No matter what you sell, production and manufacturing is almost always your largest cost. Sourcing production locally typically means quality assurance, reduced transportation, and no customs or tax – it also means a dramatic increase in costs.
Outsourcing to other countries with lower cost of living means dramatically reducing overhead, without necessarily reducing the quality of your goods. For example, factory workers in China earn just over $2 per hour while the average American working the same job earns about $12.
Unfortunately, outsourcing can seem overwhelming and complex, especially if you're new to e-commerce, don't have supplier contacts, and don't know where to get started.
Fortunately, manufacturers in other countries want your business, so the process is simpler than you might think. We outline how to get it done in 6 straightforward steps below.
1. Define Product Expectations and Parameters
The first step to outsource manufacturing should always be defining your product, expectations, and needs. Many manufacturers specialise in niche production, offer a very specific range of options, and only make deals for large orders or significantly higher fees.
You should define the product size and weight, desired quality, and the required volume and frequency of order. If you need specific colors, you should chart them to an internationally recognised code like Pantone. This information can go into your request for proposal (RFP).
Have blueprints and other product information ready, as well as a sample or prototype product to more easily convey your needs with a manufacturer and to ensure that they can provide what you are looking for. It also enables you to accept bids on production costs, so that you can get the best deal. However, you may want to request that manufacturers sign a non-disclosure agreement before sending samples or specifications.
2. Find a Manufacturer
Once you know what you want, start looking for manufacturers to supply it. There are two primary ways to find manufacturers; online and at trade shows.
Tradeshows exist in every industry, every niche, and for manufacturing as a whole. These events are designed to bring people together in specific industries, and connect international business owners with manufacturers in China, India, Malaysia, and many other countries. For example, the American International Toy Fair in New York typically features booths and visitors from more than 1,500 international manufacturers each year.
However, there are many niche-free trade shows you can attend to meet potential manufacturers or contract manufacturing organisations in person.
- Chinese Import and Export Fair - The oldest trade show connecting manufacturers with retailers.
- Global Sources Trade Show – Global Sources holds numerous trade shows throughout the year to connect retailers in specific niches with manufacturers.
- International Fair – Hosts numerous fairs and trade shows throughout the year in different niches.
- Global Sources Summit – Voted the #1 trade show for small-to-mid-size Amazon retailers.
Most manufacturing niches will have their own trade shows, and you may be better off attending a specific trade show if you are looking for niche products and high quality production.
Sourcing Manufacturers Online
Sourcing manufacturers online is significantly cheaper and faster, but requires more careful review. Most tradeshows vet and qualify manufacturers for you, and application to the tradeshow involves providing licensing business numbers, and other proofs of business. Sourcing online means that you are responsible for qualifying and ensuring that your manufacturer is genuine.
A simple Google search with "<your niche> manufacturer" will likely pull up results. However, you can also check sites that bring manufacturers together. Some of the largest include:
Alibaba – Offers direct sales and pre-manufactured products, but they also list manufacturers who take custom orders, work with prototypes, and are typically verified and qualified by Alibaba. The site also enables you to submit an RFQ and allow suppliers to bid on your project, at your specifications.
Global Sources – Global sources collects and lists manufacturers around the globe, alongside quality reports, qualifications, and reviews. Global Sources also maintains a directory of all registered manufacturers, which you can use to cross reference anyone you find online to help verify their authenticity.
It is important that you take the time to verify and qualify any manufacturer, no matter where you find them. Start by researching the factory and visiting it in person if you can.
You should also consider:
- Manufacturing authorisation
- Valid business licenses
- Availability of prototypes
- Quality standards
- Production capability and minimum
- Total costs including shipping, legal, import, etc.
- Reputation and professionalism
If you have friends or colleagues who already work with manufacturers in other countries, you should ask for referrals. Just note that this doesn't guarantee that you will get the best rate or a qualified manufacturer.
3. Establish an Intermediary
You may not speak the local language of the country you’re outsourcing to, and your business may not have enough budget to fly an inspector to the country too often. However, goods still have to be inspected, you still have to handle local production and legal fees, and you still want to be able to communicate with your manufacturer quickly. An intermediary is the fastest and most efficient method to make this happen.
