Getting to Know the Manufacturing Industry
Reference: This article is from Foundr – by Nathan Resnick from Sourcify – built with resources to help founders and entrepreneurs improve their business.
It’s crucial to understand the various types of manufacturing services and middlemen out there in order to find a method 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. We will cover overseas manufacturers only.
Below covers three categories of manufacturing services: wholesalers, trading companies, and actual factories. While working directly with factories will likely be the most practical option for most startups, take a quick look at the alternatives:
Wholesalers
By purchasing products in mass quantity and often storing them in warehouses, wholesalers can be very appealing to the untrained eye. While it seems convenient for 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 could save 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.
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 attempting to find overseas sourcing 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.
