Outsourcing to China

Must Knows about Outsourcing Manufacturing to China

by Sara Cheng

Are you considering outsourcing your manufacturing to China?

Before deciding, you need to:

-assess the outsourcing opportunity
-select manufacturing partners
-protect your intellectual property
-guarantee quality supply and,
-secure a long-term commitment from your manufacturing partners?

You also need to consider the following:

Take a strategic approach
Outsourcing your manufacturing should be a strategic decision to enhance your international competency and create scales of economy so that you can harness your financial and human capital to concentrate on your core business and its competitive advantage.

Before making the decision to outsource you need to:

Determine the costs of outsourcing vs. in-house production / product purchasing
Assess your corporate goals when it comes to ownership, strategic fit, core competency, expansion plans, long term vision and business strategy
Look closely at your operations in particular performance controls, logistics, IP protection, what to outsource
Review your organisation and how outsourcing will affect your control, management efficiency, staff issues.

Choose the right cooperation model
Here are some options:

-Buyer-OEM manufacturer: you simply outsource manufacturing to the manufacturer.
Strategic alliance: through commercial arrangement, you and your manufacturing partner share the production risks and profits.
-Joint-venture: set up a contractual or equity joint venture with your manufacturing partner in China. Hence you partially own the manufacturer to better manage the manufacturing overseas.

Build a robust outsourcing contract
-Contracts are crucial and need to be scrutinised.
-Terms of payment: most popular terms include L/C, bank guarantee, D/A, D/P, down payment plus L/C or D/A or D/P. Letter of credit is a comparatively safer and fair term to start with.
-Specify the requirements for quality and inspection authority: Chinese government agency conducts pre-shipment inspection by random sampling. However, many companies prefer to outsource to SGS or other third parties to conduct pre-shipment inspection on their behalf.
-Legal arrangements for disputes: include in the contract the clause that International Chamber of Commerce rather than local industry bodies or government agencies in China will be the arbitrator in case of any disputes.
Protect your intellectual property!
-Don’t rely on legal actions on IP to work for you in China! Be proactive and protective:
-Keep core products/technology manufactured in-house.
-Position your self as leading innovator and brand. Keep ahead of your competitors in technology.
-Split manufacturing tasks to 2 or 3 un-related manufactures in China. Have a back up for each current manufacturing partner.
-IP registration in a country rather than China does not mean you are automatically registered with China. Register your patent, copyright, design and trademark in China.
-Invest in un-tangible assets: brand, business process, people and corporate culture.
Don’t compromise product quality
It’s common sense but lots of companies don’t apply for it: Put your QA system into place. The manufacturer manufactures for you and is supposed to do it to your standard. Ask yourself: does their QA meet your requirement? You need to have your own quality assurance system in place to monitor the manufacturing and conduct pre-shipment inspection. Fortunately, it may not be as expensive as you assume. Get a local QA service provider monitor your manufacturing partner on your behalf today.

Above all, be committed!
It’s common sense and here are some tips:

-Conduct due diligence on manufacturing partners
-Update information on the partners, competitors and the industry
-Visit China and review situation often
-Maintain your manufacturing partners’ commitment through frequent communication, profits/benefits sharing and steadily growing orders
-Look for complementary resources and create synergies
-Seek win-win solutions
-Take advantage of the partner’s complementary resources
-Maintain your own competitive advantage
-Seek to evolve the relationship
-Drive long-term strategy and growth

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