Answer these 11 Questions before you work with a Contract Manufacturer in China

This post is for buyers who are sourcing a contract manufacturer in China for electronics, mechanical products, and other types of hard goods. In order to find a suitable CM who is a good fit and can be relied on, you need answers to these questions before you sign anything and send payments.

But first, let’s understand what a contract manufacturer is in comparison to other types of manufacturers…

Prefer listening to reading?

Listen to the audio for this post here:

What is a contract manufacturer in comparison to other suppliers you may encounter?

When sourcing manufacturers you’re going to see ODMs, OEMs, and CMs (and EMS, too), but what do these acronyms mean and what’s the difference between them?

ODM – This supplier has already designed and developed the product, you put your brand on it, and you sell it as a kind of distributor. You may ask them to make some small changes for your version, such as adding another feature, new casing, changing color, etc. You do not own the product IP, they do because they designed and developed it.
OEM – You approach this supplier with your own product design and they will assist in developing it and then do the manufacturing. OEMs tend to take ownership of the product IP that they work on (especially common in China) and may offer to do product development work for free which can be attractive until buyers realise that they’ve lost IP rights to their own product. They may also lock you into working with them by holding onto your custom tooling and making it difficult for you to move to another factory. This can be prevented by signing an enforceable product development and manufacturing agreement with them that outlines who owns what and the terms of your relationship if they’ll agree to it.
EMS (Electronic Manufacturing Service) – Specific to electronics. Their main focus will be on PCBA, but they may also provide upstream SMT and assembly as well. Buyers should be cautious because an EMS may not be as capable on the assembly side as, say, a CM, as this may not be their strength.
CM (Contract Manufacturer) – The option that provides buyers with the most control and safety. This supplier will usually be comfortable with working to a contract that outlines everything in black and white and does not expect to own the product IP nor prevent you from leaving them. The buyer has control over all aspects of the project and the CM will do whichever work they’re being paid to do, which could be sourcing, product development, testing, and/or manufacturing. The buyer will own the deliverables. (02:10)

Now we understand the differences between the suppliers, let’s move on to the 11 questions buyers need to answer when sourcing a CM…

1. What will your order quantity be? (This influences the type of CM that is suitable)

If you’re developing a new product and your first batch will only be, say, 1,000 pieces with an estimate of increasing to 20,000 if all goes well, you need to select a supplier of the right size. Trying to work with a Tier 1 contract manufacturer who works with Apple might seem attractive, but your order size is too small for them to be interested in and/or give priority to it, nor to put their best staff on the contract. You’d be better served by working with a smaller CM who will find your order important enough to put enough resources into doing a good, fast, and thorough job.
On the other hand, if your orders are large, choosing a small CM could be a mistake because they may not have the capacity to deal with the order quantity and mistakes will be made as they rush and staff struggle to get through the development and transfer to manufacturing, for example. (06:55)

2. Will your order be a high-volume, low product mix, or the opposite?

If you order one product in one color and a relatively high quantity, that will be more interesting for CMs. If you have a larger mix of SKUs, for example, a small, medium, and large version in several colors to be made at the same time, this is a more complex project for CMs which will be less welcome unless quantities are high because they will see it as ending to manufacture several different products at the same time. They will also be wary that the volumes of materials and components they need to buy from their usual sub-suppliers won’t be high and are therefore not interesting to them, either, resulting in more difficulty to do the sourcing and get good pricing.
Sourcing a CM who can handle a product mix is an important consideration when sourcing, but without higher volumes, the more flexible and capable CMs are unlikely to be interested (so maybe start with a simple V1.0 of the product). (09:43)

3. Do you have visibility and transparency over the supply chain?

Many manufacturers of different types take your order and provide a turnkey solution where buyers sit back and wait for the products to be shipped. They do not encourage questions about the supply chain and where different components, etc, are coming from because this gives control to the buyer and could allow them to leave and find a new supplier, especially if they have access to a full bill of materials. This is convenient, but there are many risks. How can you be sure that the product is compliant or uses the exact components that were tested and passed certifications? How can you monitor the supply chain for its environmental impact? How can you visit the suppliers of your product’s key components? You can’t.
This will be more common if they offer to do your sourcing ‘for free.’
So signing an agreement from the start that outlines that you will be given transparency over the supply chain and access to the BOM will protect you and this is possible regardless of your order volume. Asking for these afterwards is less likely to be successful because the supplier will feel that they’re at a disadvantage. (12:24)

