You've created a prototype, collected feedback, raised funding, and now you're ready to bring your product to market. The next step: finding the right factory to make your dream a reality.
A manufacturing partner is a business that transforms raw materials into finished products. Manufacturers sell goods to distributors, retailers, consumers, wholesalers, or other manufacturers seeking to create more complex products.
In your search for a manufacturing partner, you will have many questions to answer. This guide discusses some of the key considerations when vetting factories and suggests some places to start your hunt.
Learn the different types of manufacturing partners
Before you get started, it's important to understand that a few different types of suppliers can help bring your product to market. These include the following:
- Manufacturers: This refers to the actual factory that produces your product.
- Wholesalers or distributors: The middlemen who buy premade products in bulk and add their margin to the total cost.
- Trading companies: These intermediaries have relationships with factories that produce a certain product category. They make money by adding a margin to the actual product costs.
- Dropshippers: These companies supply products and fulfill orders of already-existing brands.
- Sourcing agents: These middlemen may work with a wholesaler or trading company and perform a very similar role.
Working with each of these partners has benefits and disadvantages. For example, a trading company or sourcing agent often deals in smaller quantities and with a larger variety of products, which can be great for small businesses; however, they can be more expensive than working with factories directly.
Choose between a domestic or overseas factory
Next, you need to decide whether you want your product manufactured in the United States or overseas. While domestic factories tend to offer high-quality products, adhere to U.S. labor laws, and may be relatively easy to communicate with, they may also charge higher rates and offer fewer options. Further, not only are there fewer U.S. factories, but those that exist may be equipped to make a more limited number of products.
Factories overseas may have lower manufacturing costs and offer many more options to choose from. They may take effort to vet, and you must be careful with your intellectual property if you're sending your prototype overseas.
If cost is your biggest concern, there's a good chance you will need to outsource your manufacturing to an overseas partner. There are a few directories and strategies that can help you find the right factory.
[Read more: 3 Companies Share Their 'Made in the USA' Success Secrets]
You can also research domestic factories (as well as those in Mexico and Canada) using their North American Industry Classification System (NAICS) code.
Do your research
Whether you work with a domestic or international factory, there are a number of ways to find the best match for your needs. Start with online manufacturing directories such as ThomasNet, Maker's Row, MFG, Kompass, and Oberlo to help you filter and find available manufacturers. Once you've created a shortlist of possible options, solicit referrals from others in your business vertical.
"Getting referrals from fellow business owners via social media and forums can be a great starting point and a way to get feedback on suppliers you've been evaluating," Liz Bertorelli, an entrepreneur in residence with Shopify told Martha Stewart.
You can also research domestic factories (as well as those in Mexico and Canada) using their North American Industry Classification System (NAICS) code. Ask to see a business license from overseas factories because reputable manufacturing companies should be able to show proof of legal incorporation. Research overseas factories on Google, social media, and other forums to make sure they're reputable.
Ask questions
To do your due diligence, create questions to ask the factories that you've added to your list. A few questions to ask before signing a contract could include the following:
- What is your minimum order quantity?
- What is your sample pricing?
- What is your production pricing?
- What is your turnaround time?
- What are your payment terms?
- Do you subcontract work to other factories, or is all production done in-house?
These questions should give you a good start to understanding whether or not a particular factory is well-equipped to handle your request.
How to calculate your gross margins
One of the biggest factors in selecting the right manufacturing partner is understanding how the agreement impacts your bottom line.
The gross margin is the amount of money you have left after paying the direct costs of producing the goods sold. Production costs vary from manufacturer to manufacturer. It's important to understand exactly what the associated costs will be to estimate your gross margin. Without a healthy gross margin, your business will not grow.
With each partner, assess the trade-off between cost and quality. Some manufacturers may quote you a very low cost of goods sold. However, the resulting product quality may not meet your customer's standards. It could be worth paying a higher unit price if you believe the quality is markedly higher.
Ask for product samples to get a sense of the manufacturer's quality standards. Control samples help you not only to make sure that your partner is equipped to meet your needs but also to hold them accountable.
"You can reference the control sample to indicate the products you received are not what was previously agreed upon," wrote Shopify.
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