How to Choose A Contract Manufacturer?

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Section 1

Introduction

You have come up with a new product idea. You are confident that it is precisely what your niche market needs. Now it is time to explore options about finding the perfect manufacturing supplier to get the product made and bring it to your customers. How can you do this? How can you find a contract manufacturer that is right for your project? What critical factors need to be considered in making the decision? This article is a guide to help you find a manufacturing supplier that is a good fit for your needs in terms of cost, quality, reliability and time to market.

Asking the right questions will help you narrow down your choices - You have every right to ask questions in the supplier selection process. In fact, asking the right questions is part of the process of finding the right manufacturing supplier. Some of the questions are straightforward; others may call for more complex answers because they include more variables.

Section 2

Five points to consider before selecting a manufacturing supplier

Here are five points you must consider before making the decision:

  • Supplier type – Depending on your type of product and its level of development, and the level of involvement you seek from your supplier, you may be looking for an original equipment manufacturer (OEM), original design manufacturer (ODM) or a contract manufacturer (CM).
  • Product type – You want to select a manufacturer who has experience, expertise and the capabilities to produce the type of product you need. In some cases, however, if there is sensitive intellectual property (IP) or the ecosystem is weak in terms of original equipment manufacture (OEM) or original design manufacture (ODM), you may need to find a Contract Manufacturer (CM) with the right manufacturing capabilities, if not industry-specific experience.
  • Supplier size – You need a supplier whose size is a good fit for your project and who has the capabilities you require. Large and small suppliers relative to project size have their positives but may also present some negatives.
  • Intellectual property (IP) protection – A clear and comprehensive Manufacturing Contract is a key tool for ensuring IP protections in contract manufacturing. But if your product is a complex one, it may be necessary to get them sign a non-disclosure, non-use, non-circumvention agreement (NNN) so that whether or not they become your contractor, they are bound to safeguard your product information and other details.
  • Supply chain visibility – Where are they getting parts and components from and who are their subcontractors, if any? You want to work with manufacturers who are committed to supply chain visibility. It is even better if you can find a manufacturing supplier who is vertically integrated so that as many aspects of the production as possible are done in-house. This will also improve quality and cost control.
  • Collaborative design and design for manufacturing (DFM) capabilities – Getting your manufacturers involved at the early stage of the product design can help eliminate unnecessary costs and delays at the production and assembly stages. Read our article on 5 Reasons New Product Developments Fail in China and How to Avoid Them to better understand why. If you are seeking a manufacturing supplier early in the design process, look for a supplier possessing DFM capabilities to get the full benefits.

Going through the manufacturing supplier selection process with proper due diligence gives you a greater understanding of each supplier, their strengths and weaknesses, and a good feel for what they can bring to your project. Picking the right supplier is going to greatly increase your chances of achieving your goal of bringing your product to market, on time within budget.

Let us now look into these five key points in more detail. The idea is to help you weed out below par suppliers and to find the right manufacturing supplier that will deliver on the promises.

Section 3

Manufacturing Supplier Types

As you begin looking for a manufacturing supplier, you will come across a variety of terms such as OEM, ODM, and CM (“ODM, OEM, CM - Which type of manufacturer should you pick for your project?”).

Assembly lines

Fig. 1: Assembly lines

OEM stands for Original Equipment Manufacturer. OEMs (O’Connell) are contract manufacturers that have the capability to make your products in line with your own unique designs and specifications, and with industry-specific experience. Look for a supplier with experience in a specific field or line of products such as home appliances, automotive, etc. as relevant. Typically, before you can outsource work to an OEM, you would have to invest in research and development (R&D) and market research as well as design and engineering, depending on the complexity of your product.

Many big businesses and big brands use OEMs to produce their industrial and consumer products. You can find examples of OEMs in the auto industry and electronics. Your iPhone, XBox, refrigerator, washing machine and some parts and components of your car, SUV or truck may have been made by OEMs.

An original design manufacturer or an ODM designs and makes products that are then sold and marketed under the name or label of your company. ODMs (Techopedia, “Original Design Manufacturer”) play a useful role if you have a product in mind but lack the inhouse product design capabilities or a budget for research, development and design. ODMs step into that vacuum to take control of the entire process from conducting product research and development to design, product testing and manufacturing. Your ODM may have the capacity to build what you want, including assembly lines and access to product developers. An OEM does not undertake these tasks.

