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 where 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 wide variety of products, which can be great for small businesses; however, they can be more expensive than if you work with factories directly.
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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 customers' standards.
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 of those manufacturers, they may have a limited range of products they can make.
Factories overseas may have lower manufacturing costs and offer 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 likely outsource your manufacturing to an overseas partner. There are a few directories and strategies that can help you find the right factory.
[Read more: American Made? How to Market Your Made in the USA Products]
Where to find and vet factories
Whether you work with a domestic or international factory, there are a number of ways to find the best partner for your needs. Start with online manufacturing directories such as OpenMill, 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, as reputable manufacturing companies should be able to provide 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:
- 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 in understanding whether a particular factory is well equipped to handle your request.
How to calculate your gross margins
One of the most important factors in selecting the right manufacturing partner is understanding how the agreement affects 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 customers' standards. It could be worth paying a higher unit price if you believe the quality is markedly higher.
Ask for product samples to assess 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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Understanding MOQs, lead times, and what to include in your contract
Production lead time and minimum order quantity (MOQ) are two very important tenets of your manufacturing contract.
Production lead time refers to the timeline from order confirmation until the product is ready to ship. A 15- to 30-day lead time is standard and reflects standard products with established production processes, goods with a moderate amount of customization, and packing with the capacity for some rush orders, according to Alibaba’s website guidance. If your product is more technical or requires high levels of customization, expect a longer lead time.
A minimum order quantity (MOQ) refers to the minimum quantity a factory requires for a single production run. An MOQ of 100 pieces means that you must order at least 100 pieces from the factory. An MOQ of 100-500 indicates that the factory is flexible; it will accept small batches but can scale with your business.
Of course, lead times and MOQs vary from factory to factory and also impact your costs. For instance, a lead time of seven to 15 days and an MOQ of 1-100 pieces suggests the per-unit cost will be high: The implication is that there is a small run that will need to be turned around quickly. Factories run best at scale, so this level of responsiveness is more expensive. This type of pricing is best suited for creating a prototype.
Red flags to watch for when vetting an overseas supplier
Sourcing from an overseas partner can feel daunting, especially when you can’t visit the factory in person. As you do your research, watch for a few red flags that can indicate this partner isn’t the best option.
The first warning sign is inconsistent or confusing communication. “If a supplier takes forever to reply, doesn’t answer your questions directly, or gives you vague estimates like ‘around two weeks’ instead of a firm timeline, take that as a giant red flag,” wrote ITI Manufacturing. Communication is paramount, especially when moving goods across borders. Professional manufacturers should tell you concrete timelines when you can expect your goods, as well as answer your questions promptly.
Pricing is also foundational to a great working relationship. If a manufacturer quotes you well below what others have estimated, that’s a sign they’re cutting corners by using low-quality materials, that they may have unsafe work conditions, or you may end up paying more in hidden fees. Be wary of suppliers who request 100% of payment upfront, since you may end up getting scammed.
Finally, any legitimate manufacturing partner should be willing and able to send you a sample. “Pushing to skip samples or avoiding spec sheets and test reports indicates a high risk,” wrote Sourcy. “Suppliers resisting documentation often deliver goods that differ from what was promised.”
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