Whenever I give a speech or write an article or post about what it takes to succeed in international outsourced manufacturing , I invariably list “a good partner” as item one. Perhaps not surprisingly, I am always getting asked how to find the “good partner”. My initial response is usually to say “with great care.”
But if the questioner pushes me for details, I tell them they need to conduct due diligence on their potential manufacturer . And if they ask what that means, I tell them it depends on what the manufacturer will be doing, as more due diligence is required for $5,000,000 purchases than for a $50,000 one. For the $50,000 transaction, an internet search, preferably in both English and in Chinese may be enough. For a $5,000,000 deal, more will be required, especially if the full $5,000,000 will be at risk.
More specifically, I am often asked what to do to find a really good manufacturer of xyz product. To which I usually list out the following three options:
1. Do it yourself, from the comfort of your own coach. Use a website like Global Sources or Alibaba, which list hundreds of thousands of manufacturers and do some (very minimal) filtering out of bad actors. I have dealt with companies that have developed good long-term relationships with manufacturers found on this sort of website and I have dealt with plenty of companies that have experienced unmitigated disasters. In my experience, these websites generally work better when the product is a relatively simple and standard product and neither quality nor customization much matter.
2. Do it yourself, with a fly-by or two. Use a website like Global Sources or Alibaba to come up with 1-10 potential suppliers and then get on an airplane and visit them. Visiting accomplishes three important things. First, it allows you to see the facility of the manufacturer that may be making your product and a lot can be gleaned from that. Second, it allows you to meet the key people at the manufacturer that may be making your product and a lot can be gleaned from that. Third, it lets your eventual manufacturer know you take your products seriously enough to come to make sure they are made correctly. I am convinced this alone makes the trip worthwhile as it increases the likelihood of you getting good product.
3. Engage an intermediary (trading company, sourcing agent or factory representative) to conduct this research on your behalf. This you are going to have to pay for, one way or another. Some of these companies charge you an upfront flat fee for the work. Some charge a percentage of what you purchase for one year, three years or forever. Some charge a set amount for the product and then buy it for less from the manufacturer. There are pluses and minuses to all the payment methods, but generally, the more you pay early, the less you will pay in total.
Some intermediaries are invaluable. Others are completely incompetent or even flat out crooks. Some do not reveal that they are acting as an intermediary, leading you to believe you are dealing directly with a factory. My law firm has made plenty of people unhappy when we have had to tell them that the reason “their” factory will not be providing them with any product is because they do not have a contract with the factory and the factory from which they previously received their goods does not even know they exist. See International Manufacturing: Sourcing Agent or Not?
You should first determine whether you need an intermediary and if you do, you must choose that person or company very carefully. If you are using an intermediary, your contract with your intermediary and the contract with the manufacturer should mesh and both should be written to protect you, and not your intermediary or your factory. Far too often companies come to us with bad product or late delivery and after one of our international manufacturing lawyers has reviewed their contract with their intermediary and the purchase orders between the intermediary and the factory, we have to tell them that they have virtually no chance for any recourse.
There are, of course, other options in addition to the three set forth above, including doing your own manufacturing domestically or overseas, but the above three are the most common for SMEs.
The major and initial issue in choosing a manufacturer is determining whether the manufacturer is “real” or not. We have seen a ton of companies (especially in China) use the Internet and sourcing websites to make themselves look much better than they are or even sometimes to appear to exist when they do not. But they can also hide the reality even on site. You have to develop an efficient system for getting to reality as quickly as possible.
First, you should conduct due diligence on your potential manufacturers. With our law firm, this investigation typically consists of one of our experienced international lawyers reviewing government databases to confirm the company from which our client is seeking to buy its products actually exists and is licensed to sell what it is proposing to sell. These investigations also seek to determine whether the company is well capitalized, is in good standing with the government regarding fines and taxes, and is not involved in lawsuits that would make us doubt its reliability/credibility. We also look at what trademarks and patents and other IP the company holds, because these can be very valuable assets and companies with valuable assets are less likely to walk away with someone else’s money or IP than companies with few if any assets. This is also why we look at their property holdings. We also look at who owns the company because that sometimes gives us additional good insights about the company. After we search the government databases, we do an internet search on the company in the foreign country language and in English to try to get additional relevant information about its overall reputation. We then compile a 4-8 page report on our findings. Because our clients are invariably in a hurry, we strive to turn around these reports within 48 hours.
Second, you or your representative should visit the factory, if possible. Factories making a virtually identical product can range from using primitive hand techniques from the 1930s to using state of the art German or Japanese automated equipment. You cannot believe what the factory says about its systems and you cannot believe the photos they provide. You must go to look personally.
Third, when you visit the factory you have to use your time efficiently. Your goal should be to determine whether the factory is real or all surface and no substance. What every foreign buyer must realize is that any factory owner can create the illusion of being a strong business by putting on a show. The buyer arrives to see a buzzing, active factory with all assembly lines moving at full speed. As soon as the buyer leaves, the place shuts down again, waiting for the next victim to arrive.
Over the years we’ve picked up the following tips from our clients and the manufacturing consultants with whom we work:
- Visit the raw materials warehouse. An empty warehouse is usually a sign of a struggling manufacturer. If the warehouse is full, look to see whether the materials are consistent with what the manufacturer says it produces. Are the suppliers local, national or international? Do you recognize any of the suppliers, and if you do, are they reputable?
- Visit the shipping warehouse. An empty export warehouse might indicate the manufacturer has no current business. If the warehouse is full, check whether the deliveries are for internal markets or for export. If for export, check the destinations. Are they headed for countries that generally have buyers that care about product quality? Pay close attention to the packing of the product and loading procedure. You can tell a lot about a company by the way it loads product into containers.
- Visit the manufacturer’s finance office and observe what is going on. If there is no activity, the company is probably struggling.
- Visit the manufacturer’s sales department and observe whether the department is busy. Are the sales people taking orders and working with purchase orders and invoices and receipts, or are they drinking tea and staring out the window? What language are they speaking? No English liklely means little to no international business. Are you hearing customer complaints about late delivery, short delivery, incorrect delivery or faulty product?
- Visit the factory itself and ask to mee with the quality control department. If there is no QC department, you just learned a ton. Ask what happens when a quality problem is discovered. What happens to a defective item? Visit the factory floor. Are they using good equipment and what QC procedures are in effect?
If your initial review suggests the factory is a good one, you should take the time to move to the next stage of discussing whether you can do business with the factory. Good factories will be busy. You need to have an honest discussion about what you want to have made, in what quantity and in what time frame. On the other hand, if you reject a factory, make your departure as soon as possible. Do not fall into the trap of wasting time going to lunch or dinner with the factory people at factories you know you will be rejecting. On the other hand, if the good factories invite you to lunch or dinner, take the time to go. Good factories are rare and you should work immediately to build a relationship.
Any more tips, people?
