Foundations in China Manufacturing: Keys to successfullly making your product in China

Foundations in China Manufacturing

A collection of key principles and tools to help you navigate the China manufacturing experience as effectively and painlessly as possible.

Copyright © 2014 by Ultimate China Resource

All rights reserved.

No part of this book may be reproduced in any form or by any electronic or mechanical means including information storage and retrieval systems, without permission in writing from the author. The only exception is by a reviewer, who may quote short excerpts in a review.

Printed in the United States of America

First Printing: April 2014

A note regarding the FREE TOOLS identified in this eBook

There are fourteen free sourcing and manufacturing tools included with the purchase of this eBook. They are listed in BLUE lettering in the table of contents below and throughout the book.

These tools can be downloaded from the UltimateChinaResource.com website. Simply go to the following webpage: www.ultimatechinaresource.com/tooldownload, and enter in your order information. An email will then be sent to you with a coupon code and instructions for ordering the FREE TOOLS at no charge from the UltimateChinaResource.com site.

Table of Contents

Title Page

Chapter 1:

Is China the right Choice?

I. To China or Not to China

II. Dispelling a Few Misconceptions

III. More Than Just Product

IV. Things to Know About the Chinese

Chapter 2:

Finding Potential Factories

Introduction

I. The First Step: Do Your Homework

Getting your ducks in a row

Market Research

FREE TOOL #1: MARKETING BRIEF

Competitive Research

FREE TOOL #2: COMPETITIVE LANDSCAPE SPREADSHEET

II. Determine What You Want

Putting together a PRD

FREE TOOL #3: PRODUCT REQUIREMENT DOC (PRD)

III. Identifying Potential Factories

Background information

FREE TOOL #4: CHINA SOURCING MAP

Online

Trade Magazines

China sourcing reports

Trade shows

Attending trade shows

Trade show tips

Solutions for small lot buyers

IV. Organizing Potential Factories

FREE TOOL #5: FACTORY WORKBENCH

Chapter 3:

Qualifying Potential Factories

Introduction

I. Pre-Qualifying Potential Factories

Online qualification

Business databases/credit checks

II. Contacting the Factories

Qualify, qualify, qualify

Making an inquiry

Company introduction letter

FREE TOOL #1. COMPANY INTRODUCTION LETTER

Factory pre-qualification

FREE TOOL #2. FACTORY PRE-QUALIFICATION SHEET

Verbal pre-qualification

Product RFQ (request for quotation)

FREE TOOL #3. REQUEST FOR QUOTATION (RFQ)

FREE TOOL #4. SAMPLE NDA

Follow up

Chapter 4:

Selecting A Factory

Partner

Introduction

I. Evaluating Factory Quotations

Comparing quotes

FREE TOOL: FACTORY COMPARISON SHEET

MOQ and Pricing Breaks

Shipping Terms

Payment Terms

Product samples

II. Common Scams to Watch Out For

Branded products

Big purchase order

Western Union

Email hijack

III. A Few Items to Consider

Factory or trading company?

Agreements and contracts

IV. Selecting a Partner

Awarding the project

Baskets and eggs

Chapter 5:

Meeting the Factory Face to Face

Introduction

I. Getting to China

Why should you go?

Travel arrangements

Passports and visas

Translation services

Flights and hotels

II. Travelling in China

What to expect

Expect some culture shock

Expect to eat and drink—a lot!

Expect to think that you are going to die

A few travel tips

Taxis

Hotels

Timing

Gifts

Business cards

III. The First Factory Meeting

The first impression

Pre-meeting preparations

First meeting agenda

Company presentation

Product overview

Project timelines and terms

Pricing discussion

FREE TOOL: SAMPLE TERMS OF AGREEMENT SHEET

IV. Negotiating with the Factory

General strategies

Dealing with Gūanxī and Miànzi

Chapter 6:

Factory Tours and Factory Audits

Introduction

I. The Factory Tour

Why and how

The importance of good questions

Key factory areas

1) Quality control for incoming raw materials and components

2) Storage of rejected materials

3) Component parts assembly

4) Production lines

5) In-line quality checks

6) Post-production quality checks

7) Performance testing

8) Durability testing

9) Safety testing

10) Staging (warehouse storage)

11) Showroom

12) Office area

Overall impression

FREE TOOL #1: SAMPLE FACTORY TOUR CHECKLIST

II. Factory Audits

Why and how

What to expect

FREE TOOL #2: SAMPLE FACTORY AUDIT CHECKLIST

Chapter 7:

