How to Select a Right Size Manufacturer 2021
How to find a perfect Right size manufacturer partner in a foreign country?
Having a loyal Chinese partner is the most crucial factor in manufacturing your products successfully in China. 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
The case of a hardware startup
Suppose that you are a New York-based bicycle company that was founded five years ago. You have acquired a strong position in the market by selling bicycles of all designs. Last year your total generated revenue was USD 1.2 million, and still, your bicycles are in the showrooms of almost 70 resellers. Now, you are planning to bring your first electric bicycle to the market, and for that, you want to place an initial order for 500 e-bicycles. For that purpose, you need to find a suitable manufacturer in China.
How to Select a Ideal Right 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 professional agent to do an audit in your 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?
What is the ideal supplier 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 supplier 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 his/her 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.
Right Size Supplier Takeaway
An important factor to consider is the size when you compare different manufacturers. You don’t want to take the risk of working with a well-reputed big manufacturer, who may not be giving such importance to your project when needed. On the contrary, you also don’t want your supplier to be very much dependent on you.
This would increase the risk that demand fluctuation negatively affects the manufacturer’s ability to deliver on time, the quality, and at cost. To avoid these risks, you should work with a manufacturer whose annual sales are about 6.5 to 50 times the value of your order, and this supplier is an ideal choice to get your project as per your requirements.
Case Study: Which Manufacturer is Best for The Bicycle Startup?
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 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!