you need to think about the sources available to you to get in touch with potential Chinese suppliers. One of these sources can be the Internet, but it is also good to evaluate any resources within your professional network. Reach out to people in your network who have gone through the same supplier selection process. You may find that they already have existing connections that could be useful to you. Another approach is to reach out to a consultancy or an agency to get comprehensive information about reliable suppliers, specifically for your product. Working with an external advisor is the most time-saving and reliable solution, and it often is what companies opt for.
The next step is to identify the selection criteria carefully. Some of the more common criteria that you should consider are as follows:
- Price, quality, and delivery
- Financial stability
- Willingness to work with you
- Long-term potential
- Experience with manufacturing similar products
- General capabilities and performance
- In-house technical abilities and understanding
- Philosophy of the company
Once you have prioritized your criteria and developed a scoring system to evaluate the candidates systematically, it is time to define your sourcing strategy. The sourcing strategy includes the type of suppliers you are looking for and the number of suppliers you plan to work with. Your sourcing strategy is based on your overarching business strategy, and there is no one-size-fits-all approach.
Understanding the types of suppliers in China
It is crucial to understand the kinds of suppliers in the Chinese market to choose the right one for you.
Manufacturers
Manufacturers are the most widely-known type of supplier. Manufacturers own factories and the entire production lines. Businesses often choose manufacturers because of the relatively low cost of production.
They often specialize in one type of product, and it is best to choose a supplier that already has expertise in manufacturing similar goods to yours. Choosing a manufacturer is the most direct approach in sourcing. It is often associated with the highest risk, as you have no middle person mediating the partnership. Nevertheless, working directly with a manufacturer has its benefits, too. You get a higher range of customization, and you are given more input in terms of materials chosen for the product.
ODM vs OEM
Understanding the differences between ODM and OEM is vital for choosing the right supplier for your business. Both types of manufacturers are common in China, and a large proportion of them have years of experience working with products for the Western market.
What is ODM?
ODM stands for Original Design Manufacturing and is often also referred to as private labelling. You will choose an existing product from the supplier’s catalogue and apply minimal changes. Opting for ODM means shorter lead times, more flexibility in terms of minimum quantities, and reliable expertise for manufacturing the specific product you are interested in. Choosing a ready design will limit your options for customization, as you will likely be allowed to alter a limited amount of features of the product. The manufacturer usually allows changing the colours and branding, as well as bundles of products.
What is OEM?
OEM stands for Original Equipment Manufacturing. OEM products are fully designed by a company and then licensed out to a manufacturer for production. In this instance, the company developing the product has full creative control over the final design. Compared to ODM, OEM products are highly resource-intensive. You should be prepared to spend a considerable portion of your budget and time on the research and development and testing in later stages. Thus, it is vital to protect the design by a clear and legal intellectual property contract, to prevent the design from being shared with external parties.
It is essential to know that some trading companies will try to position themselves as manufacturers in China. If your priority is to work directly with a factory, you should perform a thorough investigation of the potential manufacturer.
Trading companies
Trading companies are industry specialists that can help with obtaining goods from manufacturers. They often specialize in a certain group of products and have almost the same knowledge of the manufacturing process as a factory.
If you decide to work with a trading company, be prepared for a higher service price. In return, you will get a network of manufacturers, which makes the supply chain more stable and years of expertise from the trading company. If you are producing at a smaller scale, it might be a good option, as a trading company can negotiate a better deal on your behalf.
This is because the trading company can group your order with another similar good and receive a price from a manufacturer based on the group order quantity. It is essential to mention that a trading company often values their relationship with a factory more than with the client – so their loyalty may stay on the factory side in case of any disputes.
Sourcing companies
Sourcing companies help clients find the right supplier for their product. They are often more flexible in terms of industries they operate in, and they are more willing to take on clients with niche products.
They often specialize in quality control, so they can ensure that your product is being manufactured according to your specifications. They will help you create Chinese contracts, attend factory visits, manage follow-ups, and more. Sourcing companies tend to provide greater flexibility than trading companies and can offer a more tailored approach. They will also act as your representative in case of any disputes.
Questions to ask a potential supplier in China
A good supplier should feel comfortable answering any questions about their supply chain, manufacturing process, logistics, and more. Ideally, you should visit your manufacturer before finalizing the contract, but it may prove challenging if you have time restrictions. In this case, you can consider hiring a specialist to perform a third-party quality check and produce a report on their findings.
Once you are ready for contract negotiations, you should ensure you ask the right questions to clarify the copyright agreements, subcontracting (or lack thereof), shipping arrangements, and warranty. You should make a list of these questions and document the answers for future reference.
We cannot stress the importance of signing an NDA (Non-Disclosure Agreement) with your supplier enough. In this contract, you should specify all the information about your product, processes, and more, that the other party should not disclose to anyone. An NDA helps create a confidential relationship between you and your supplier and protects the shared trade secrets.
Moreover, if your product is niche and starts with a smaller quantity, it is good to confirm whether your supplier’s approach is aligned with your product philosophy. Here are some helpful questions to get to know your supplier beyond the standard T&Cs:
- How much do you know about my product? How much do you know about the industry my product is in?
- What experience do you have in manufacturing products similar to mine?
- How do you allocate resources for a project?
- What is the minimum order quantity (MOQ)?
- How large are the sales of your top three clients?
- Do you work with startups? What is your experience working with startups?
- What is your approach to solving challenges for your clients?
- Can you create a mockup project schedule for my product?
- How do you protect your clients’ intellectual property?
- What are your plans in terms of factory development and expansion?
Managing your supply chain in China
Once you have chosen a suitable and reliable supplier, ongoing quality control will be one of the most critical factors in your product’s success. In contrast to the West, in China, it is not considered the supplier’s responsibility to ensure that product design continuously meets all regulatory requirements of the market in which it will be sold. This means that there has to be ongoing communication about product specifications – to ensure that the product design does not change based on the factory decisions or is adjusted according to any newly-released market regulations.
At KD Product Development, we offer comprehensive supply chain management services, including ongoing supply chain quality control and factory visits. Read our brochure below to learn more.
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