Best practices for outsourcing manufacturing to China

11 September 2019 8 min. read
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For the past 20-odd years, businesses in the US, UK, and Europe have increased their cost competitiveness by manufacturing products or components in China, prompting some of them to invest the profits earned to expand their operations or innovate.

Today, despite the ongoing US-China trade war, which has forced some American companies to shift production and supply chains out of China, the country’s superior infrastructure, supply chain networks, and ability to manufacture to a massive scale still give it a clear edge over its manufacturing rivals such as India, Vietnam, and Thailand. In fact, a Boston Consulting Group report published late last year said that despite several economic and geopolitical challenges, “it is reasonable to assume that China will remain manufacturing’s center of gravity for the foreseeable future."

Western companies usually don’t decide to outsource manufacturing overnight. These decisions are carefully considered because of the massive changes they entail. Moving production to a factory thousands of miles away leads to organizational changes across departments. Outsourcing manufacturing also comes with its own set of challenges related to differences in language, culture, and time zone. For their project to be successful in the long run, companies must address all these issues while drawing up their outsourcing strategy.

As an expert who has helped businesses in the US, UK, and Western Europe source products and components from China, India, and Eastern Europe since 2006, Niclas Bengtson of sourcing company Sourcing Allies has some insights on what companies must do to ensure that their China manufacturing project is successful in the long term, outlined below. 

Best practices for outsourcing manufacturing to China

1. Bring everyone on board

To start with, securing internal support for the project is critical. Once the top leadership has greenlit the project, they must communicate its benefits to their employees. Middle management employees tend to be a bit blinkered in their approach to the project, looking specifically at the impact of outsourcing on their particular field of operations – be it human resources, inventory management, logistics, or quality control – instead of the big picture. When the top management clearly communicates how outsourcing will help the company stay competitive and grow, this resistance usually ebbs. Additionally, when employees know what their role is in the entire exercise, they tend to stay invested in it.

Once employees have been briefed, the leadership must form a separate team that will work on how to find a manufacturer in China. This is also a good time for firms to decide whether they want to hire a China sourcing agent who will act as their eyes and ears on the ground. It is best to make this decision earlier than later to avoid wasting money, time, and effort. Companies sometimes make the mistake of setting up a team for the first production order, and once the shipment arrives – and if it meets all expectations – it dissolves the team, expecting future orders to arrive in the same perfect condition.

This attitude is foolhardy, as manufacturing in a facility halfway across the world requires regular coordination and supervision, which each company’s outsourcing team or sourcing agent must handle. Businesses that dismantle outsourcing teams after just one successful order will find the quality of their shipment deteriorating with each successive delivery.

2. Choose a component that will make a visible difference

One of China’s biggest advantages is the ability to manufacture to scale. This is why despite the fact that material costs tend to be similar globally, Chinese manufacturers still offer competitive prices.

But it is advisable that businesses choose a product or component that sells in large volumes for their first order. This will allow them to capitalize on the cost advantages related to manufacturing in high volumes, and will reflect early in their financial statements, motivating employees.

Ideally, this component should not be a prototype but a well-designed product that has not given trouble on the factory floor while being manufactured at home. This is important because production-related problems rarely disappear on their own, much less in a factory thousands of miles away. Large orders also give buyers a certain hold over the factory, which is less likely to neglect their order to focus on a more lucrative order from another buyer.

Once you complete a few manufacturing cycles with your China supplier, and are satisfied with its quality, you could then look at testing, refining, and manufacturing any prototypes you have with your supplier.

3. Verify the credentials of your supplier

This is a pretty crucial point. Once you shortlist suppliers who meet your requirements, you must verify their credentials before you proceed. This is important for two reasons. One, to ensure that they are genuine manufacturers, not traders/middlemen (as only manufacturers will offer you the best price) or frauds. Two, to ensure that they have the production ability and capacity to manufacture your order and any projected increase in its volume.

In China, make sure supplier credentials are verified

As a preliminary check, cold call each supplier’s office in China and ask them a few basic questions about what they do, and the location of their factory, and match the information with other details they provide you with.

Ask each shortlisted factory for their business licenses, foreign trade and customs registration certificates, any quality certifications, bank account certificates, and Value Added Tax invoices. Ensure that the name of the company is consistent across all these documents. You must always make payments into the firm’s registered corporate bank account to protect yourself against fraud.

Once you finalize a supplier, it is advisable to visit the factory for a final check – either yourself or through a representative. Besides verifying the credentials of the supplier, these visits will help you evaluate factory conditions associated with quality control and workers’ safety.

4. Define product specifications clearly and conduct regular quality inspections

Rule number one of manufacturing in a low-cost region such as China is that the earlier you catch problems during production, the faster and more inexpensive it is to find a solution. For this, you need to first define your specifications clearly, listing out in minute detail what are acceptable and unacceptable deviations, your preferred raw material, and so on.

You or your representatives must also conduct regular quality inspections to keep your supplier on its toes. It doesn’t matter if you are in the first production cycle or the 150th, these inspections are important and are usually conducted at three stages:

Pre-production: Inspections at this stage ensure that the raw materials and components ordered by the factory are in conformity with the predetermined specifications. Inspectors also inspect the production line and environment, which can be especially important to certain types of manufacturing such as readymade clothes.

During production: These inspections are particularly helpful for large or recurring shipments for which continuous production takes place. Such inspections ensure consistency across batches by identifying deviations. They help prevent costly situations such as one batch being junked because of quality issues. These checks help you identify any flaws early on in production, allowing any fixes to be made earlier than later when they are more expensive to resolve.

Pre-shipment: Quality inspectors pick out randomly selected samples to check that the finished product has been manufactured as per the terms outlined in the manufacturing agreement. If there were any quality improvements suggested in the “during product inspections,” the inspector checks if they have been executed. Such inspections also examine the quality of packaging.

5. Draft an NNN agreement, enforceable in China

Manufacturing/purchase agreements must specify terms such as price-per-unit, volume, mode of payment, payment terms, mode of shipping and so on. The agreement should also spell out product deliverables, quality specifications, acceptable and non-acceptable deviations, delivery dates, financial penalties for breaching any of these clauses, and dispute resolution procedures.

When sourcing from China the agreement should be drafted in Mandarin and enforceable in China. Because these agreements are usually translated in English for the western client, the agreement must specify which version will prevail in case of a dispute.

Firms keen on protecting their intellectual property rights are advised to draft an NNN (non-disclosure, non-use, non-circumvention) agreement in China with their supplier instead of the NDA (non-disclosure agreement) that is popular in the West. A strong contract damages provision in this agreement usually acts as a good deterrent against copying by the supplier.