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How do I manufacture my product and how much will it cost?

How do I manufacture my product and how much will it cost?

By Sayee Ganjekar

First things first, always make sure you have your product idea well documented and explained. It is important for you to define your expectations and where you're trying to go with it.

Next step is to make sure your idea is protected and then to shortlist manufacturers who can help you prototype it. This is important because you need to see what your product would look like in real before getting a whole batch manufactured. Based on your prototype and the costs involved, we recommend defining a business plan and how you intend on marketing the product before going into manufacturing.

Finding the right manufacturing facility to produce your products is a critical component to your success.

  • Manufacturing is a complex process that you'll need to hire a factory to do.
  • By registering a patent, copyrighting your work, or trademarking your name and logo, you can protect your intellectual property.
  • Be sure to understand your potential manufacturing partner's proficiency by scrutinizing their experience, technical capabilities and reputation.

What should you consider when choosing a manufacturer?

When selecting a manufacturing partner as a small business, certainly you want to get your product on the market as soon as is feasible. Yet, it's important to make sure the company you work with reflects your values and goals. The following are some of the potential risks you could face when entering into a manufacturing agreement:

Poor labor practices

If you or your company supports that it cares about its employees, you should make sure this value extends to your manufacturing partners. Failing to do so will, if nothing else, pose a PR risk. When choosing a manufacturing partner abroad, find out how well the workers are compensated, how safe their working conditions are, and if they're compliant with existing regulations.

Protect against fraud

Some foreign manufacturers are in countries where corruption is rampant, so it's imperative to do your homework. Ask to look at a potential partner's finances, and request references from their other partners. By seeking out only experienced manufacturing companies and regularly conducting audits, you can vet your partner to see whether they are acting in good faith.

IP theft

Your company's intellectual property (IP) is important. It's what makes your product unique and sets you apart from your competitors. Unfortunately, there are countless stories of foreign companies improperly using a company's IP. To protect against this, you can do things like using multiple suppliers to source your materials, only trust companies you already have a relationship with, and ensure your legal protections like contracts, patents and trademarks are ironclad.

Demonstration of knowledge and experience.

You want a factory that answers all your questions and guides you through the process. If you're making a food product, can the factory recommend a good food chemist? For clothing, can it offer advice on the sourcing of materials?

Technical capabilities.

The factory should already be producing goods or products that are very similar to your own. This ensures that they understand your market and what it takes to succeed.

Reputation.

Does the factory do work for major brands or retailers? Does it have any sort of regulatory fines or infractions? If it's overseas, what are its labor policies, and how high is the turnover rate? It's paramount to find a factory you can trust.

Questions to ask a potential partner

Because so much can go wrong, the vetting process is crucial when you're choosing a factory. Here are some important questions to ask:

What kind of experience do you have in this industry?

Who are the clients you're currently working for?

What is the turnaround time to produce my product?

What are your minimum order requirements?

Can you provide recent proof of inspections or third-party audits?

Do you subcontract work to other factories, or is all the work done in-house?

What are my payment options? Is a deposit required?

Do you make materials in-house or outsource?

Can you handle the sourcing of materials, or do I need to provide my own?

When looking for suppliers if you plan to manufacture or wholesale, you’ll need to decide whether you want to source domestically or from overseas. Overseas can refer to any location abroad.

Domestic sourcing

Advantages

  • Higher manufacturing quality and labor standards.
  • Easier communication with no language barrier.
  • Marketing appeal of being made in your country eg. “Made in Germany”.
  • Easier to verify reputable manufacturers.
  • Faster shipping time.
  • High intellectual property right protection.
  • Greater payment security and recourse.

Disadvantages

  • Higher manufacturing costs.
  • Less product choice (there are many items that just aren’t made in domestically anymore)

Overseas sourcing

Advantages

  • Lower manufacturing costs.
  • High number of manufacturers to choose from.
  • One-stop services like Alibaba have made it easy to navigate suppliers.

Disadvantages

  • Lower perceived quality from customers.
  • (Usually) lower manufacturing and labor standards.
  • Little intellectual property protection in some countries.
  • Language, communication and time zone barriers can be difficult to navigate.
  • Difficult/costly to verify manufacturer and visit on-site.
  • Longer shipping time.
  • Cultural differences in business practices.
  • Product importation and customs clearance.
  • Less payment security and recourse.

Referrals

Some of the best leads can come from referrals. Don’t be afraid to ask connections in your professional networks if they have any recommendations, or if they know someone who might. Look for individuals who’ve found success in an area you’d like to pursue and see if they’re willing to share their contacts.

Social networks have made it much easier to get the word out so make sure to use these channels. Join Facebook groups and other online communities of ecommerce business owners and see if anyone there has a glowing review.

