Disaster! Why is my production going wrong? Chapter 116-Nov-2018
Whether you are a startup, or an experienced company looking to explore new product categories or markets, it is highly possible that, regardless of how good your design is, you are stuck in the process of manufacturing.
Why do you think that happens?
When startups or companies with demands for low-volume production consider hiring Low-Cost Manufacturers (LCM), it is important to be fully aware of the pitfalls. Due to fierce competition, more and more LCM companies are accepting low-volume production but the reality is that they are not geared to do so.
There are several factors laid out in this article that create friction and conflict, but first and foremost, it is important to understand that LCM companies work under shockingly thin margins and are in a constant struggle to survive. As a result, they are almost never able to gain profits from small batch manufacturing; their business model only makes sense for large scale production.
Then why do LCMs accept low-volume projects? (1) They would like to fill the gaps between bigger projects; (2) management wants to diversify, which makes sense on paper but their production team may not support it; or (3) they are desperate to get work under fierce competition.
You will read throughout the article that the Low-Cost Manufacturers’ thin-margin business model is the root of many smaller projects going wrong.
Risky isn’t it?
In most cases the LCM will not be prepared to go through rigorous contract negotiations. Your project is just too small to set up an extensive contract and the LCM prefers to work under a Purchase Order Agreement (PO). This creates an area of ambiguity.
A PO is only legally binding when it is placed and agreed upon by the LCM at the final stages of development. This means that throughout the design and engineering phases, production cost, pricing and schedules are all highly dependent on the goodwill of the Low-Cost Manufacturer and that is dangerous. It almost always leads to price increases and substantial delays as the LCM is not bound by a contract.
Too good to be true? Maybe it is.
Negotiating a low price at the beginning of a project is no guarantee unless you are a big company with a watertight contract and legal backing. Being used to working under a slim-margin business model, manufacturers will give overly optimistic and poor cost estimates in the beginning.
More often than not, the producer agrees to manufacture your product at a low price without having thoroughly studied your project. They never fully understood the complexity of product development and, in a hyper competitive market, they set their lowest price to prevent you from going to another factory.
Only after completing the development the LCM realizes that they cannot accept your original PO and as there is no contract, they invoke price increases and delays. In a best case scenario, the LCM will manufacture your first product run at cost only to increase the price for future production to recuperate their losses.
In some cases, price hikes have been part of the strategy from the beginning. The supplier quotes a price, gets an order, cash deposit and tooling fee only to tell you afterwards the price has increased. The LCM assumes that you will be unwilling to start over your development cycle with someone else and therefore will accept the “updated” cost. This is particularly likely if the LCM does not expect return business from you.
Another hidden cost increase may happen due to poor logistical estimates of volume and weight. Time and again, manufacturers underestimate the metrics of a batch of packed goods and the total volume does not fit in the designated container. This results in shipping cost increases as well as shipping delays, meaning: more hidden costs!
Let’s not panic just yet …
Based on CRE8’s past experiences and professionalism, we help our clients to run their small volume projects with middle sized Taiwanese manufacturers, most of which have been audited and sub-contracted for the big Taiwanese giants such as Foxconn and Wistron. This means that they’re trained to meet international standards and processes while maintaining immaculate factories of the highest standards.
Contrary to the big local enterprises, the mid-tier Taiwanese manufacturers are used to set up production lines for small orders and the finances make sense for them to do so. We have not experienced any quality or service fade between the small and big projects we run with them.
The down side of working with mid-level manufacturers is that, like the LCMs, they have small R&D teams (more on that in chapter two) and are not versed in doing business in English. Their clients are the big Taiwanese ODMs and all communications are conducted in Chinese. But worry not. CRE8’s engineers have helped many international clients with their production issues and language was never a barrier.
Then what are some other challenges that might come your way? The next chapter will cover how to get your production right. Stay tuned!