4. Will your Intellectual Property be protected, and how?

Any manufacturer you outsource to has the ability to become a competitor, so you need to make sure that that doesn’t/can’t happen by protecting your IP. Working with a CM is a good start because they usually do not have any claims over your product IP. It’s also good to sign an enforceable product development and NNN agreement that clarifies this in black and white, because you don’t want anyone in your supply chain using your internal parts, firmware, etc, without your knowledge in products that rival yours. (19:14)

5. Will they be involved with developing and making your product compliant?

Some buyers do some of the new product introduction/development work, such as creating the firmware and then turn to the manufacturer to handle the mechanical, DfM, and quality side of things, for example. If you entrust this important work to a CM, do they have the capabilities and capacity? Are they a good fit due to their past experience working on similar products?

The same goes for product compliance. Be sure that the CM understands the compliance requirements for your market and has the capabilities to handle it. More sophisticated and costly CMs are more likely to be knowledgeable about your market’s compliance regulations. (20:48)

6. What manufacturing processes does the CM have in-house?

CMs usually won’t manufacture every part of your product themselves, but there are some benefits to choosing one with mature manufacturing processes who can make some things in-house.

There is more control over the part or product’s quality, especially if the CM is sophisticated in their quality systems and capabilities.
If they only make very the same kind of specialized products repetitively and they need unique and custom-made parts for the product/s.

For buyers who want to develop and manufacture new products, don’t be surprised if your CM sources materials and parts for your product from outside. This is normal. (23:51)

7. What is the CM’s QC capability?

Buyers should investigate the following points regarding the CM’s quality management capabilities:

Does the CM have a QC testing lab? How well-equipped is it?
Do they have a solid quality system?
What preventive actions do they take (not only inspections)?

A factory audit will uncover these points and give you the peace of mind that the CM has the ability to manufacture products that reach your quality expectations. (27:45)

8. What kinds of tooling, fixtures, and jigs does the CM have for in-line testing?

Relevant to electronics, in particular, the CM may need function testing stations for the PCBA if the PCBA supplier hasn’t done this. They will also need assembly fixtures, go-no-go gauges, etc. Does the CM have process and quality engineers who are capable of setting this up? A factory audit will confirm this, and many other things about them. (28:35)

9. Who has liability for safety and compliance issues?

If the manufactured product turns out to have manufacturing defects causing safety or compliance issues, your business could be hit with expensive lawsuits. Can you sign a contract with the CM that pins liability to them in cases like this? The standard for Chinese manufacturers is that they will offer a rebate for future orders or rework returned products if issues are found, but this doesn’t cover legal costs and so an agreement with escalation will be wise for buyers.
If the defect comes from the product design, the manufacturer is probably not at fault here unless they also worked on it. (29:37)

10. What payment terms can they accept?

The standard payment term in China is a 30% deposit and then the balance just before or after shipping (the shipping documents such as the bill of lading will then be sent to you after payment is received).

Better terms may be negotiable if a CM sees that you are not a new startup, you have already cemented a place in the market with products, you can get them excited about your project, and/or you have sound financial backing. (31:00)

11. What delivery terms do they provide (incoterms)?

Chinese manufacturers tend to provide the FOB incoterm for sea shipments by default. This is suitable for many buyers because you have more control over the delivery and shipping process and will be able to arrange final inspections before shipping, for example, because you know that your freight forwarder hasn’t received the goods yet.

For trusted CMs who have team members who are capable of arranging logistics effectively, they can ship to you using DDU or DDP terms (door-to-door to your warehouse from China), and buyers with less experience in arranging to ship from China or who just value the convenience may prefer this even though there is control conceded to the CM.

CIF is also commonly used by suppliers because the shipping they arrange is cheaper for them, but this is not a good idea for buyers who are unsure of their local fees. It can result in some pretty heavy unexpected costs for you once the goods arrive. (32:01)

Don't miss a post