We asked one of our clients to give us their impressions during a China factory visit during a buying mission recently. Read below to get an idea of how they felt during this trip. This is one of a series of blogs that we will title: Buyer Diary.
During your China factory visit, you will definitely encounter these foreign production terms. In fact, these production terms are important for negotiations and discussions with factories during the pre-production process. There are a thousand and one existing production terms, of which only a few are widely used. Using the simplest words possible, let me groom you to be a production term expert!
OEM stands for ‘Original Equipment Manufacturer’. OEM refers to the company which manufactures the product, these products are then purchased, branded and sold by another firm that desires to market the product.
ODM represents ‘Original Design Manufacturer’. As compared to OEM, an Original Design Manufacturer designs in addition to manufacturing and selling these products to be marketed by another firm.
OEM vs. ODM
The primary difference between the two is that ODM companies are completely responsible for the designs of their own products. In comparison, OEMs can be associated as contract manufacturers, a party hired to perform based on another company’s requirements.
Read ‘How OEM and ODM Works’ and ‘How Businesses are Profiting from OEM and ODM’ to understand more!
A RFQ basically means a ‘Request for Quotation’ by clients. As mentioned in the previous blog, in order to send in an RFQ to factories, you have to present all the relevant information! Let’s do a re-cap, what are the various information required for factories to give a quote?
- Product name
- Logo Details
- Color of product
- Size of product
- Material of product
- Shipping Details
- Attached Reference
Also, what should you expect from a quotation from the factory?
For more information, read more at China Factory Visit – Buyer Diary #4 Pre-Production!
The ‘Minimum Order Quantity’ is what you always hear when requesting for a quotation from factories. As the name suggests, it is the minimum quantity that you have to order to enjoy the economies of scale price reduction. Most factories are unwilling to take up orders that are below the MOQ as this would reduce the profit greatly, and at times may not make profit at all.
Take for example it takes 1000USD to operate this oven.
To justify this cost, the factory has to take up an order of at least 1000 toys to breakeven for operating the machine. In this case, 1000 toys is the minimum order quantity otherwise the factory would be making a loss. Of course in the real world, the minimum order quantity ensures a certain profit and not a breakeven.
Most probably you will know this – ‘Quality Control’. Following China Factory Visit – Buyer Diary #3 Don’ts, Quality control is a step in production that must not be overlooked. It stands for QC in short and it reviews on the quality of production goods. There is an international standard for quality control which all inspectors adhere to. Quality control is wholly based on the AQL table (Acceptance Quality Limit), where you decide the passing mark of a QC test.
QC is of utmost importance and you will understand more in the later diary posts.
What is sampling? “Sampling is just like trying on an Armani Exchange shirt before deciding whether to purchase it. It simply means to request for a sample that is similar or is the exact replica of your suggested promotional product. Based on the sample, you can judge whether the factory is able to meet your requirements for the product.” – Buyer’s Entry #4
Lead time is basically the time taken from placing the order until the delivery of the goods. Sampling lead time and production lead time then refers to the time taken to manufacture and deliver for a sample and mass production respectively!
As factories tend to drag the production, it is wise for any firm to start ordering early and continuously be on top of the factories’ production schedule. By dragging the lead time, you may end up in various troubles such as having to ship by air instead of the initial sea freight. This would probably burn a hole in your pocket!
What is molding? Molding basically means producing the shape of your product.
Usually, the first step of every product is the molding stage –
A mold is required in order to manufacture the products in the desired shape.
Take for example clay pottery. In this case, your hands are the mold that defines the shape of the vase. Similarly for manufacturing, a mold is required to build the shape of your product.
Take a look at the 8 holes that the factory worker is focused on during my China factory visit. Those are the molds required to make the toy. So liquid plastic is poured into the mold and after the high temperature processing, the toys have been molded into the required shape!
With this, I can go on explaining –
Mold Cost/ Set up Cost
Mold cost, sometimes also defined as set up cost is the cost required to build an initial mold. This may not be required for all production, depending on your product.
Take for example if you’re producing a toy car. Factories would already have current molds which they have used in the past for other projects. This way, there is no need to open a new mold and incur molding cost. In contrast, if you’re looking at a unique product – your firm’s mascot plush toy, there is a need to open a new mold as there is no existing one. In this case, molding cost will be incurred.
Mold costs are a one-time cost and are generally expensive. Therefore, bear this in mind when you are thinking to manufacture brand new products into the market.
Business Dictionary defines payment terms as – The conditions under which a seller will complete a sale. Typically, these terms specify the period allowed to a buyer to pay off the amount due.
Usually in the manufacturing industry, the payment terms are as follows –
“By T/T transfer, 30% deposit, 70% balance on QC before shipment.”
It basically means that before the manufacturing begins, there is a need to pay a 30% deposit out of the total order cost through telegraphic transfer. During the QC and before shipping goods, the remaining 70% has to be paid.
Remember our diary entry on the Don’ts! Always, always include contract details on a written agreement. And this includes payment terms.
China Factory Visit!
With understanding of these production terms, you can now plan for your China factory visit to discuss production details with the factory!