If you have a product that needs to be manufactured in high volume and at low cost, you may be considering outsourcing production to a low-cost Asian country such as China. Outsourcing the production of your product can be done directly, in which case you manage the factory yourself, or through a third party which manages the factory on your behalf, and in return is compensated in some way.
Managing a factory yourself can be expensive and time-consuming, and requires a substantial level of time, expertise, and experience to do a good job and avoid potentially fatal (in the financial sense) disasters. For this reason, working through an experienced third party is often a prudent choice.
It turns out that the third parties available that do this work follow different business models, and the best choice depends on the nature of your product and your business. Choosing correctly is important – the wrong choice could result in large schedule delays, expensive cost overruns, and the expenditure of large amounts of your time to resolve.
Essentially, there are two different business models that third parties follow; the Middleman model and the Manufacturing Partner model. Each has advantages and disadvantages and with that, inherent circumstances where one may be a better choice than the other.
A third party that acts as a middleman is literally ‘in the middle’ between you and the factory. Working with a middleman might follow a sequence somewhat like this:
- You provide your design and specifications to the middleman.
- The middleman gives you a quote.
- You write a check to the middleman.
- The middleman arranges for your product to be manufactured at a factory known to him, and shipped to you. You do not know who the factory is, and do not know what price the middleman is paying for the goods.
A Manufacturing Partner assists you in managing the entire manufacturing process without getting in the middle. They will:
- Find candidate factories
- Prepare quote packages
- Conduct a competitive bidding process
- Resolve technical issues
- Negotiate improvements in price
- Work with you to choose a factory and negotiate a contract
- Manage the factory on your behalf during preparation (MSA negotiation, quality plan development, production start and ramp, vendor oversight, etc.) for manufacturing and then oversee the high-volume manufacturing itself.
The key characteristics of the relationship with a Manufacturing Partner are:
- Throughout this process you are included in all of the communications with the candidate factories, and will usually have visited them.
- The contract to produce the goods is signed by you and by the factory, but not by the manufacturing partner.
- You pay the factory directly and the factory ships the goods directly to you. Neither the money nor the product passes through the hands of the manufacturing partner.
- The manufacturing partner does not receive a percentage or any funds whatsoever from the factory, ensuring that the price you pay the factory is accurate and honest, and is the lowest obtainable in a competitive bidding process. The manufacturing partner is compensated by you directly.
- If your relationship with the manufacturing partner ends, your relationship with the factory continues and your supply chain is not interrupted.
Advantages and Disadvantages of the Two Business Models:
|Area of Concern||Middleman||Partner|
|Pricing||↓Pricing is often not the lowest, because:
||↑Pricing is usually lower, because:
|Opportunity to climb the Asian manufacturing learning curve||↓You typically do not get to work with the factory directly and so will not have the opportunity to learn from the process.||↑The relationship is open and you are part of all communications with the factory, giving you the opportunity to climb the learning curve if you desire.|
|Ownership of production tools and fixtures||↓You may not own the tools and fixtures, and this may make it difficult to move production to a different factory.||↑You usually do own the tools and fixtures, making it less difficult to move production to a different factory.|
|Ability to move production to a new factory||↓If you are unhappy with the service you are receiving, and move your project to another factory, you will have to start again at the very beginning, causing a schedule delay of many months before you are in production again. This puts you in a weak position when negotiating price on an ongoing basis.||↑If you move production to a new factory, you can bring along all your tools and fixtures, saving a number of months out of the time required to get mass production up and running at the new factory.|
|Communications with the factory||↓Communications with the factory can be very slow, because all communications have to pass through the middleman. Solving technical problems that halt production can become long drawn-out ordeals.||↑You are free to communicate directly with, and visit, the factory at any time. The manufacturing partner does not filter the communications.|
|Manufacturing products with key safety or quality requirements such as children’s toys or medical devices||↓Manufacturing products with critical safety or quality requirements through a middleman may leave you exposed to potential liability since you are one layer removed from the factory and cannot supervise them directly. You will have to trust that the middleman will do this for you.||↑You are free to work with the factory to ensure that your key requirements are being met.|
|Degree of effort on your part||↑If your product is one that is handled easily by the factory (because it is not technically demanding and the factory and/or middleman has a lot of experience with that type of product) then the workload can be light for you. This may be valuable if this is a one-off project and you do not wish to build up in-house manufacturing expertise.||↓You will be more involved with the manufacturing process, requiring more effort and time on your part than if you had used a middleman, assuming that your product is suitable for production through a middleman arrangement.|
|Financing||↑Some middlemen will finance the fixed costs of the tools and fixtures, amortizing these fixed costs over time. Although this may relieve you of a large upfront expenditure on tools, your unit cost will increase, and if your sales go through the roof, you may pay for your tools and fixtures many times over.||↓The manufacturing partner does not typically provide financing, and the payment terms are those of the factory.|
|Payment terms||↑Some middlemen (usually the larger organizations) may give better payment terms for placement of production orders.||↓The factory may want to apply fairly conservative payment terms until a track record has been established.|
|Additional Services||↑Some of the larger middlemen can also provide additional services such as warehousing and fulfillment. Although these services can simplify things and decrease your workload, this integration may come at a price, since you do not have the ability to put these individual services out to bid between multiple competitors.||↓The manufacturing partner does not typically provide these services and you will have to obtain them from other suppliers. You will, however be free to quote from multiple competing suppliers, ensuring the best price.|
When is a middleman a better choice?
A middleman may be the better choice if:
- Your product is not technically demanding, and can be manufactured with a low chance of needing direct technical support from you.
- You do not expect to move your product to a different factory later on.
- You do not want to be involved in the manufacturing process, and do not need to climb the manufacturing learning curve.
- You need the improved financial terms or extra integrated services that some of the larger middlemen can offer.
- You are willing to pay a potentially higher price for your product in return for these conveniences.
- The level of quality control offered by the factory and the middleman together is sufficient for your product.
Good examples of projects appropriate for production through a middleman include one-off projects produced by non-manufacturing organizations and that are close to being commodity items.
When is a manufacturing partner a better choice?
A manufacturing partner may be the better choice if:
- Your product is technically demanding, perhaps unique, and the factory is unlikely to be able to produce it with the level of performance you desire, without your direct involvement.
- You want to be able to put your project out to bid among multiple factories that compete for your business and give you the best price.
- You do want to own the tools and fixtures, and have the ability to move production if needed.
- You do want to be involved in the manufacturing process and to climb the manufacturing learning curve.
- You want the lowest unit price possible for your product, with no hidden expenses or markups.
- You want to be able to work directly with the factory, onsite when needed, to ensure your product is built to your standards.
Good examples of products best suited for production through a manufacturing partner include unique or innovative products not seen or manufactured before, with demanding technical, safety, and/or quality requirements, and for which the best possible pricing is needed.
Understanding the various options and choosing the right path for your company is critical for success. If you’re in the process of weighing these considerations, we encourage you to learn how Dragon can help you.
Question or comments? Let us know below or ask one of our engineers!