Quality Control and inspections

Introduction

I. Principles of Quality Control in China

Acceptable quality is subjective

No one cares for your baby like you do

Quality fade

Component swapping

Every production run is a new challenge

All the risk is on the brand, NOT the factory

II. Quality Assurance and Inspections

Establishing your quality expectations

Standard Operating Procedures (SOP)

Durability testing standards

Enforcing your quality expectations

In-line (during production) inspections

Pre-shipment (post-production) inspections

III. Handling Issues and Claims

Common issues and claims

Strategies for effective reconciliation of issues

A few thoughts regarding legal recourse

Chapter 8:

Product Development and Design

Introduction

I. Product Development Milestones

Product and packaging design milestones

II. Project Kickoff Meeting

III. Mechanical Design

IV. Electrical Design

V. Packaging Design

Manuals and Inserts

Model/Part Numbers

Bar Codes

Serial Numbers

Accessories

Shipping Information

International Shipping Customization

VI. Following Up on Progress

VII. Protecting Your IP

Chapter 9:

Samples, Tooling, and Certifications

Introduction

I. Product Development Milestones

Samples, tooling, and certification milestones

II. Samples

White-box samples

Mechanical samples

Functional prototypes

First article samples

III. Purchase Orders

IV. Tooling

V. Certifications

Common factory certifications

ISO9001

ISO14000

Social Accountability SA8000

Common materials certifications

RoHS

REACH

Common safety certifications

EMC and RF Transmission

Electrical Safety

Food Safety

Other Safety Regulations

Chapter 10:

Production, Shipping, and Logistics

Introduction

I. Product Development Milestones

Production, shipping, and logistics milestones

II. Production

Engineering Production

DVR Production

Pilot Production

Mass Production

III. Shipping and Logistics

Key Shipping Terms

Product Ex-Factory

FREE TOOL: SHIPPING INCOTERMS REFERENCE CHART

In Transit

Customs Clearance

Delivery to Warehouse

IV. Conclusion

About UCR, and the Foundations in China Manufacturing eBook

Chapter 1:

Is China the Right Choice?

A discussion of the strengths of sourcing in China, as well as the things you need to carefully consider before jumping in.

Introduction

In this chapter we will discuss the strengths of sourcing to China as well as things that you need to carefully consider before jumping in. We also go through several things that you need to be mindful of once you begin sourcing, such as government regulations and fraud prevention. Finally, we list several of the main differences between Chinese and Western culture and how these differences could affect your business relationship with your Chinese manufacturer.

I. To China or Not to China

It’s a good time to venture into China

The Internet has created an equal playing field in almost every market known to man. No longer are larger companies able to rest on their laurels, reaping huge profits solely because of specialized information and sheer size. Little companies can now have access to many of the resources and know-how that the bigger corporations have historically kept for themselves. This is especially true when it comes to manufacturing products overseas. The abundance of information freely available on the Internet has created a pathway for anyone, from anywhere, to tap into the savings that are available overseas. Over the past ten years, thousands of small companies, just like their larger competitors, have learned how to reap the benefits of producing their products in China. In fact, the reality in today’s world is that, in most product-driven markets, if you don't outsource your production to overseas manufacturers, you likely won't be around very long to compete with those who are. The dichotomy in cost of goods sold is just too high. Even many companies who claim their products are made in the USA are sourcing the vast majority of their components from overseas and then assembling the final product in the United States.

Not only the availability, but also the quality of information on the Internet has never been better. With a few clicks of the mouse, you can find dozens of factories in China who make products similar to the one you have in mind. For a few thousand dollars you can find yourself in Asia attending some of the largest industry trade shows in the world. With instant messaging, you can communicate with factory employees almost any time of the day or night, and you can get answers to your questions in real time. The mystique of China is quickly dissipating to reveal a world of people who are not too unlike ourselves—people who are just trying to make a living and provide for their families—and a generation of young people who don’t adhere to some mysterious ancient relationship code, but instead are open and excited to learn the ways that other countries are doing business.