Because they invest in the research and development to make the product, the ODM may end up owning the design, tooling and other intellectual property and patents.

Contract manufacturing or CM for short (“Contract Manufacturing: A Helpful Guide (2021)”), is also more commonly called outsourcing. Once you have a product you want to make and sell, you want to find a contract manufacturer that would make it for you.

You may hire a CM to make your product and either send it to you for distribution or deliver them directly to your customers. As the hirer, your company is responsible for the entire sales, marketing, and providing customer service.

Type of contract manufacturing / Criteria

ODM

OEM

CM

Product design

Owned by the supplier

External design usually owned by customer

Fully owned by the customer

Product modification

The customer can usually request only basic changes

The customer gives input on specifications

The customer defines specifications

Tooling and other IP

Belongs to the supplier

Usually only external design owned by buyer

Belongs to the buyer

BOM

Customer has little to no control

The customer has limited control or input

Fully controlled by the customer

Category specialization

Specialized in a certain category

Specialized in a certain category

Wide range of product categories

Table 1: A comparison of ODM, OEM, and CM manufacturing models

In general, you can also plot the product volumes against the level of control as follows:

Product volumes vs level of control: ODM, OEM and CM compared

Fig. 2: Product volumes vs level of control

Section 4

So, what type of manufacturing supplier will you opt for?

Will you go for an OEM, ODM or CM as your manufacturing supplier?

There are multiple benefits of choosing a contract manufacturer (CM) over an OEM or an ODM. The following variables need to be considered when you compare these supplier types:

  • Type of project you are working on.
  • Off-the-shelf — materials, design and equipment are ready so you can fast-track the product to the market.
  • Custom — increased costs, risks, and more time to develop a personalized design.
  • In-depth manufacturing solution vs. no manufacturing customization.
  • Extra design support vs. an already existing and proven product design.

The key advantage is that a contract manufacturer is open to providing a wide range of products you may otherwise not get from an OEM or an ODM. A CM is also more open to managing the relationship openly and being an available point of contact.

A rule of thumb for selecting your manufacturing model

Here's a way to figure out which manufacturing models suits your need.

  • If you are competing in a highly price competitive market with little differentiation and do not plan to make significant investments in the product design and development, you may want to work with an ODM.
  • If your focus is more on marketing, and product development with differentiated designs and features, your best fit may be an OEM.
  • If you need a high level of control and have unique or complex products and sensitive intellectual property, go for a CM.

If a manufacturer is an OEM or an ODM that competes in the same industry or there is a chance of IP leakage, you may opt for a more established supplier with a reputation to safeguard your IP. You may also opt for a contract manufacturer who will have fewer potential conflicts of interest.

Check out our article on ODM, OEM, CM - Which type of manufacturer should you pick for your project? It explains in detail the pros and cons of each manufacturing model and the process of selecting a type of supplier best suited for your project.

Section 5

Product Type

Most suppliers will specialize in different aspects or verticals of manufacturing. For example, sheet metal fabrication requires tooling and equipment different from those required by Electronics Manufacturing Services (EMS). An EMS, likewise, will often lack the capabilities to excel at sheet metal fabrication (“Electronic Manufacturing Services”). Before settling on a contract manufacturer, you must make sure that your product type and the supplier specialty are a good match.

Plastic injection tooling shelves

Fig 3: Tooling shelves

In particular, look for compatibility in the following areas:

  • Manufacturing experience in a related field or application
  • Machinery and technology
  • In-house expertise for niche industry products
  • A proven production process
  • Sufficient testing and control equipment
  • Quality, reliability, and consistent standards

The bottom line is to select someone with a good fit in all of the above. You cannot ask a sheet metal fabricator to deliver automobile tires. A good manufacturing focus equals better quotes for making your specific product.

You need to keep in mind that your contract manufacturer may be open to, and indeed resort to outsourcing certain aspects of the manufacturing process. Always ask about this before you make a choice.

Refer the comparison table we have given at the end of this article to perform a qualitative comparison of selected manufacturers to find the best fit.

Order and track sheet metal components online through Komaspec's on-demand sheet metal fabrication platform.

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Section 6

Supplier Size

You need a right-sized supplier. What does this mean, and why is it important?

A mismatch in size, compared to the quantity of work that you need done can lead to serious supplier relationship and management issues down the line. A key part of selecting a supplier is finding a good fit for your needs. Consider the relative size of the supplier and how large a percentage of their sales your annual order will amount to.

