Last week, Renaud Anjoran, CEO of Sofeast, wrote a guest post that explained the two main product development models employed by Chinese companies, outlining the advantages and disadvantages of each. This post looks at the two most common product development choices, with a focus on how they affect the transition to mass production.
At this stage, the foreign company has typically approved a final prototype — or it is close to that stage — and it is looking at going into mass production with its Chinese manufacturer.
As experienced manufacturing engineers know, transitioning from final prototype into production can be a lot of work. The more innovative and complex the product, and the more product requirements (e.g. finish quality, reliability and durability, etc.), the more work involved.
This work is commonly referred to as “New Product Introduction” in the electronics industry and as “Product and Process Validation” for automotive parts and medical devices.
This transition stage of product manufacturing often requires an enormous amount of work and most startups (and many others) severely underestimate what is required. Failing to take the time to validate that your planned process is appropriate for making your product at the necessary quality level almost invariably will lead to you having problems during your first production batches. Those problems usually manifest as quality issues and/or shipment delays.
1. The two main models for transferring your new product to manufacturing
The purpose of this article is to explain the two main models for bringing a new product to manufacturing and to weigh their pros and cons.
a. The Western model
— Type of relationship
Most of the transfer work (before mass production) is billed as engineering contract work. During mass production it is contract manufacturing work.
— Practical implications of the Western model
- The sourcing of some components (if that still remains to be done) is done transparently and is charged to the customer.
- Tooling fabrication is paid by the foreign customer and the customer owns all related intellectual property and can it can take back its tooling at any time.
- The customer can stop the work at any time and move its manufacturing to any other Chinese or other factory.
— How to ensure the overseas manufacturer does all the required work
Experienced manufacturers recognize that they have an interest in doing a good job and reducing risks before manufacturing starts, as production problems eat into their margins. Typically, there is a contract in place that specifies various performance requirements for the overseas manufacturer, and production problems mean financial losses to that manufacturer.
Pros
- The customer retains full control of the project and that means it is free to line up a backup factory and transfer production to another factory.
- The manufacturer updates the customer regarding progress along the way and the customer is involved in production decisions.
Cons
- The customer pays for more of the work (supplier sourcing and qualification, tooling, pilot runs, etc.), so its initial costs are higher.
- All these steps can take time and manufacturing may start weeks or months later than expected.
- If the manufacturer’s team does not follow a structured and proven process to industrialize its product, unpleasant surprises may still appear in production.
b. The Chinese model
— Type of relationship
The manufacturer is the supplier and it commits to delivering a final product. The relationship is typically based on a simple purchase agreement. The whole process looks easier and more straightforward.
— Practical implications of the Chinese model
- The manufacturer reviews the product design to confirm that the product can be made. The manufacturer handles all industrialization and component/material sourcing work (if any) at no charge.
- The customer may not work directly or indirectly with the component suppliers sourced by the manufacturer (but this is rarely made clear in writing), so switching to another manufacturer may be possible, but difficult to accomplish.
— How to ensure the overseas manufacturer does the required work
Most Chinese manufacturers want to rush through the product development phase, as they lose money during development and make money only on production orders. They do not plan to do much validation work before manufacturing. Their plan is for production and product problems to be discovered during the first product batches. In the end, this means the customer bears the brunt/costs of any problems.
Pros
- The customer does not need to be involved in what happens and it can thereby avoid getting overwhelmed by the complexities of the project.
- The product goes into production relatively quickly.
Cons
- There are virtually always issues when a totally new product goes into manufacturing. If those issues have not been addressed through proper process validation, they will invariably be very expensive to fix.
- Chinese factories confronted with high product rejection rates simply raise their prices to their customer. This move is nicely described in The International Manufacturing Price Trap. The factory raises its prices and claims that it set its initial price before it did a full production run, and now that it has completed a full production run, it has “discovered” that it must greatly increase its price to be profitable. This sort of “surprise” price increase is very common under the “Chinese model”.
NOTE: Most start-up companies underestimate the costs of poor quality. If half the products in a batch of 2,000 are defective, and if one finished product costs 15 USD to make, that’s 15,000 USD at stake, not to mention the cost of having to expedite subsequent shipments and the impact on the customer’s reputation in the marketplace. Also, a re-worked product is almost never as good as a first-time-good product, and it will tend to fail earlier.
Now, if that quality issue is not detected and it reaches the end customers, the total bill may be over 100 USD per defective item, and that is assuming that the quality issue does not lead to customer injury. We have seen plenty of companies go out of business in these sorts of situations.
2. How to detect your overseas supplier’s product development model
If you are unsure whether your potential supplier follows the “Western” or the Chinese” model of product development, just ask for its new “Product Introduction Plan” or “Process Validation Plan”. If its plan does not include a detailed explanation of the quality and process engineering work and at least one pilot run, it will be following the Chinese model.
If you do actually want to engage a “Chinese model” manufacturer, you should, at the very least, carefully define your quality standards and make sure your contract specifies the financial consequences to your manufacturer if it does not meet those standards. See Drafting China Contracts That Work.
If the supplier pushes back on your quality standards, you should consider that as another indication that it will not follow best practices. It may also signal that your standards are not realistic, so you should talk to other potential suppliers to get additional feedback.
Generally, if you are planning for the manufacturing of large volumes of your product, your costs from poor quality may be quite high, and this usually justifies working with a “Western Model” manufacturer.
The above post was written by Renaud Anjoran, CEO of Sofeast, a leading China-based supply chain management/product engineering/quality assurance/supplier product management company. Renaud is a globally recognised expert in quality and supply chain issues. He is an ASQ-Certified ‘Quality Engineer’, ‘Reliability Engineer’ and ‘Supplier Quality Professional’, and a ISTA-certified ISO 9001 and ISO 14001 Lead Auditor. He also regularly and excellently blogs on these topics at QualityInspection.org. Harris Sliwoski has worked with Renaud and Sofeast for more than a decade on various client manufacturing projects, including China product development projects.
