There are few things in entrepreneurship more exciting than seeing your ideas come to life in a tangible form. You’ve spent countless late nights polishing and revising your designs, and now it’s time to build your product flawlessly. But do you know how to find a manufacturer?
This step is also often the most nerve-wracking, and for good reason. This is essentially the first time in your creative process when you’ve placed the outcome in someone else’s hands, and it’s likely that these hands belong to a team of distant strangers in a foreign country.
Young entrepreneurs often underestimate the importance of how to find a manufacturer for their products. Once the development phase is over, they tend to jump at the first manufacturing opportunities that match their budgets without laying down some essential groundwork to ensure a seamless process.
But no quality product has ever been produced without taking the right steps up front to ensure its quality and sustainability.
Believe me, manufacturing is a topic I’ve been passionate about since I moved to China in 2010. It was then that I saw the sheer power of China’s factories and realized that everything we use or wear has to be produced somewhere. Since that turning point, I’ve worked to bring ideas to life and create unique products, and it’s led me to a career in ecommerce, first creating my own products and then working with others through my company Sourcify.
In this post, I’ll share with you what I’ve learned about bringing products to life and running ecommerce brands based on physical products. That includes how to find a manufacturer to make your product, what you should ask potential partners, the ins and outs of the industry, step-by-step advice, and proven strategies for entrepreneurial success.
Understanding Your Gross Margins and Business Strategy
First and foremost, any startup entering the stage of how to find a manufacturer should be highly conscious of its budget, gross margins, and overall business strategy. Without having a clear idea of your current funding and how much you can spend, it’s easy to head down the wrong path when getting your products made.
For example, an apparel company and a tech startup might have very similar budgets going into manufacturing, but will certainly opt for different production routes for obvious reasons. Aside from the difference in products, one might be producing a significantly larger number of products, or merely getting a single component of a gadget made, as opposed to a finished product.
When it comes to planning for costs, many manufacturers will cut into your predetermined margins due to unexpected middlemen. If you neglect to thoroughly research your manufacturer’s operation, don’t be surprised when you discover you’re overpaying for your products.
This is why, from a strategic perspective, every ecommerce entrepreneur needs to know the essential formula below:
Profitability = (Sale Price – Unit Costs) – Cost of Acquisition
If your unit costs are covered by the return of your ad spend, you’ll be a profitable ecommerce store. As an example, let’s say you sell sunglasses for $100 and produce them for $10. This means you have $90 to make a sale profitably. If it costs you $50 to make that sale, you profit $40.
Profit ($40) = {Sale Price($100) – Unit Costs ($10)} – Cost Per Acquisition ($50)
Knowing this basic ecommerce dynamic will help spearhead your growth.
Getting to Know the Manufacturing Industry
It’s crucial to understand the various types of services and middlemen out there so you know how to find a manufacturer that works best for you.
Depending on the size of your company and how much you’re looking to produce, you will first want to compare domestic versus overseas manufacturing. For almost every product, producing overseas will make more sense, as you need a lower production cost to have a higher margin to grow. Most of the companies that decide to produce domestically do so to align with their brand image. For the sake of brevity, we will cover overseas manufacturers only.
Below we’ll cover three categories of manufacturing services: wholesalers, trading companies, and actual factories. While working directly with factories will likely be the most practical option for all startups, let’s take a quick look at the alternatives:
Wholesalers
By purchasing products in mass quantity and often storing them in American warehouses, wholesalers can be very appealing to the untrained eye. While it seems convenient for North American companies to receive their products faster and save on shipping expenses, wholesalers make money off upcharging the products significantly. This also makes it hard to know where the product is being made.
Companies that have made the switch from buying from wholesalers to working directly with factories have saved up to 65% on manufacturing expenses. This stems from cutting out the middleman margin that wholesalers take, which adds up to an average of over 30%.
Trading Companies
A trading company has close relationships with multiple factories and produces across a variety of product categories. Most trading companies do not have their own factories.
Trading companies add a percentage to the initial product cost for buyers. As such, they also profit significantly from those who refrain from going straight to the source. While they can be a great resource for getting small orders done, trading companies can also have some negative tendencies.
It is not uncommon for trading companies to claim that they’re manufacturers themselves, working out of their own factory. If you’re ever suspicious about the credibility of your chosen trading company (or any foreign manufacturing source, for that matter) or are unsure if they have a factory, simply ask them to write your name and date on a piece of paper, and have them send a photo of the paper in the factory where your product would be produced. Though this trick isn’t foolproof, it enables you to know that the trading company has access to those facilities that they are claiming to be their own.
Another common difficulty associated with trading companies is holding them liable in the event of a defective product. They tend to be flakey when issues arise, so don’t be surprised when communication is lost at a critical moment for your business. Additionally, seeing that you are unsure of the factory they’re associated with, contacting the manufacturer directly won’t be easy.
Factories
Direct relationships with manufacturers should be every company’s ultimate goal for the sake of your product and budget. While it’s often difficult to achieve such relationships, there are many resources out there today that can help you pull this off.
My goal isn’t to help you immediately know how to find a manufacturer to make your product for some quick turnaround and cash in your pocket. Sure, that is a great perk, but the quality of your product speaks volumes for the credibility and longevity of your brand. Working with a manufacturer directly from the factory will open up so many creative doors, eliminate unwanted middlemen entirely, and ultimately enhance the quality of your product at an affordable cost.
