by Fredrik Grönkvist
Before you can make a supplier selection you need data. Such data include pricing, tooling costs, MOQ requirements, supplier information, certificates and payment terms.
In this article, we explain how you can develop a system for acquiring this information. The purpose, and preferred outcome, of this process is to gather enough data so that you can make profitability calculations, and select a manufacturer that is actually qualified to make your product – in compliance with both your quality requirements, and with the safety standards and regulations in your market.
The RFQ template is our starting point. The data gathered during the process is only as good as the specifications and information requests listed in the RFQ template. Chinese manufacturers never provide more information than requested, so it’s up to you to do your homework before you even think of contacting suppliers. This is, at least in comparison to the later stages, the easy and fun part. This is what you must include:
A quoted price is useless if you don’t know according to which specifications it’s based on. Price is based on ‘quality’, and quality is in turn based on technical specifications. As such, the very first step of the RFQ process is to list the product specifications that the suppliers shall quote you for. There are two ways to do this, and depend entirely on the type of product you intend to buy:
OEM: If you intend to buy an OEM (custom designed) product, the bulk of the specifications must, for obvious reasons, be provided by the buyer. Depending on the product, such specifications may include the following:
That being said, all manufacturers are limited to a certain degree, both by their own capability (i.e. their own capability to reach a certain dimensional tolerance) and their subcontractors (i.e. their subcontractors capability to provide certain components).
Knowing exactly what these limitations are, before the process begins, is virtually impossible, thereby requiring a certain degree of flexibility when compiling a set of product specifications. What we normally do is to leave a few ‘gaps’ open, for the supplier to specify. That is usually not a problem, as long as these specifications are defined and explicitly mentioned.
ODM: Drafting specifications for ODM (private label) products is different, compared to the OEM process. When buying ODM, you buy a product based on a ‘ready made specification’. Thus, the right approach is to provide a ‘guideline specification’ or ‘reference products’ for the supplier to match with one or more ODM products. That being said, Chinese manufacturers consider ODM products as rough product templates, rather than fixed specifications.
As such, you can’t leave anything open, and therefore identify all specifications that the supplier must confirm. In short, ODM buyers need to prepare the following:
A mistake I often see is that many purchasing managers start the process before they have even decided whether to go for an OEM or ODM product. Don’t do that. You can’t drive this process forward unless you know what you want to get out of it, and it’s not the manufacturers job to decide for you.
Prices are, as said, entirely based on the specifications. Without them, you will first of all have a hard time even getting quotations from serious suppliers. Second, the price data you receive is never more accurate than your product specification.
Ensuring compliance with overseas (e.g. RoHS, REACH or CPSIA) requires both technical expertise and ‘compliant’ components and materials. Both of which cost money, in addition to compliance testing and certification procedures. Clearly, a compliant product is more expensive to produce than a non-compliant product. For example, a RoHS compliant electronic device can cost up to 10% more than a non-compliant device.
Without communicating the safety standards and regulations to which your product shall be compliant, you will not receive accurate prices from your supplier. Yes, that holds true even if the supplier belongs to the minority of Chinese manufacturers that are able to ensure compliance. If you fail to communicate, in writing, said compliance requirements, they will not quote you accurate numbers.
The purpose of the RFQ process is to obtain actionable price and product information – enough to make a decision on which supplier, or suppliers, to move forward with. However, technical specifications and prices are only part of what you need to make an informed decision. You want to know more about the companies that take part in the process, and the order terms they are willing to offer. This is the information we require suppliers to specify, as part of the RFQ process:
– Registered Capital
– Registered Address
– Contact Person
– Technical Files
– Substance Test Reports
– Declaration of Conformity
– Quality Management System Certificates
– Social Compliance
– Audit Reports
– Production Time
– ODM Sample Availability
– OEM Sample Production Time
– Bank Account
– Payment Methods
– L/C Minimum Order Value (e.g. $50,000)
– T/T Payment Plan (e.g. 30% Deposit / 70% Balance)
And before we move on, what exactly is an RFQ template? It can be a Google Doc or an Excel file, and a list of complementary file attachments. All that matters is that it’s structured and easy to understand, from the suppliers point of view.
As I’ve already mentioned, the quality of the data you get from the suppliers is only as good as the information you send to them. That also extends to the physical product later on, as misunderstandings can result in severe quality and compliance issues further down the (production) line.
Next stop is supplier selection. There are no hidden or secret supplier networks. Chinese manufacturers, like any other business, want to be found by potential buyers. And, this is where you find them:
Regardless of where you decide to make your selection, make sure to pick out at least 8 to 12 different suppliers to which you submit the RFQ. There are various reasons for this:
1. Half of the suppliers will either not respond, or be unable to manufacture your product
2. Many suppliers will not be able to ensure compliance with the standards and regulations in your market.
3. Some suppliers will fail to provide acceptable reference samples.
4. You always need at least one backup supplier in case your first choice becomes difficult. Issues often surface just before the Sales Contract is about to be signed, and you need to stand ready to switch supplier when that happens.
5. Finally, getting prices from many suppliers, based on the same product specification, is the only way to determine a market price for a product, especially when buying OEM.
This is the hard part. Sending a long list of technical specifications, design files, information and document requests is asking quite a lot from any company. At the time of writing, sales reps are still human beings. Gathering documents and making price calculations requires a lot of work. They tend to ignore specifications, provide half of what you initially asked for and sometimes they just stop responding all together.
Dealing with a long list of suppliers, in English, on the other side of the world, isn’t really making things easier either. However, without the data, you have nothing to act on. Below follows a list of things that matter when trying to move things forward:
1. Begin with a Skype or Phone call, and follow up by sending your RFQ file right after. Before you hang up, make sure to set a deadline.
2. Keep sending reminders by email or Skype until they have provided a first draft.
3. The first draft will not come out perfectly. There will be gaps and conflicting information. Ask for revisions until everything has been specified and answered in full.
4. Make sure to store all the information in a main document, for easy comparison.
5. Hire a Chinese speaker, but don’t let he or she get free hands to make decisions. You are still supposed to be the expert.
It’s a long and tedious process, that requires a lot of work, hands on with the suppliers. However, the only way to obtain the data you need to make the right supplier selection, is by applying the procedure explained in this process. But, when it’s done, you’ll have something that looks like this:
Fredrik Grönkvist is the co-founder of ScandinAsian Enterprise in Shanghai. Since 2010, he and his team have helped hundreds of companies worldwide, primarily in the EU and US, to develop and manufacture products in China. He is also the main contributor on www.chinaimportal.com, a leading knowledge base for small- to medium-sized enterprises importing from Asia. For further questions, you can contact him on www.chinaimportal.com/contact-us/.