Larger businesses typically handle this by setting up an overseas office, which can then handle all of the business of outsourcing, while reducing tax by paying it locally. If not, consider hiring an agent or outsourcing company that specialises in working as an intermediary.
A purchasing agent will work with you to inspect goods, handle shipping, pay the manufacturer, and otherwise ensure that everything is as it should be. Your agent should be able to speak the local language, should live in that time zone, and should be prepared to fly to see you when necessary.
A buying office is more reliable because they are typically registered businesses, which you can take to court in case something goes wrong.
Alibaba maintains lists of potential purchasing agents and buying offices. However, you should take steps to qualify and verify your purchasing agent. Check their business license, reviews, and other details before hiring. For example, if they are importing on your behalf, they must have a Customs Broker license.
4. Create a Contract with Clearly Defined Standards
Once you've selected a manufacturer, it's important to create a contract that clearly specifies quality standards, non-disclosure, and other details. Most countries also have specific regulations regarding contracts.
For example, Contract Law in China mandates that any contract contain the name, title, and domicile (living address) of all involved parties, the contract object, quality of objects, quantity of objects, cost of objects, time limit of production, place of production, manufacturing method, liability in case of breach of contract, and methods to settle disputes.
You should also:
- Specify a quality monitoring process. Your local agent should inspect all goods before they leave the country
- Insert a clause to ensure that you have the right to inspect factories
- Detail payment methods
- Detail product and product quality with high specificity
5. Set up a Payment Process
Paying for goods overseas can be difficult and frustrating, especially when dealing with a new manufacturer or supplier. Even thorough research can be wrong, so it’s important to try to minimise risk for initial transactions. For this reason, you are not recommended to pay with bank transfer for a first-time manufacturer order.
Escrow services hold money for you when you place an order so that the manufacturer can see that you've paid, but you don't have to actually pay them until you receive and approve of goods. These services can cost anywhere from a flat rate fee to a percentage and will also handle the physical process of moving funds to the manufacturer for you.
Bank transfers or telegraph transfers are fast, easy, and typically cost anywhere from $30-$50, making them one of your cheapest options. However, they are also typically high risk, because you cannot reverse a transfer and you have no buyer protection. Consider using it with a manufacturer you trust, after you have worked with them for some time. Western Union is an alternative, and often the preferred payment method for sample orders.
Letter of Credit
A letter of credit is a secure but complex and expensive payment solution. You should consider it if you are placing a large order, and if you are buying in excess of $50,000, it may be your only option. A letter of credit can be acquired at most banks where you hold an account, and typically costs between 1.5 and 3.5%, with an additional fee of $50-$75.
Alipay costs 5% per transaction and requires that your manufacturer have an account with Alibaba. The system offers buyer protection, quality disputes, and escrow for peace of mind.
Note: Credit, debit, and PayPal are rarely accepted by international manufacturers due to either difficulty in processing international transactions, plus high fees.
6. Importing Goods
The final step of outsourcing goods is actually importing them to your country. You can typically achieve this through a very straightforward process of filling out customs paperwork (or having your agent do so), paying the shipping fees and duty, and picking up your goods. You can typically choose either direct shipping or a freight forwarder:
Direct Shipping – Your manufacturer or agent directly ships your product to you, handles paperwork, pays customs, and ensures that any licenses or documentation needed are ready.
Freight Forwarder – A freight forwarder handles paperwork, customs and duty, and actually shipping goods, and then charges you the total once they have arrived. This vastly simplifies the process, but can cost considerably more.
Customs – All imported goods require paying Customs Duty tax. This is calculated based on the specific item, its quality, and its initial value. In Europe, you can calculate customs duties on the European Commission website. For the USA, you can reference the Harmonized Tariff System (HTS) for a comprehensive library of customs rates, or use the United States International Trade Commission resource to calculate your potential customs tax.
If unsure about your import, be sure to contact the nearest customs office to the port receiving your goods.
While there are numerous, often complex and expensive steps to outsourcing, the end result is often significantly cheaper than manufacturing locally. In most cases, the highest cost is also the initial process of researching and qualifying a manufacturer – after which your largest concerns are production costs, shipping costs, and customs tax. However, it is important to review total costs to ensure that you are profiting by outsourcing.
Outsource manufacturing to speed up production, reduce costs, and increase the number of products or product types you offer, while decreasing overhead.
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