Renaud has 9 cost-cutting options for you here regardless of where you’re manufacturing. Some, like using competition among suppliers to drive them to offer better pricing, are relatively low-hanging fruits, whereas others like moving production to a lower-cost country are much larger projects.
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1. Avoid big problems on the manufacturing & transportation side.
Use risk-based thinking to avoid the largest and most expensive problems on the manufacturing side. Some examples:
- A batch of products with a quality defect can’t be sold as is. So the cost of the batch which could be hundreds of thousands of dollars, plus the cost for rework or scrap, expedited air freight, penalties from your customers, and damaged reputation and lost business will very quickly add up.
- Avoiding quality issues with finished products is key, so working with good manufacturers is one of your best bets for avoiding them.
(Click here to listen to our 👉 DIY Sourcing from China Series as this will help you find a good one).
- Also, be sure to bring mature product designs that have gone through a thorough new product introduction process to production in order to have the lowest risks of quality issues occurring.
- You may also consider how the packaging affects the products during transit. If insufficient protection is given by, say, cartons, it could lead to a shipment of perfectly good products needing to be scrapped after manufacturing, shipping, etc, have already been paid! (03:29)
2. Avoid big problems on the distribution side.
There are two key issues to look out for here:
- Avoid being forced to recall non-compliant products that fall foul of your market’s rules and regulations. This is incredibly costly and damaging for a business and you risk being punished by regulatory bodies or lawsuits if you end up importing ‘dangerous products’ that end up being sold to customers.
- Avoid returns if you offer a warranty or accept returns (or sell on a platform like Amazon that accepts returns). This will be costly and lead to bad reviews and even being punished by platforms like Amazon which has little patience for products that aren’t reliable and upset customers. Dealing with product returns is also expensive as they need to be triaged and then re-tested, reworked, scrapped, etc, which means more time and labor in the factory to do so, as well as the cost of shipping them back. (08:18)
3. Re-engineer your products.
Re-engineering products following design for manufacturing and design for assembly principles is often the #1 way to cut costs (in particular electro-mechanical products). For example, when devising version 2.0 of your product you may focus on using standard parts rather than custom ones in it as they are more readily available, lower cost, and are likely to have far fewer issues. You may also use fewer parts in total which would also reduce your costs. You may even choose to simplify the V2.0 by removing certain features that aren’t valued by customers while still selling it at a similar price point.
Re-engineering the assembly process to be more streamlined (like a simple kitting of parts) will also save money in the factory as products can be made faster and with fewer mistakes, saving on costs and improving reliability.
Re-engineering the product should be considered when the company has enough cash flow and sales (from its prior version perhaps) to justify paying product engineers to start working on DFM and DFA.
Learn about a good example of successful design for assembly is IBM’s Pro Printer from the 80s. (14:04)
4. Place larger orders with fewer key suppliers to benefit from lower pricing.
Use strategic sourcing to work with fewer key suppliers and consolidate them for the things you purchase a lot of (this is IKEA’s model), as buying more from fewer suppliers enables you to get lower pricing due to the scale of orders. This has limits. At one point you will reach a price point that suppliers can’t go below. (21:42)
5. Use competition among your suppliers to drive down prices.
This is an easier approach than method 4. It’s easy enough to get an idea of the market price for your required materials and components online by researching them on platforms like Global Sources or Alibaba. When you know the range of costs, it’s possible to negotiate a fairer/lower price from your different suppliers, especially if you’re able to use cheaper competitors as leverage.
This also only works up to a point. There will eventually be a cost that no one can go below, and choosing the cheapest all of the time is also a double-edged sword. If s supplier offers the lowest cost, how might they make their profits? Can you guarantee they won’t reduce quality or cut corners in order to boost their margin?
Also, if you use a sourcing agent who gets paid a percentage of what you pay your suppliers for orders they have no incentive to follow this approach as they would lose money, so the convenience of using them to assist you with sourcing may come with a larger price tag. (23:17)
6. Avoid buying via a trading company if they don’t add value that warrants the extra cost (in most cases).
Trading companies don’t always benefit importers, especially if they are not being honest about who they are. This leads to you having little control over your supply chain, which has the knock-on effect of higher risks of poor quality and compliance problems.
