Manufacturing in China · Consumer Products

Product Development Strategy: Manufacture in-house or outsource?

Ada MBA Accomplished leader experienced in Project Management, Business Analysis, Process Improvement and Training & Development

January 21st, 2015

Currently working on structuring an operations strategy for a startup who designed a consumer product. The product is currently being manufactured in-house by one of the founders. The cost to manufacture one product in-house is very high. We were considering outsourcing the production to China or another country to lower costs. The primary components of the product is silicone which has to be cured to a specific hardness- this is the primary quality concern.

Currently the product can only be produced by one of the founders- he is the only one with the know-how. The founder who makes the product does not want to outsource. Instead he wants to hire a few people in the states to make the product. With the current production process and setup, one person can only make up to 6 pieces per day.

We have an investor interested in funding the company; but we are concerned about the current production capabilities and the founder's preferred strategy.

Does anyone have experience dealing with a similar dilemma? If so, I'd be interested in your suggestions.

Mikal Greaves Mechanical & Power Manager at Facebook

January 22nd, 2015

Hi Ada,

I have experience manufacturing in China and the robots at Wonder Workshop (Play-i) are made in China in reasonable quantities. Quality control is the big issue with outsourcing to China. The only way to ensure the quality is what you want is to oversee the manufacturing yourself or pay one of the few good QA consulting groups to do it for you. I'm pretty picky so I like to oversee it.

Making in the US is a great luxury if you can afford it - that is, will your customer pay enough to allow it. Typically in the US you need automation or some other advantage to make manufacturing competitive with outsourcing. It's impossible to gauge if 6 pieces per day is a good or scalable number without knowing the complexity and cost of the product.

The biggest challenge to outsourcing is the MOQ (minimum order quantity). If you don't have a sufficient order for the typical manufacturer of the type of product you are making, then they won't be interested in the business. This is assuming you can find a manufacturer who your are confident can do the work at the quality level you require. This is typically not a trivial problem.

I guarantee that there are manufacturers who can do silicon at a quality you would be impressed with. So it's just a matter of finding them, meeting their MOQ then verifying the production is up to standard.

I hope this is helpful.

Cheers,

Mikal

Lalit Sarna Business & Technology Leader

January 22nd, 2015

Unless you have high volumes, outsourcing production to China or another cheaper country may not be as effective and may hurt your brand for the reasons described below.

I would recommend that you keep production in house until you reach a large enough volume.

Getting new products right takes iterations and resources. Most factories do not want to invest resources in an order that does not guarantee volume.
Even if a factory does take the order, their larger clients will take precedence, simply because they have a higher potential. It's highly likely that your product does not get enough resources allocated to insure uniform production.
Smaller factories may be more willing to work with you but they often do not have any process to insure quality control. For my last business I had to set yup a process team across India and China to work around this issue. Beware of hiring local Quality control freelancers, its common practice in China for these agents to be on the take.
Smaller factories are also plagued with high churn in labor, especially around Chinese new years. So be prepared to get huge variation in quality.
Enforcing accountability through legal contracts is cost and time prohibitive for small orders.
All the reason above lead to high degree of unpredictability in your product pipeline. This may lead to unhappy customers and immense amount of stress.

A possible work around is creating an instrument where you give the factory a large upfront fee, that gets applied to your balance once you cross a volume threshold. This creates enough incentive for the manufacturer to allocate necessary resources. However its not fool proof.

Ada MBA Accomplished leader experienced in Project Management, Business Analysis, Process Improvement and Training & Development

January 26th, 2015

Thank you all for sharing your experiences. This is very helpful.

kiranaimhigh kota Project Engineer at Unicorn Industries

January 29th, 2015

Hi Uribe,

I have gone through your problem in detail. With my experience of more than 6 years in this field of manufacturing, this is what I feel.

1. Companies who have been doing these kinds of Manufacturing, have a in house facility and they are experts in these activities.

2. My suggestion to you is, first take a quotation on likely probability of the volumes expected from the sales. Get a Quotation especially from China or India. I prefer India more than China and the reason behind this is not because I am an Indian but because the quality of the products manufactured in China is really bad and they cannot be trusted. Silicon is generally used mainly in Food, Pharma, Vaccine Applications.

3. The Vendor will first have to make a die which depend upon the dimensions of your product.
4. When the sales are picking up, you can think about manufacturing them in house, orelse its waste of time, resources and money.
5. You can utilize this time in improving your systems, think about other innovative ideas, designing new products and marketing. Because as this guy is sound in Technical, this will be really helpful for marketing your product.
6. Negotiate a Price with one of the vendors for the volumes which you require.
7. Always remember to be very strict with products which come out from China. They are great at duplication.

I hope so my views will be of certain help. If in case you need any further assistance, please feel free to contact me on my gmail: kirankota28@gmail.com

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

April 21st, 2016

If it's a mass consumer product, my strong suspicion is that the numbers will be such that it would be economically irrational to do the production in-house. The big concern of the investor is that if you do the production in house, then the investor will have to pay for the factory. If you outsource, then some other investor has already paid for the cost of the factory. I should point out that this is the big reason why manufacturing tends to happen in China (i.e. the factory is already built), and cheap labour is not a particularly strong reason to manufacture in China any more.

It turns out that these decisions are rarely solely economic, and I very, very strongly suspect that the founders want to keep production local for sentimental reasons. There is nothing wrong with that, but unless there is something unusual about the product, then it's likely that if you run the numbers, you just can't make it work for the investor unless you outsource.