How to Select a Right Chinese Factory Size to Make a Product?
How to find a perfect factory size manufacturer partner in a foreign country? Having a loyal oversea partner is the most crucial factor in manufacturing your products successfully. People mostly ask the same question, i.e.,
This essential question does not have a clear-cut and simple answer. Many different factors determine whether a manufacturer is suitable for your project or not. One very crucial that often seems to be ignored is the impact of your order on them and the size of the manufacturer.
Table of Contents
What is the Ideal Factory Size?
It is quite natural that many SMEs would love to work with a leading manufacturer in the industry, and this logic is understandable. I mean to say, if Geoby (or Foxconn for electronics) produces for all the well-known brands, then their quality must be the best, right?
Even working with a larger and high-volume manufacturer isn’t always the best choice to have. It completely depends on your business, your product’s complexity, and the volume you want to produce.
Most significant is that you find a manufacturer that is the best fit for your company.
And factory size plays a vital role in this.
On the one hand, you need a supplier who has adaptable capacity.
This means that your supplier should have the necessary workers, machines, and all required facilities to handle larger orders in the future. Of course, while maintaining desired quality, lead-times, and service levels. Also, you don’t want a supplier that is very much dependent on you. Temporary decreases in volume can then force them to discharge resources, making it difficult to scale up again when regular demand is restored.
On the other hand, you also want to work with a supplier that makes your order priority.
This means that your order is of such importance that the supplier will make exceptional efforts to complete your order on time.
This is particularly very important when problems arise (and believe me, they always do) during production, and when you have a very complex product, it requires special assistance. If the manufacturer is a reputable one, he might think of your order that it is not worth the trouble of allocating extra resources.
Typically, you can say that a supplier gives more attention and importance to your project when your order makes up 2% – 15% of its annual sales.
In this case, the supplier will take your project seriously because he/she knows that your order will generate enough capacity to scale production.
What is the Optimal Factory Size and Minimum Viable Factory Size?
Unfortunately, there’s no one-size-fits-all answer to the optimal or minimum viable factory size. It depends on a complex interplay of several factors:
1. Production Volume:
- Optimal Factory Size: This is directly linked to your projected production volume. A factory that’s too large for your current needs will have high overhead costs and underutilization of resources. Conversely, a factory that’s too small will struggle to meet demand and might require frequent expansions, leading to disruption.
2. Product Complexity:
- Simpler Products: Factories producing simpler products with fewer components can often function efficiently at smaller scales.
- Complex Products: Manufacturing intricate products with numerous parts typically requires a larger factory with specialized equipment and skilled labor, increasing the minimum viable size.
3. Automation Level:
- Highly Automated: Factories with extensive automation can function with a smaller workforce, potentially reducing the minimum viable size. However, the initial investment in automated equipment can be significant.
- Manual Labor: Factories relying heavily on manual labor might require a larger workforce to meet production targets, potentially pushing the minimum viable size upwards.
4. Location and Operating Costs:
- Labor Costs: Regions with lower labor costs might allow for a smaller factory size with a higher reliance on manual labor to achieve the same production output.
- Land and Building Costs: The cost of land and building construction can influence the optimal size. In areas with expensive real estate, a smaller, more efficient factory layout might be preferable.
5. Market Demand and Growth Potential:
- Steady Demand: If your product has a steady, predictable demand, you can plan for a factory size that meets current needs with some buffer for potential growth.
- High-Growth Market: If you anticipate rapid growth in the market, you might need a larger factory from the outset or choose a location with room for expansion.
How to Select a Ideal Factory Size Manufacturer?
Just a reminder! There is no guaranteed method to select a manufacturer that will always deliver without any issues.
However, you can set some requirements your supplier needs to fulfill to increase better performance. Below here these are explained:
-
Specialized in producing your product category
Firstly, you need to find a factory that is specialized or mainly works to manufacture electric bikes. There are high chances of getting poor results if you select a factory that manufactures your required product but does not specialize in it. Let’s say that if you make a contract with a factory that specializes in making skateboards and has just started manufacturing e-bikes, too, you can imagine the result.
