By Sunny Wong
How important is product quality really?
In a survey of almost 5,000 importers on our website since October 2016, 57 percent said managing product quality is their greatest manufacturing challenge.
Of course, there’s no disputing the massive role that product quality plays in an importer’s success. Quality issues undoubtedly can lead to customer complaints, product returns, damaged brand reputations and profit loss. But are product quality issues the only reason your importing business might fail?
Imagine if your supplier shuts down due to noncompliance with government laws or bankruptcy. They won’t be able to manufacture your product at all, let alone to your quality standards. Or imagine your shipment is so delayed that your customer cancels an order because it won’t arrive on time. It won’t matter how high the quality of your product is if you don’t have any customers.
Avoiding issues with your supplier often starts at the very beginning of the sourcing process: choosing the right supplier to work with. Importers should always prioritize production capabilities and quality when manufacturing abroad. But focusing solely on quality might cause you to overlook some other important considerations for choosing a supplier to work with.
Let’s take a look at four other factors to consider when sourcing your next product in Asia.
1. What’s the cost to manufacture my product?
Would your manufacturing cost expectations vary between a promotional drawstring bag and a name brand leather bag? Almost definitely.
A product’s price point is often closely related to its quality. And customers and brands tend to expect this. But some importers will be more sensitive to price than to quality for certain products, like promotional products or single-use products used on airlines. Like them, you might value price more than quality capabilities when choosing a supplier.
Wages are one of the main determinants of manufacturing costs. And rising labor cost remains a major factor driving manufacturing from more developed to less developed countries in Asia. Low wages continue to be many developing countries’ greatest advantage for attracting industry.
Labor costs have started diverging among Asian countries over the past several decades, as some have developed faster than others. Labor costs can also change between regions within a country, often leading to relocating manufacturing facilities within borders.
Rapid increases in minimum wages can make it difficult for factories to adjust operations to offset costs and retain profit margins in the short term. All of these countries had lower minimum wages only five years ago, and even lower wages 10 years ago. This has caused some factories to raise prices , leading many importers to seek lower-cost suppliers elsewhere.
For instance, Malaysia is considering a 50-percent hike in their minimum wage in 2018 after last adjusting the minimum wage by 10 percent in 2016. This increase would make Malaysia’s minimum wage the second highest in ASEAN, behind only Singapore. The Federation of Malaysian Manufacturers (FMM) says this increase is too fast and too high for stable operations and could force companies to restructure and raise prices.
Other costs that affect the price your supplier gives you
Most importers are careful to consider labor costs. But many don’t think about the other factors that can affect a supplier’s profit margins, and thus, the price that supplier offers. These costs may include:
- Technology and equipment: Technology can help factories improve production capacity, efficiency and quality, as well as process variability. But factories outfitted with automation and other relatively new technologies tend to be more expensive to work with than those that aren’t.
- Order volume: Suppliers can often get a better price for raw materials and packaging from sub-suppliers by leveraging economies of scaleand buying these in bulk.
- Types of parts and materials used in production: The cost of a product can vary greatly by the types of materials and components used in manufacturing. While changes in inputs often affect product quality, they don’t always.
- Transportation of production inputs: Assuming your supplier is buying parts and materials from sub-suppliers, the cost to ship these inputs from the source to the manufacturing facility can impact the per unit price you pay for the finished goods.
Raw material pricing can fluctuate often. And some factory managers prefer to buy a surplus of raw material inventory at the lowest pricing level. You might be able to negotiate a better price from your supplier by giving an honest forecast of future order volumes when placing an order, so they can consolidate raw material orders.
2. What’s a reasonable lead time for my product?
Lead times are one of the biggest determinants of an importer’s success. Long lead times can result in missed shipping deadlines, backorders and even lost distributors. And it’s becoming increasingly important for manufacturers to be able to adjust to shifts in customer demands as quickly as possible.
Set clear expectations about your shipping date upfront when placing an order. This helps hold your supplier accountable to keeping your shipment on schedule. Let’s looks at some of the factors you can consider when choosing a supplier to help you predict lead times and potential delays.
Does geography matter for lead times?