A company’s first instinct when researching how to find a manufacturer is often to use a service like Alibaba. This is a fine tool for gaining English-speaking contacts in the manufacturing business and getting an idea of how much you’ll be spending on your products. However, it’s important to note that most companies on sites like Alibaba are trading companies—thus, likely not in your best long-term interest.
If you’re looking to work with a factory, your first step will be to look at the name of the company. If it includes the terms “trading company” or “industry,” chances are this company isn’t an actual factory. The next trick is to see what product categories they produce. If they produce in multiple categories that don’t stem from the same raw material, chances are they aren’t a factory. As an example, a shoe factory won’t also produce clothes.
Knowing how to tell if you’re working with a factory is a tricky job, and even if you are, a factory may still subcontract certain products. If possible, visit the factory to determine its validity. That’s the single best way to know what you are getting into.
Questions to Ask Potential Manufacturers
We’re all eager to cut straight to the chase when initially contacting potential manufacturers. However, do your best to avoid the blatant, “how much?” question upon first interaction, and truly get to know the quality and legitimacy of their service by asking the following:
- What companies have you worked with in the past? – The purpose of this question is to both strike up a natural conversation and gain additional information beyond their response. If they mention several brands you’re familiar with or know on a personal level, reach out to them directly for a quick review. Don’t be fooled by some fraudulent “name dropping” and go straight to the source for validation. Additionally, don’t be turned off by companies you’ve never heard of. Do your research, as they could be the next big thing.
- Can my company review your business license? – While this might sound a bit intrusive for an introductory email, we assure you that it is both legal and expected from foreign manufacturers. Depending on their location, you may need further assistance translating and ensuring its legitimacy, but it’s a great way to determine credibility nonetheless. Once you’ve acquired this information, you can then search their work history via their online records.
- Do you have a minimum order quantity (MOQ)? – This is an essential question to determine your compatibility with this manufacturer from the start. If their minimum does not serve your business model and there’s no room for negotiation, don’t waste your time and move on. Keep in mind that minimums will vary significantly depending on product.
- What is your average turnaround time? – Although this will be difficult to answer without producing a prototype first, it’s best for you and the manufacturer to get on the same page so you can start planning for the future. Time is always of the essence when talking business.
Keep in mind that there’s always a possibility you’re contacting a non-native English speaker who’s using online translators to read your emails. With that in mind, keep your messages brief and simple. It is also wise to number each question so they can reply easily with a yes/no or a simple numeral answer. Making their job easier will increase the chances of maintaining a positive relationship with your new manufacturer friend overseas.
After getting thorough responses to these essential questions, it is safe to move on to the more pressing financial issues:
- Do you charge for samples? – Note that this question isn’t phrased, “How much do you charge for samples.” Many manufacturers won’t charge if you’ve proposed a large enough order for them to justify a freebee, or simply come across as a genuine buyer in the midst of needy and overwhelming clients. Always be concise and strategic with your wording to avoid being charged any additional fees. Also, factories will often refund sample costs once your order size hits a certain point.
- What is your standard production pricing? – It is in your best interest to ask about the cost of a specific amount of products to gauge how the manufacturer discounts higher quantities. You can then negotiate pricing and discuss with your team your projected sales and profit margins. This is also a great time to bring up packaging, and whether or not it’s included in the cost.
- What are your terms of payment? – This question will determine how you and your company will budget moving forward. Most manufacturers will require 30% paid upfront and 70% once production is complete. All payments are typically complete before product is shipped. The more production runs you go through with a factory, the better payment terms you’ll get.
Keeping Communication Open and Friendly
Source: Sourcify
I understand you may have some hesitation when starting to source overseas, as you weigh the potential risks in your head. Needless to say, you’re putting a great amount of trust into a source you’ve never met to provide your company with the products you’ve been tirelessly working to develop. However, with the proper research, this could be the most financially sound decision your company will make.
That being said, we cannot stress enough the importance of keeping communications open with your manufacturer. Request notifications as soon as production begins as well as updates throughout the process. If possible, find additional contacts with a similar or higher position at the factory in the event that one contact is unresponsive. Weekly communication is mandatory, but strive for daily conversations if you’re uncertain or curious about any aspect of your order.
Email will likely be used most frequently, but it’s also important to use other methods of communication such as WhatsApp, Skype, or WeChat to maintain a conversation throughout the week. WeChat tends to be the most popular among Chinese manufacturers, as it’s literally their go-to social media platform. WhatsApp has also recently been blocked in China. However, be mindful of the time differences when dealing with manufacturers overseas, as you’ll inevitably have to be patient when awaiting a critical response.
Read more: How to Find Amazon FBA Suppliers — Kian Golzari Exclusive
Now You Know How to Find a Manufacturer, Time to Start Production
The difficulty of how to find a manufacturer to represent your brand can make or break your business. I hear manufacturing horror stories every day from intelligent, young entrepreneurs who’ve become utterly fed up with the process entirely. By providing your company with the information needed to rule out any fraud, “scammy” or unqualified manufacturers, I hope to help the next generation of groundbreaking companies prevail.
There are some entrepreneurs who take the short-term approach and start dropshipping, but this model isn’t sustainable in my experience, and for every dropshipping entrepreneur you hear making it big, there are 10 others who haven’t seen their online stores go anywhere.
Luckily for you, the digital age has provided so many great resources that can assist in this trying process of bringing a product to life. Never be too proud to reach out for assistance when dealing with overseas manufacturing, and keep your relationships strong through consistent, amicable conversation.
It’s now your turn to start building your business. Browse our selection of free business courses where you’ll learn everything from setting up a Shopify store to building an ecommerce brand.
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