As you do start to uncover suppliers, even if they aren't the right fit for you, be sure to ask them if they can point you in the right direction. Being in the industry means they’ll likely have great contacts and would be happy to refer you to an option that might be a better fit.

Requesting a quote

Once you've found a suitable supplier, it’s time to approach them. The biggest question you’re going to have is “how much?” but before you hastily send the supplier your request for quotation (many times referred to as an RFQ), plan what you want to say and the questions you need to ask.

Planning your initial inquiry can increase your chances of receiving a response and the correct information. Here are a few important questions to consider for your email:

What is minimum order quantity?

Also referred to as a MOQ, you want to make sure the minimum order quantity is manageable for you, and that you can afford them. This minimum order quantity can vary wildly depending on the product and the supplier, so it's important to ask upfront. If you’re looking for a supplier for the first time, you're going to quickly learn about minimum order quantities (MOQs). It’s not uncommon for a manufacturer to require a commitment to purchase hundreds or even thousands of units for your first order depending on the product and manufacturer.

MOQs make it difficult when you have limited funds or want to start small and test the market before making larger purchases. The good thing is that MOQs are almost always negotiable.

Before you negotiate, understand why the supplier has imposed a minimum. Is it because there’s a lot of work upfront? Or maybe it's because they prefer to work with larger buyers. Understanding the reasons behind the minimum will help you better understand their position and allow you to negotiate and propose to best counter offer.

After you have a better understanding of your supplier’s position, you can offer a lower order quantity. Compromises can include giving the supplier a deposit for a larger order, but just producing small amounts at a time or paying a higher price per unit.

What is sample pricing?

You'll likely want samples to inspect before making a full order. Sample pricing ranges, depending on the product and supplier. Some suppliers that receive many requests may charge the full retail pricing, others will offer you samples at a discounted rate, and some may even send you samples for free.

What is production pricing?

One of the most important questions is how much your products will cost. You’ll probably want to ask for pricing for several quantities to get a sense of if and how they do discounted pricing for bulk orders.

What is turnaround time?

Knowing how long it will take to produce your order is an important consideration. Depending your exact business, time can be critical.

What are payment terms?

Many manufacturers will require new businesses to pay for the full order upfront. This is important to know since inventory is a major cost for hardware startups. You may want to also ask if they provide payment terms on future orders.

Manufacturers gets bombarded with email quote requests all the time from buyers that are just ‘kicking the tires’ so it's not unusual for many suppliers not to reply to every request. A lack of supplier responsiveness is a common complaint from new hardware entrepreneurs.

So how to avoid being ignored? There are a few things that you should avoid when you reach out to manufacturers for the first time:

Long emails: Your first email to a manufacturer should be clear and concise. Avoid telling too much about your story and background. The first email should purely assess potential fit at a high level. Focus on what suppliers care about the most, like the details of what you’re trying to source.

Asking for too much: Requests aren't always easy for the supplier to produce. It's important to ask for a few prices for multiple quantities, but avoid asking for too much or too many quotes. Stick to asking for what you absolutely need to assess fit between you and the supplier.

Asking for too less : If you ask for a quote well below the supplier’s minimum order you risk being met with silence. If you’re unsure whether your request is too small, consider giving them a quick call or send a one-question email prior to ask what their minimum order is.

Finally, if you're contacting a manufacturers from overseas, keep in mind that in many cases, they may be using programs to translate your email as well as their reply. Keeping your emails short, concise, well-formatted and error-free will not only help the manufacturer but ultimately provide you with better replies and answers.

Also, when asking your questions, it's best to number them. This way, they can easily reply to each number, keeping the questions and communication clean and organised.

Sourcing manufacturers is a unique process, and for many, a new experience. Trying to locate manufacturers that are a good fit is a critical decision for your new business and aren't always easy to find.

It's easy to get frustrated when you hit dead ends or brick walls but in most cases, it just requires a little more patience and perseverance to find the perfect partner for your new product idea.

What your product will cost?

As a guide, This is just an estimate only from last 25 years of experience.

In short if you have done production quality prototypes

Prototypes of production grade = 10x -20x of product cost

Or

Product cost = 1.5 x Total Direct Cost x "What you know you don't know + What you don't know you don't know" 30% safety margin (unknown knowns, unknown unknowns)

Total direct cost= BOM + Direct Labor + Factory costs

Direct Labor = Typically 20% of BOM

Factory cost = Typically 30% of BOM

Wholesale price = min 3x product cost

High risk products (Medical Devices) can be up to 10x Product Cost.

So getting your BOM until your product reaches customers is very important.