Geography can play a major role in lead times for your product. Most products have long supply chains, often snaking through several countries and regions as products follow a few basic steps on their way to end consumers’ hands:
- Raw materials and components procurement
- Mass production
- Distribution to target market
Many importers only concern themselves with steps two and three because those are where they get involved with production and sales. But your supplier needs the input materials and components for a product before they can manufacture it. If raw materials need to travel a long distance from their source to the factory, lead time might be longer (and price higher) to reflect that.
You might be very conscious of which country to source from. But have you considered which city or region to manufacture in within that country?
For instance, there may not be much difference in your mind between a small town in Jiangsu Province and one in Hubei Province of China. Maybe you’ve never visited either, and they’re just names on a map to you.
If lead times are important to you, consider sourcing from a factory as close to major ports for trade as possible. Infrastructure can vary drastically, delaying arrivals to ports. It’s one reason why China’s Guangdong and Zhejiang provinces are such popular manufacturing hubs—factories there aren’t far from major port cities like Shenzhen, Hong Kong and Shanghai.
How poor logistics and infrastructure can cause delays
When importers consider logistics and shipping deadlines, many think choosing the proper freight forwarder or logistics company is the only hurdle to jump. But no matter how efficient your logistics company is, they can’t pave roads where roads don’t exist. And they can’t restore power where there’s an outage.
Like costs, infrastructure also varies among Asian sourcing destinations. Vietnam and India are often heralded as lower-cost alternatives to sourcing from China. But they also consistently perform worse than China on logistics and infrastructure metrics from the World Bank, ranked on a scale from one (worst) to five (best).
Electrical outages can also cause temporary factory closures and otherwise lead to delays. Power outages are often more common in southern Asia, where infrastructure is less developed. And outages there are often more likely to occur during warmer months when there’s a higher demand for electricity.
Firms in Pakistan and Bangladesh experience the highest average number of power outages in the world with around 75 and 64 per month, respectively. Even India, a much more developed country, faces almost 14 outages a month.
How industry size and supply chain connectedness affect lead times
Manufacturers operating within a larger industry can often more easily and cheaply find components, sub-suppliers and skilled workers. They may also benefit from a variety of preferential government policies intended to foster growth. In turn, they’re less vulnerable to economic slowdowns or fluctuations, which can lead to more stability for your business.
Cluster manufacturing applies these benefits of large industry to smaller, concentrated and specialized manufacturing regions, or “industrial clusters”. An industrial cluster is a region that focuses on manufacturing a specific product type. In a cluster, most suppliers and their suppliers for materials, components and packaging for that product type are all concentrated in one area.
Concentrated manufacturing in clusters can offer importers greater supply chain transparency, clearer lines of communication and reduced transportation costs.
A well-developed and connected manufacturing industry is one way China has maintained competitiveness and risen up the industrial value chain. Industrial clusters exist throughout China for everything ranging from socks to electric wires and cables. This has helped limit costs for importers, despite rising wages and raw material costs in recent years.
3. How important is social and environmental compliance to my customers?
You’ll typically need to audit your supplier’s facility to determine their social or environmental compliance. And compliance often comes at an added cost smaller importers may not be able to afford—both from the audit to verify the supplier and the higher prices compliant factories often charge.
But the retail landscape is changing, as compliance becomes an ever stronger part of more and more consumers’ purchasing decisions. And if it’s important to your customers, then it should be important to you too in choosing a manufacturing partner.
In a 2015 Nielsen global survey of 30,000 consumers in 60 countries, brand trust topped the list of purchasing drivers for more than half (62 percent) of respondents. The survey also found that 66 percent of respondents were willing to pay more for products and services from companies who are committed to positive social and environmental practices, a 16 percent increase from 2013.
According to a Cone Communications study of millennials aged 18 to 34:
- 83 percent are likely to trust a company more if that company is socially and/or environmentally responsible
- 69 percent consider a company’s social and environmental commitment when deciding where to shop
- 45 percent are likely to refuse a company’s products or services if a company is not socially responsible
And the importance of compliance standards doesn’t stop with consumer expectations. Many retailers, including Walmart and Target, have their own set of compliance and sourcing standards they require their suppliers to meet. Many of these retailers require regular annual audits using their framework to ensure compliance (related: How Importers Meet Walmart Ethical Sourcing Standards).