When we say large supplier or small supplier, we mean that in the context of what you need to get done. A larger supplier (for your purposes) is someone for whom your business contributes only a small fraction of income and workload. If your business is less than 1% of a factory’s annual sales, their resources and their best experts - engineers, designers, sales and marketing people and managerial talents - going to be channeled to other, more “important” customers. In general, the larger the supplier, the more comprehensive and sophisticated their systems and the greater their capabilities. However, will those resources be directed to your project? And will they value your business enough to be flexible on pricing, scheduling, and prioritization? These are the questions you need to ask all potential suppliers, especially larger ones.

Product storage area

Fig 4. Product storage area

A smaller supplier may be a company for in which your project makes up a significant (at least 5% or more) of their annual sales. That translates into significantly more clout when negotiating lead times and pricing. You can expect greater flexibility and attention in terms of resources devoted, better access to engineering and sales support, among other things.  Smaller suppliers can offer significant advantages in terms of agility and flexibility in how to work. But suppliers who operate at a very small scale (unless they are highly specialized) can find it difficult to meet your project needs and fulfill their part due to insufficient resources, capabilities, system limitations and lack of experience.

Here’s a summary of what you can expect with a supplier size mismatch with your needs.

A large supplier may:

  • Not value your business as much
  • Be less flexible in terms of business operations and financial terms
  • Offer less input, less direct contact
  • May prioritize other projects or customers
  • Miss deadlines as a result of all of the above

A small supplier may:

  • Not have the necessary capabilities, expertise and experience for your category or project
  • Not have sufficient redundancy in resources, capacity, personnel which can lead to project bottlenecks
  • Have less comprehensive reporting or documentation
  • May have more difficulty in manufacturing complex products or components
  • Require more design or engineering support
  • Have less financial stability, comparative to a larger setup

You must make your decision based on both qualities—supplier size and capacity.

Exactly which of the many factors will impact your decision depends on the type of project. Customized products typically require a higher level of capabilities in the same supplier. On the other hand, the right small-sized supplier can develop a cheap off-the-shelf product.

Section 7

Intellectual Property (IP) Protection

It is imperative to clarify ownership of intellectual property (IP) in manufacturing. In situations where your supplier is from overseas, or simply doesn’t share the same regulatory environment, you stand the risk of mishandling IP protections.

When you opt for a foreign-owned contract manufacturer, it is vitally important that you familiarize yourself with the local regulations and business practices. Do not assume that the laws that apply to similar manufacturing in your home country also apply in the same way in the foreign country, for example in China. The same goes for intellectual property protections.

Here’s broad guidance on IP best practice (“Best Practices: Intellectual Property Protection in China”) and how to avoid IP mistakes:

  • Make an IP strategy for the destination (such as China) that covers all your potential IP assets, IP risks and put in place measure for IP protection. IP-relevant information must be classified according to sensitivity and the access controlled accordingly. Document the policies and how to handle infringements and disputes on trade secrets.
  • Understand the legal landscape and the main IP laws and regulations relating to copyrights, patents and trademarks.
  • Consider preventive measure to protect IP. For example, in China:
    1. File patent applications with the State Intellectual Property Office (SIPO) for both core and fringe technologies. You will need to get the patents translated prior to filing.
    2. Broadly register your core trademarks with the China Trademark Office.
  • Everyone should be clear about the way you handle IP, including employees, business partners and contract manufacturers and customers.
Section 8

Dealing with potential business partners

One danger with using ODM or OEM supplier is that they can one day become your competitors. In general, with all manufacturing contractors:

Business meeting

Fig. 5: Business meeting

  • Keep IP protections in mind when engaging
  • Require a non-disclosure, non-use, non-circumvention agreement (NNN) before releasing product details to obtain quotations of previously vetted manufacturing suppliers (Harris Bricken). There is common agreement that the US style non-disclosure agreements (NDAs) do not work in China.
  • Include relevant clauses in your Manufacturing Agreement about IP protections, infringements and litigation in cases of infringements. Include protection rights for the concept, final design, process, components, and packaging design.
  • Check what measure contract manufacturers may have in place to protect your intellectual property and trade secrets. This should be a key criterion in your qualitative assessment of manufacturing suppliers. Using a contract manufacturer that has good IP protection in place is the best option.
Section 9

Supply Chain Visibility

Having some control over the supply chain gives you another level of assurance that you are choosing the right supplier. Make it clear to your potential manufacturing suppliers that they need to demonstrate transparency in how they handle the following:

  • Components
  • Assembly
  • Testing, inspection, and control
  • Compliance with standards, not just in their home country, but also in all the markets you plan to sell your products.
  • Reporting
  • Risk assessment and mitigation measures

Often, everything works well until something goes wrong. And you need to be prepared for such an eventuality. This is why you should ask your supplier to give you a contingency plan for handling a potential crisis; for when things don’t go according to plan.