-
Experienced in making products with similar specifications
You need to find a manufacturer that has manufactured e-bikes successfully with the same features before getting your order. Let’s say that your bikes have built-in rear & front lights. It will be helpful if you find a factory that has manufactured e-bikes with these specifications. If the supplier is familiar with your requirements, it can deliver the product you desire.
-
Enough capacity to make your order
Not the least but a very important one, you must know whether a manufacturer can make your e-bikes according to your requirements. A factory’s capacity is related to its resources that include manpower, equipment, and facilities to produce your order successfully.
What you are finding out is how the manufacturer plans to utilize these resources on your project. Are they currently available? Does the manufacturer need to buy more machines to fulfill your order or to hire more labor? Does the supplier need to finish the ongoing project to start manufacturing your electric bikes?
To prevent from getting bad experiences later, you should inspect the factory during a visit, or you can hire a third party to do an audit on your behalf. This is very crucial because every Chinese factory will claim that they can do your required job. Another very important point is to verify your supplier’s “Business License” to make sure that you are dealing with a legitimate supplier.
Select a Right Size Manufacturing Takeaway
Selecting a manufacturer with the following characteristics will increase your chances of success because finding the right manufacturer is not an easy job:
- Core competence.
- Experienced in products with similar features.
- Enough capacity for your project.
To make sure that the factory you have selected has the characteristics mentioned above, it is suggested to make an on-site visit. If you can not visit the factory, hire a inspection agent to do an audit in your factory place.
How to Calculate the Impact of Your Order on Suppliers
Now let’s suppose that you have found three well-reputed e-bike manufacturers. You have asked them about the Quotation of your required project, and all three of them have quoted the same price, i.e., USD 50,000, to complete the order of manufacturing 500 electric bikes.
The first supplier on the list, Manufacturer X, in the image, represents Geoby. They have an estimated sales output of USD 66 million per year, and this company is one of the biggest suppliers of e-bikes in the world. The manufacturer Y, on the other hand, represents a small family-owned e-bike factory. In comparison, Manufacturer Z is in between X & Y and has an annual revenue of USD 1,100,000.
We can now calculate the relative impact of each manufacturer’s order depending on their sales levels and the USD 50,000 order value. The order impact can be explained as the percentage of a supplier’s annual sales comprising your order. It can be calculated by the equation that is available in the image above.
As you can see, it is clear that the USD 50,000 order’s impact is different among all three manufacturers. For factory Z, the USD 50,000 order is very crucial because it makes 25% of their total sales. On the other hand, factory X is a bigger manufacturer, so your order’s impact is quite small for them because it makes only 0.078% of their annual sales.
Calculate the Order Impact Takeaway
It is always a good strategy to calculate your order’s impact on the suppliers when you are evaluating their proposals. Order impact is evaluated as the percentage of annual sales that your order is representing. This is very important to get you an idea of how crucial your order is for the manufacturer. Is your order relatively small or large? How does this impact the supplier’s commitment? Are there more important orders, or will your order be the top priority for the manufacturer?
Factory Size Selection Case Study
Here is a quick recap of the case study. A New York-based bicycle company is planning to produce 500 e-bikes. That’s why the company is looking to make a contract with an ideal manufacturer in China. After evaluating different suppliers, the company made a list of three suitable manufacturers.
All three manufacturers have experience producing e-bikes with similar specifications, specialized in manufacturing e-bikes, and have enough capacity to complete the order with devotion. They all have good references and quoted nearly the same price, i.e., USD 50,000 for completing the order.
You can assume ‘Ceteris Paribus’ for this case. The only difference between these three shortlisted manufacturers is their factory size. The most suitable manufacturer would be ‘Manufacturer Z. The order of $50,000 order has a contribution up to 4.55% to its annual sales, which makes it significant to the supplier while leaving enough capacity to scale production in the future.
The situation is often not as straightforward as in this case study. Many factors come into play when finding the best manufacturer. Many times, you will find out that different suppliers have their pros & cons.
Don’t forget to mention the manufacturer’s size in the equation when selecting a supplier for your next order! If you need a product souring agent, please kindly contact us.
