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:
A Manufacturing Partner assists you in managing the entire manufacturing process without getting in the middle. They will:
The key characteristics of the relationship with a Manufacturing Partner are:
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:
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:
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.