Supplier chain visibility becomes less of an issue when you opt for a vertically integrated manufacturing contractor. Then, your supplier has a better handle on costs, quality and delivery terms than would a supplier that depends on a host of subcontractors. Such suppliers may also be able to offer you better terms as they have the benefits of economies of scale in their operations.

Section 10

Summary

There is always a certain amount of risk involved in selecting the right manufacturing partner for your product. But conducting supplier due diligence and going with a reputed supplier can help you mitigate some of that risk.

Here’s a format that you can use to carry out a qualitative comparison of selected manufacturers to find the best fit for your business.

An example of a qualitative comparison of manufacturers

Table 2: An example of a qualitative comparison of manufacturers

In this table, we have given weights to each criterion. Feel free to assign weights as you feel fit and to remove or add new criteria. For example, the political risk criterion doesn’t apply if all the manufacturers you are using are in the same country since it’s the same for all. But if you are comparing manufacturers from different nations, this may be relevant.

In the end, what you need in a contract manufacturer (CM) is a manufacturing partner that will handle your concerns professionally and in the most flexible way. This will be reflected in how you are given a quotation for a project and in the way they relate to you.

Here are some questions to keep in mind as you conduct your qualitative comparisons:

  • Are they willing to sign a NNN agreement?
  • Does it look like the manufacturer has done the basic research before giving you the quotation?
  • Do they take the manufacturing contract/agreement seriously? (Have you got a version of it done in the supplier’s language? This is also important)
  • Does the manufacturer understand and is willing to comply with the IP protection measures and compliance relevant to your key foreign markets?
  • Does it sound like they value your relationship and take a long-term perspective?
  • Are they looking at this project in a strategic manner and show signs of wanting to cultivate an ongoing mutually productive relationship?

These aspects will help prevents cost overruns for you and protect you from misleading quotes and poorly written contracts. Pragmatism is key. Critical points should never get brushed aside, at any point in the contractual process. Whatever the firm you choose, you need to be confident that they will deliver not just an excellent product, but also a corresponding business relationship experience.

Section 11 - FAQs

What qualitative criteria should we look at for in selecting a manufacturing supplier for our product?

The selection criteria may include:

  • Cost of goods and total cost. Just the cost quoted by the manufacturer is not enough. Yes, you need to factor in costs of tooling, samples and prototypes as well as costs of purchased components and customization. You must also account for getting the finished products from the manufacturer to your warehouses. These include the costs of packaging, shipping, duties, transportation costs and payment terms. Exchange rates also come into the equation. Outsourcing your manufacturing only makes sense when the total cost of doing so is lower than getting the product made inhouse.
  • Company size fit for the project. This requires looking a how big or small your order is compared to the total business volumes of a contract manufacturing firm. Are you likely to be their largest or the smallest client or something in between? Read: 5 Reasons New Product Developments Fail in China and How to Avoid Them. (give link)
  • Product portfolio: It is necessary to see the compatibility of the manufacturer’s product portfolio and industry experience with what needs to be done. If the manufacturer has made products similar to yours, they have the capacity and the experience to deliver yours as well.
  • Communication matters: How they respond to your emails and during visits gives you an indication of who they may be in the relationship once contracts are signed. Was it easy to get conference calls organized? How about language barriers? How responsive are they to your emails or questions? How prompt to get back? Complications at the early stages may be a sign that you are going to be facing problems down the line.
  • Relationship building: If you are new to the region or to a specific manufacturing company, look at what they expect from this relationship. Are you just another customer? Are they seeking a strategic partnership? You don't want to consider someone a strategic partner if there is no reciprocal mindset from the other party. This is a common mistake made in contract manufacturing.
  • Assess the scale-up potential. You are making a new product with the idea of market growth and for its profit potential. This is why it is important to consider potential for scaling up production volumes, capacity for facility expansion and automation. Here the size of the company and its financial and business stability matters. You also want to ask about volume discounts, when scaling up volumes to meet the growing demand.
  • Shipping costs: Look at your shipping alternatives and pick the most cost effective to get products from manufacturer to where your customers are. All the shipping and transport costs from where the manufacturer is to your warehouses and to the locations where your product will be sold need to be accounted for and monitored to benefit from outsourcing.
  • Supply chain and level of vertical integration of manufacturer: Does your manufacturer plan to make most components inhouse or are they planning to outsource some items and aspects of work? Are they confident they can source all the necessary parts easily within their region? The level of vertical integration is a key factor to consider in choosing a contract manufacturer because that offers you benefits in terms of lower overall costs, reliability, quality and timeliness.
  • Equipment: Does the manufacturer have the right equipment to make your product? If they have state-of-the-art equipment and technologies that is great. But not critical. What you want to know is whether they have the necessary technologies that they need for the production, post-processing and assembly of your product. Also check whether they have documented maintenance and calibration schedules that they follow. What about their inventory management practices? Do they plan to share equipment across multiple projects?
  • Risk mitigation and contingency measures. What measures are there for risk mitigation and contingencies that may delay production? Have they got the expertise and the management capacity to get the job done? Are their people trained?
  • Quality assurance. Look into their quality assurance systems and processes. Do they adhere to quality standards such as the ISO 9001?
  • Do they carry out the key components of a quality management processes such as quality planning, quality assurance, quality control and continuous improvement?
  • What additional services do they offer? Some manufacturers offer design-for-manufacture (DFM), cost reduction, product optimization and other services, such as component sourcing. The closer you are to the one-stop-shop concept the more affordable and efficient your contract manufacturing experience is going to be.
  • Intellectual Property protections. Enquire into their process for ensuring the safety of intellectual property that you need to share with them.

Political risk is a relevant criterion for comparing manufacturers from different regions because tariffs and duties in international trade may have an impact on your product costs, profitability and competitiveness of your product.

Section 12 - FAQs

What is a manufacturing contract or agreement and what components are included in one?

Clients will generally use a manufacturing contract, also referred to as a manufacturing agreement (Harris Bricken, “Template International Manufacturing Agreements”), to clarify the relative responsibilities of both parties and to protect their interests vis a vis intellectual property, set out payment terms, quality clauses, etc. and generally lay out the terms of the relationship. It must include product specifications, materials, packaging instructions, equipment, designs and models and clauses ensuring confidentiality of information.

You can use one as a negotiation instrument and therefore, it is important that it is drafted with clarity and include clauses and details relating to:

  • Responsibilities of both parties
  • Intellectual property ownership
  • Confidentiality
  • Quality control & quality clauses
  • Necessary authorizations
  • Delivery and payment period specifications
  • Subcontracting
  • Compensation
  • Law and jurisdiction
  • Jurisdiction
  • Arbitration
  • Governing Language
  • Signatures
Section 13 - FAQs

What questions should we ask a potential contract manufacturer?

Asking the right questions will help you to separate the wheat from the chaff. Ask your questions and keep an open mind about not just the answers you get, but how they are given and what is left unsaid. This is also part of your manufacturing supplier due diligence.

Here are some basic questions to get you started. Please note that there will be significant variances depending on products and industries.

  • What are your in-house manufacturing capabilities?
  • How much design for manufacturing and engineering support can you offer?
  • How do you protect our intellectual property?
  • How transparent is your pricing policy?
  • Should we expect hidden fees and additional costs?
  • Who will you assign as our dedicated point of contact? (make it a point to get to know that person on your site visit)
  • Will the project have a dedicated project manager and engineer?
  • How do you ensure process efficiencies and minimize delays and downtime?
  • What are your quality control procedures?
  • How will you ensure our products have a consistent quality across the batches?
  • How much access to quality information or documentation will I have? Can we conduct 3rd party audits?
  • Will you share some references of repeat clients in our industry or for similar products?
  • What project management methods/software do you use to ensure all projects run on time?

Here at Komaspec, our more than 15 years of experience in sheet metal fabrication and contract manufacturing in China mean that we are a leading choice for companies looking for China-based Contract Manufacturers. With exceptional in-house integration, NPI and DFM experience, and thousands of successful manufacturing projects, we provide service to a range of customers and industries.

We are glad to review your product design together and help you select the fabrication process that best suits your product’s needs.

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Section 14

Works Cited