What are the risks of working with noncompliant factories in Asia?
Not only is compliance important to sales, but compliance issues can also affect production timelines and reliability. Disasters like factory fires, labor strikes and government-imposed shutdowns can all stall production and cause shipping delays. You might have to find another supplier to work with altogether if a factory closes permanently.
Less developed countries, like Bangladesh, Pakistan and Myanmar, are especially prone to disasters like factory fires, as a result of quick and shoddy factory infrastructure development. And workers in these countries are often oppressed and subject to illegal overtime hours and underpaid work. They lack enforced protective regulations and have yet to effectively mobilize to improve working conditions.
But that doesn’t mean more developed countries, like China, don’t pose their own risks. There are often many growing pains associated with moving up the value chain and improving compliance that can affect production. As standard of living expectations have risen in China in recent years, so too has the frequency of disruptive labor strikes, from under 200 strikes reported in 2011 to 1,256 in 2017.
Developing countries must also improve their environmental compliance to be viewed as a peer among advanced manufacturing countries. In 2017, the Chinese government launched an unprecedented environmental crackdown on factories with high polluting emissions.
The Chinese government punished over 80,000 factories with fines over $43 million in total in 2017 alone. This has resulted in factory shutdowns, shipment delays and increased costs for importers. These pressures will likely only increase in years to come. Conducting a China environmental protection audit can help you identify your supply chain’s risk.
4. Do I need product design and engineering support?
Many companies have traditionally designed and engineered their own products in their home country, rather than abroad. Since this process is linked to a company’s intellectual property and trade secrets, it makes sense to hold that information close. Research and development (R&D) is also closely connected to marketing, cost management and other business strategies.
But importers are facing a growing need to manufacture goods at a faster pace and shorten product development cycles. This has led many to work with overseas OEMs to develop their products. Your supplier might be able to provide support and knowledge ranging from:
- Price and availability of essential raw materials and components
- Simple design support for adding a new feature to an existing product
- Prototyping and support for bringing a new product to market
- Product sample development
Increasing labor costs have prompted government support through the Made in China 2025 initiative to help Chinese factories transition from labor-intensive industries to technology-intensive industries. As factories advance, shifting some R&D tasks to China might be more feasible than for other Asian countries that have yet to advance.
The amount of available skilled labor in a country can have a major impact on manufacturers’ ability to provide engineering support. For example, 78 percent of Vietnam’s workforce has no academic qualification and limited formal education, leaving highly-skilled manufacturing or R&D largely out of reach. Meanwhile, Apple CEO Tim Cook recently said China has more tooling engineers than even the U.S.
Request golden samples to verify production capabilities
Some importers request a product sample from multiple prospective suppliers before choosing which supplier to work with. While this is arguably more important for custom-designed products, all importers can use the sample development phase to verify a supplier’s capabilities.
If you don’t establish a golden sample before choosing a supplier, be sure to at least do so before production. Then either review the sample yourself or hire a local third-party to review the sample for you and ensure it meets your requirements. This sets production off on the right track by establishing quality expectations and product requirements before any mistakes can be made (related: How Experienced Importers Limit Product Defects in 3 Stages [eBook]).
Product quality and production capabilities are definitely key considerations when choosing a new supplier. Intangible factors like factory relationships and communication are also worth weighing in your decision (related: 5 Qualities of a Good Supplier). Every importer is different. So some factors might be more or less important to your business than others.
Sometimes, once importers find one supplier they’re happy working with, they consider their sourcing work done. But it may be a good idea to find at least two or three suppliers who can all similarly meet your needs. While you may get a good price by placing a whole order with one supplier, you also leave yourself vulnerable to any of the fluctuations that supplier might experience.
Manufacturing is a volatile industry. Taking note of the above considerations and hedging your risk by finding multiple of qualified suppliers will help your business prepare for any contingencies, not just quality issues.
Sunny Wong is a Client Manager at InTouch Manufacturing Services, a QC firm that performs product inspections and factory audits in Asia for clients in the US, EU and Australia.