By Allen Bell and Allison Goldman
It’s daunting enough to launch a business around a new product concept, but even more daunting when that product involves manufacturing with entities overseas.
At SeaTurtle Sports, our business model revolves around manufacturing new and innovative products, with the majority dependent on securing manufacturing relationships in Asia. When we went to develop our first product prototype in Taiwan in 2004, we were complete novices, unaware of the risks and how many things can go wrong–potentially ending a venture before it even starts.
We had to learn to mitigate the risks associated with rising materials costs, language/communication barriers, and cultural differences with manufacturing partners we had never met in person or even by Skype.
Sourcing manufacturers in China and Taiwan has been one of our greatest challenges, and a decade later we have a few tips we can share to help you avoid some of the pitfalls and near disasters we encountered in doing overseas business, especially in China.
Tip #1: Ask for References
Manufacturers will actually compete to work with you, especially if you are perceived to have a sustainable business model and legitimate prospects for increasing order quantities. This means you have a choice, and you will want to do your own due diligence before commencing a relationship with one particular manufacturer.
The first step is to ask each potential manufacturer if they have previous experience with similar American companies. Then ask if they would be willing to connect you with a few of their clients to share their experiences. If a manufacturer can’t or won’t provide any solid contacts or references, you may want to pass on working with them.
If the manufacturer does connect you with some of their clients, you will want to ask about the client’s overall experience in back and forth communication, if the manufacturer met the client’s expectations (didn’t over promise at the beginning and then under deliver on the end product), and if the manufacturer was able to stick to timelines in the partnership agreement.
As a rule of thumb, try and speak with at least two of the manufacturer’s clients for a well-rounded perspective. As a bonus to contacting these references, if you select a mutual manufacturer, the discussion may lead to cooperative business opportunities with them, potentially leveraging synergies in supply chain management, import logistics, and even product development.
Tip #2: Hire a Sourcing Company to Identify and Manage the Overseas Relationship
Consider contracting a sourcing company to identify the best manufacturer for your product, within the criteria you establish, such as design capabilities, quality assurance practices, pricing, location, etc. These intermediaries typically build a management fee into the overall production costs negotiated with the manufacturer, but it is often worth it with smoother communication, time saved, and assurance that your final product meets your original expectations.
Sourcing companies frequently have offices based in the U.S. and teams on the ground in Asia and other countries for sourcing, manufacturing, and even coordinating export logistics to ship your products back to the U.S.
Using one of these companies as a liaison versus doing business directly with overseas manufacturers can have many benefits. First of all, you can communicate directly with U.S.-based, English speaking individuals within a U.S. time zone, making communication far less challenging. As another, American based entities are more accountable; it’s easier to check their references and reputation, and you have the ability to speak on the phone regularly and potentially meet face-to-face.
Finally, executed contracts in the U.S. with an American-based business are legally binding within the U.S., and American companies tend to better understand U.S. laws and regulations regarding importing, etc.
Tip #3: Request a Video Skype Tour of Production Facilities and to Meet the Manufacturing Team
If you are going to do business directly with an overseas manufacturer, before you get started, request a video Skype conversation between their team and yours, and ask for a video tour of the production facility.
Tip #4: Go to China to Meet Face-To-Face with Manufacturers and Walk Production Lines
Once you start manufacturing in larger quantities with larger investments, you may want to coordinate a visit to your factory while your products are on the production line and to meet the overseas manufacturer’s team in person.
Tip #5: For Many Products China is No Longer the Only or Best Option
You will make a better decision in selecting a manufacturer, here or abroad, if you begin with an objective analysis of your product’s particular requirements, factoring in complexity of design, expected labor and material costs, and importing costs.
The size and weight of your end product can be a significant–and frequently overlooked–variable in a realistic evaluation of your true cost of goods and ultimately your net profit margin.
As an example, after over a decade of importing our first product from Taiwan, we have seen a 57 percent increase in our per unit importing costs. This direct impact on our gross profit margin has forced us to adjust our business model and operating expenses in order to continue to maintain the product’s viability.
Recognize that in many product categories, countries outside of Asia and China in particular, are much more competitive today than even just five years ago. In a long distance and potentially long-term relationship, the economics of an offshore manufacturer “in this hemisphere” may warrant a closer look at the outset.
For example, countries like Mexico and Honduras are aggressively expanding their manufacturing scope and capabilities. And of course, “Made in the USA” is becoming a more viable option as “buy local,” patriotism, and new government policies seek to make the U.S. more competitive again in manufacturing.
All in all, manufacturing overseas can often make a product-based business viable due to cheaper labor costs and a variety of other factors. If you are careful in establishing a relationship with the right sourcing company or directly with a factory, you can create a sustainable competitive advantage that can help your company grow in the long-term. These steps can steer you in the right direction as you work through the supply chain process.