If you are like many small to medium-sized companies that sell finished products in Europe, America, or Australia, you have probably considering overseas manufacturing. As globalization marches on many large and small companies are seeking cost savings by assembling their products in Asia or South America. Fortunately, small companies do not need to invest millions of dollars in foreign plant and labor to benefit from overseas manufacturing. There are thousands of fully operational manufacturing plants in India, China, and Brazil (to name a few major players) that you can partner with to complete large or small runs of your product.
Industries that commonly outsource manufacturing of their products include: apparel, footwear, furniture, toys, electrical machinery, chemicals, energy equipment, industrial machinery, pharma, and automotive. If your company falls within any of these categories you will be able to choose from hundreds of pre-existing manufacturing facilities to produce your products using the latest machinery and technologies. You can easily keep your core operations of R&D, design, and marketing close to home, while still benefiting from oversea manufacturing expertise.
Companies that are unable (or chose not) to invest in foreign plant or equipment have two options:
This involves creating a contract with an overseas firm to manufacture all or part of your product. Your relationship with the manufacturer is simply that your are the customer and they are the supplier. In many cases you will need to provide them with a mold of your product, or choose from a existing mold in their catalogue, as well as detailed manufacturing specifications and instructions. The biggest concern with this option is protecting your Intellectual Property (IP).
Manufacturing under a license involves giving an overseas company the right to both manufacture and market your product within a defined territory, usually the country or region of their manufacturing plants. Through licensing your company will be able to sell in new foreign markets, while simultaneously taking advantages of lower production and transportation costs.
There are many benefits to overseas manufacturing including:
- Allows you to focus on your strengths, such as R&D or design, rather than production.
- Better quality products, materials, and machinery at lower prices.
- Reducing the overall cost of production.
- Getting your product to market faster.
- Reducing delivery costs.
- Offshore production and manufacturing may enable you to overcome import restrictions, opening up new markets.
There are also risks involved when partnering with an offshore manufacturer including:
- Losing some control over the production of your products.
- Problems ensuring consistent quality.
- Communication difficulties with your new supplier / manufacturing partner.
- Falling victim to IP theft or abuse.
- Exposure to negative impact of exchange rate fluctuations.
Tips for Finding the Best Manufacturing Partner
As you enter the world of overseas manufacturing, your most important challenge is finding the right manufacturer for your products. You’ll need to find a reliable company, with the best machinery to manufacture your products specifications and ensure consistent quality. They will also need sufficient capacity to meet your production needs and be flexible enough to work with your operations schedule. Finally they should have a strong distribution channels to ensure on-time delivery of orders.
- Learn the international regulatory requirements of your industry.
- Know exactly what you need. Define your specific manufacturing needs beforehand.
- Research potential manufacturers.
- Shortlist potential manufacturers and get price quotes and references.
- Do a legal background check on the final candidates to verify the information they provided including: ownership, registrations, certifications, capacity, and past business activities.
- If possible, personally visit the top candidates with a trusted translator and experienced resident.
- It is best to only employ manufacturers who have top management that are fluent in English, or the language used at your home operations. If this is not possible, make sure that all final contracts are properly translated by a law firm specializing in international contract law and who is familiar with the law in the country concerned.
- Consult a professional finance specialist to determine how best to structure the financial aspects of your contract to protect your business against foreign currency exchange rate fluctuations.
Your Manufacturing Agreement
A manufacturing agreement is a contract between you and your chosen manufacturing partner that outlines the terms and conditions on which they will produce your products. To mitigate risks, you should communicate clearly about your quality requirements, delivery expectations, and shipping terms. Be sure to include a comprehensive IP clause, confidentiality agreement, as well as governance, dispute resolution practices, and exit provisions. Most importantly, your agreement should include an accurate description of the products including specifications, raw material requirements, as well as a standard packaging and ordering procedures. Finally your agreement must address the “transfer of title” as the products are delivered to their final destination, the price for the finished products, payment terms, and whether or not the manufacturer has a license to sell finished product to third parties.