How to Estimate the Cost of Opening a Brand New Franchise

The one question always on the mind of a business owner is: How to reduce production costs? Reducing costs, after all, leads to increased profits, and which business owner doesn’t want that?

Production costs are the costs incurred in producing a good or component. Let us say a company manufactures brass door knobs in its factory. For this, it needs raw material such as brass as well as labour to process it. These are direct costs. Indirect costs are the costs of the machinery used to process the raw material, the costs of its maintenance, the electricity used to run it and so on.

Taken together, direct costs and indirect costs constitute the production cost of the door knobs the factory produces.

When the company lowers the costs of production, it increases profits. But costs – be it raw material, labour or even electricity – are always rising. So it is usually difficult for business owners to increase profits by lowering costs of production.

Other ways to increase profits is to increase prices or increase production to take advantage of economies of scale. Increasing prices is not the preferred option, as customers are extremely price sensitive and tend to move to lower-priced competitors if one company increases prices. Similarly, it is not always easy to increase the production capacity of a factory because this requires a huge investment.

All these reasons are why many businesses in the US and UK have been dealing with Chinese manufacturers over the past 15 years or so

As a developing country, China has several advantages over the West. To start with, wages and overhead costs are lower in China. Many of its factories also have huge production capacities, which lowers the per unit cost of manufacturing the product. So even if the price of the raw material used is more or less the same in the US, UK, Europe and China, all these other lower direct and indirect costs mean that businesses that want to remain competitive without increasing the prices of their products can look at China to manufacture their products cheaply .

China’s increased investment in infrastructure and automation (which offsets increasing costs of labour in China itself) means that it will retain a cost edge over the West with regard to manufacturing for some time to come.

Sourcing from China therefore has clear benefits for businesses looking to survive in an increasingly competitive world.

But how do you get started on a China sourcing project?

How to find a good manufacturer in China

Western companies have been manufacturing in China for decades and continue to do so today despite dark clouds hovering over US-China trade ties. Despite these tensions, experts said last year that they are confident that China will remain “manufacturing’s centre of gravity for the foreseeable future”.

To find a good manufacturer in China you could do a preliminary search on the internet. Several Chinese companies have websites in English directed at western customers. These are, of course, bigger companies with resources to develop and maintain such websites and are consequently likely to quote higher prices as compared to smaller manufacturers who don’t have a big presence on the internet but can still make your product to the desired specifications.

You could also look at various B2B or business-to-business websites such as Alibaba and Global Sources that have thousands of suppliers offering to manufacture almost anything buyers want – from die cast door handles and mortice locks to stainless teel metal brackets to plastic acrylic lampshades and toilet seats made of polypropylene (PP).

A quick way to identify a reliable supplier in China is to ask others in your industry who already manufacture there for help. You could also approach trade associations and business networks that you are part of for recommendations.

Many buyers also attend trade fairs in China to scope out potential suppliers, and to get an idea of what the market offers. Canton Fair, the biggest trade fair in China, is held twice a year, in April and October. Spread over an area of several football fields, it has thousands of manufacturers offering buyers almost everything under the sun.

Once you shortlist China suppliers from your preliminary search, you could send each of them a detailed request for quotation or RFQ that states exactly what you are looking for, what quantity, how often and so on. You need to be as specific as possible so that their quotation takes all your requirements into consideration. For instance, you could specify the raw material you want used and your desired lead time and mode of shipping. Once they get back to you with this information, before sending any money whatsoever to the supplier you finalise, you need to first verify their credentials.

How to verify a supplier’s credentials.

Often, the suppliers you find on B2B platforms such as Alibaba and Global Sources are middlemen or traders. While some of them may be efficient and connect you with good manufacturers, you may not get the best price from them as they will obviously take a cut for connecting you with a manufacturer, increasing the cost of the product you want manufactured.

This is why price conscious buyers (and isn’t everyone price conscious now?) may want to contact the manufacturer directly as they will offer the best price. Verifying a potential supplier’s credentials will help you sift traders and middlemen from manufacturers.

The verification process is also important because you don’t want to be scammed by a company posing as a manufacturer/trader whose representatives disappear when you send them money, say, for a sample run.

You can verify a supplier’s credentials using the information they send you as part of your RFQ communication as well as through other means.

For instance, let us say, you find a supplier you really like in a B2B website. You can check if that supplier has a website, and call the numbers provided there. If you get through, ask them preliminary questions about what they manufacture and so on. It may help to hire a Mandarin speaker to do this for you as not all employees of such companies are proficient in English.

Another quick way to assess if the supplier is a trader or manufacturer is to check the basket of goods they offer. A trader will definitely have a wider variety on offer than a manufacturer.

Once you finalise a supplier, ask for samples (if any) and then do one final verification check before you send any money. Ideally, you should visit the factory for this or get a representative in China to do it on your behalf. A factory visit will help you ascertain if the company is what it claims to be and if it has the production capabilities it claims to have.

Sourcing agents – companies you can hire to take care of all your China sourcing needs – have a presence on the ground, which makes it easier for them to verify Chinese companies than for you to do it from halfway across the world. This is one reason why many western companies hire sourcing agents to handle their outsourcing requirements.

Sourcing agents handle everything – from identifying reliable suppliers, to request for quotations, to shortlisting suppliers, to asking for samples, to finalising a supplier, helping draw up payment terms and agreements, to quality inspections during production, pre-shipment inspections, right up to tagging your shipment with the right HSC code so that it doesn’t run into trouble with customs while being shipped to you.

Many businesses – especially smaller ones that don’t have the resources to hire a team in China for the long term – find it is worth their while to hire such agents as it reduces their risk and increases the chances that their outsourcing project will be successful.