And fortunately for those of us who want or need to have our products manufactured overseas, China is still growing. They are still developing their manufacturing infrastructure, processes, and products, which to you and me means that there are still great deals to be found, and great margins to be made. For now, China offers to the world the perfect storm of manufacturing capabilities. No other developing country has been able to hold a candle to China’s staggering financial resources, smartly combined with cheap manual labor and budding entrepreneurism. Other countries may have the labor force to make things affordably, but they just can’t match the trillions of dollars that China has poured into the roads and infrastructure and utilities that are so vital to manufacturing—not to mention the amazing web of raw materials and component suppliers that form the world’s most impressive manufacturing network. Indeed, China has learned a lot in the past twenty years. Factories are becoming more and more sophisticated in their processes and experienced in their operations.

Chinese labor costs are rising, however, as employee insurance and health-care benefit costs increase and workers gain more bargaining power through China’s new labor code, which took effect in the past few years and is intended to protect worker rights and crack down on sweatshops. China is also struggling to maintain its once endless stream of migrant, unskilled laborers from the inner villages and cities. Yes, Vietnam or Malaysia or Bangladesh or India or some other country may indeed come to the forefront and compete in the low-price manufacturing war, but it will be a while before their infrastructure and processes can match China’s. Most large manufacturers in Hong Kong, Taiwan, Japan, and Korea will produce a part or a majority of their components in Mainland China. For the near and perhaps distant future, China is still the place to be if you want to produce your products affordably and reliably overseas.

A few things to consider

Have you ever had a brilliant idea for a new product? Have you ever looked at the sales tag of an item in the store and thought, Wow, there’s no way it could cost that much to make this. Or have you ever inspected a product and realized there was a much better or more efficient way to make it? Regardless of the source of your inspiration, if you are reading this eBook, chances are you have wondered if it would be feasible to have your idea manufactured overseas. These days that usually means, in one form or another, the opportunity to deal with China.

There’s no question that Chinese manufacturers can make great products at great prices. But it doesn’t always make sense to have your product produced in China, especially when you are just starting out. There are some major considerations to weigh when deciding whether it’s the right time to move your production to China. Here are three important factors to consider:

1. Door-to-door costs

The initial quoted price that you get from a Chinese manufacturer may sometimes cause a, You’ve got to be kidding me! reaction. Even Chinese manufacturers often can’t get their head around the huge disparity between the ex-factory (leaving the factory) unit cost for a product compared to its manufacturer’s retail selling price (MSRP) in its destinations country. If you don’t consider ALL the costs involved with that product, you may find yourself with a premature and deceiving case of China-euphoria.

The following are some unique costs to overseas manufacturing that you must consider before getting too excited about your quotation from a China factory:

• Quality control audits (For more info see Chapter #7: Quality Control and Inspections)

• Trucking fees and port/airline charges (For more info see Chapter #10: Production, Shipping, and Logistics)

• Freight and handling charges (expedited air shipping is especially expensive) (Also in Chapter #10)

• Duties and taxes (For more info see Chapter #8: Product Management and Design)

• Finance costs (wire transfer fees or letter of credit banking fees)

(For info on payment terms see Chapter #4: Selecting a Factory Partner)

Other significant development and manufacturing costs, not necessarily unique to overseas manufacturing, include:

• International certifications (For more info see Chapter #9: Samples, Tooling, and Certifications)

• Tooling costs (Also in Chapter #9)

• Government tariffs, restrictions, or other fees unique to your product category (For more info see Chapter #10: Production, Shipping, and Logistics)

Depending on the nature of your product, any one of these costs may make it prohibitive to manufacture overseas. For most products, the overall savings of overseas manufacturing is substantial, but just make sure to do your homework before you assume it to be the case with your product.

2. Cash flow

We all know that most start up businesses don’t make it. Running a business is hard. Even companies with the greatest products in the world can fail, and often cash flow ends up being the primary culprit. Manufacturing products in China presents some unique challenges in this regard, specifically MOQ, down payments, and tooling.

MOQ: In China, the magic word is MOQ (minimum order quantity). China factories are like a well-oiled machine built specifically for mass production. If you need 10 or 20 pieces, you had better stick with your current method of production. If you want 200 or 20,000 pieces (MOQs vary greatly depending on the type of product and the manufacturing processes involved), then China can be a good fit. Just plan on needing to order a lot more than you may think.

Down payments: MOQs most often mean that you will need to come up with a significant down payment to get your products rolling. Once you have established a history of steady purchasing, factories are sometimes open to working out an open account (net terms) payment arrangement, but to start out they almost always want your money before the product ships (normally 30% down at the time of the purchase order, with the remaining 70% paid before