In some cases they may be able to offer financing and other benefits, so that could be beneficial. But in general, they are middlemen who increase your costs over ‘buying direct’ from factories and you need to consider if paying them an extra percentage long term on top of your true cost from the manufacturer is serving you financially over, say, hiring your own in-house purchaser. (26:08)
7. Relocate manufacturing.
Importers are looking for China alternatives more regularly these days due to the rising wages in the manufacturing industry there, political reasons, and tariffs (especially Trump’s tariffs for US importers which can add a lot, maybe even 25%, to China-made products) which could make Chinese products more expensive than those made in other countries such as Vietnam or India, for example, these days. However, companies who just want to source attractive products to sell and distribute (such as white labelling) may find it difficult to find an alternative to China, as countries with a wealth of manufacturers who already have products and supply chains mature enough to compete with China are very limited. (29:49)
8. Internalize manufacturing (DIY).
If you have the capital to start doing your own manufacturing, in theory, you could do it in almost any country and make savings over doing it in China if the manufacturing costs for your product are actually higher there as well as avoiding tariffs, being closer to your market, etc. You can also set up your factory using modern and efficient processes to reduce waste, lead times, and costs, which it may be tough to get your current manufacturer to do.
However, if you have been used to working with contract manufacturers there is a steep learning curve because you will need a lot of experienced process and manufacturing engineering assistance to set up the manufacturing facility (because your current manufacturer won’t help, of course) as you’re on your own and maybe don’t have the experience to do so having been relying on other manufacturers. (31:51)
9. Spend money more wisely on inspections, testing, etc.
Product inspections and testing, such as reliability testing are recurring costs that can’t really be avoided. Importers looking to trim their costs may look into their inspection and testing schedules to find areas where they can reduce costs, often creating a reasonable testing plan, for example, that walks the line between enough testing and reasonable risks.
Great suppliers with proven performance can be allowed to self-inspect if they’re trained correctly to do so and this would reduce the need to use third-party inspection forms as regularly.
Checking production early, maybe with a first article inspection, could find issues that can then be corrected before all/most of the production run is completed, reducing the risk of scrap, rework, and delays and thereby lowering your costs if the manufacturer carries on in the right way.
Skip lot inspections can be used to focus only on larger orders, or orders from medium to high-risk suppliers. The point is to be selective about which orders must be inspected and which it may be alright to ease off on inspections of in order to reduce overall costs without increasing risks to too high a level.
For lab testing, consider batch testing a number of products for the same potentially hazardous material, for example, rather than testing them one by one. This should reduce the number of tests you pay for while getting you the results you need. Reducing the number of colors your product is available in may be a strategy you could follow because each different model requires independent testing, therefore fewer colors equals fewer tests required and your market may be fine with only a few color options.
Chemical analysis testing is quite costly, so instead you may task inspectors to check that metals are as expected by using a magnet or by burning a product’s plastic enclosure to see if and how it burns to confirm the plastic type…these would be low-cost workarounds that may be enough for some importers. (36:21)
P.S. Related content you may also like to read and listen to…
- Travel To China In 2022 – Don’t Test Positive!
- Get help to find great suppliers in China: DIY Sourcing from China Podcast Series
- Explore a comprehensive new product introduction process
- Why You Need Mature Product Designs BEFORE Working With A Chinese Manufacturer!
- 9 Types of Packaging (Benefits, Costs, Sustainability, and more) – Guide for Importers
- 5 Main Reasons For A High Product Return Rate
- The Design for X Approach: 12 Common Examples
- Introduction to Design For Assembly (DFA)
- Is My Supplier A Trading Company Pretending To Be A Manufacturer?
- Chinese trading companies and their dirty little secrets
- Globalism 2.0: North American Importers To Move Supply Chains Out Of China Soon? [Podcast]
- How to optimize inspections & drive suppliers to improve quality to reduce costs & risks?
- Sofeast is tracking the costs of China raw materials to help give you transparency and control when dealing with your suppliers
- Get help with your product inspections and select only those that you need