Sometimes you receive worrying pricing from the manufacturer you’re outsourcing production to. It seems like it’s too expensive. Maybe they’re trying to take advantage? But how do you verify the pricing you’ve been given?
How to verify your manufacturer’s pricing?
If you’re unsure whether the pricing you’re being given by your manufacturer is reasonable and you’re worried that they’re trying to make some extra margin at your expense, it is possible to verify those costs. There are 2 steps for you to follow:
1. Get the market price for key materials/components
You need to research the market price for your critical and most costly components (these are the most important to know the cost of, understandably), and especially custom components, from other suppliers who are not already in your product’s Bill Of Materials.
If the rough estimate of the market price is systematically or even much lower on one or two key components, that’s a strong warning sign that you may have an issue with being overcharged.
2. Get quotes from other manufacturers or assemblers for the same work
At the same time, you can go to similar factories and get a quotation for the manufacturing/assembly work to check that your manufacturer’s cost is at least similar to theirs, i.e. the market rate.
Questions you need to answer before approaching other suppliers to do the research
Before you go to factories and suppliers who provide the same or equivalent services and components that your product is using, you’ll need to be able to provide this information in order for them to provide a realistic quotation:
- What kind of product is it (including description and photo/s)?
- Is it in a regulated industry, with specific compliance requirements?
- What is the expected volume (1st order, and then total in years 1, 2, 3)?
- Do you have the drawings for the custom parts, and/or the industrial design for the full product if the outside is unique?
This may seem like a lot of information to gather, but in order to get precise quotations from suppliers for custom components, for example, they will ask to see the drawings so they know exactly which parts you require.
It’s also about interesting the suppliers enough that they take the time to give you a quotation on however many SKUs you need to find the market price for. If you go to them with some basic information, they may feel that your request is not serious and will either ignore it or will only provide you with rough quotations which are not final (unless they can get very accurate information).
“Is it safe to give component suppliers our product information?”
Precautions should be taken when sharing product information, especially if going to the market to research the market price by approaching different suppliers, because there will be more eyes on it by necessity.
One approach you may take is to ask them to sign an NDA that can be enforced in their country, and also to only share the drawings of the component that they’d supply rather than the entire product information. The goal is that they do not have a full picture of your product, just an idea of what it is and exactly the component that you need from them.
Go deeper 👉 We wrote more about this approach here: Why keeping component suppliers in the dark is good for protecting your product IP.
2 common outcomes
- If you have the costed BOM (including all the components) from your current manufacturer and also the engineering design files, it’s possible to get quotations from other component suppliers, and separately to get a quotation for the assembly & testing work. If you did the product development work, you should have the design files anyway. If the supplier did it, you will need to get them from them.
Then you can get an idea of the market price and will be in a position to confirm whether your manufacturer’s price is or is not reasonable. - If you do not have the engineering design files for your product (for example, the 3D drawings of plastic parts), the suppliers you’re approaching won’t take it very seriously and it’s harder to get a precise (or any) quotation. This means that you cannot verify your own manufacturer’s costs.
What if my manufacturer isn’t giving me the information I need to verify their costs?
This may be down to the type of manufacturer you’re working with and whether you have signed a product development and/or manufacturing agreement with them.
A contract manufacturer commonly provides you with all of the deliverables for your project, including the drawings, industrial design, and sourcing information that is required here, because they work on a basis where you pay them to do the work and you own all of the resulting deliverables.
Most contract manufacturers will give you no issues if you feel that you need to walk away and switch to a new manufacturer for whatever reason and will hand over the BOM, product designs, etc because they’ve already been paid for this work.
Go deeper 👉 We discussed how contract manufacturers work on Sofeast’s podcast recently.
The problems start if you’re working with an OEM or ODM.
These two types of manufacturers often don’t like to disclose their supply chain information, such as the sub-suppliers they buy your product’s components from, because they consider it to be a trade secret. In many cases, in China at least, they offer to do product development and sourcing work ‘for free’ which is compelling for some importers.
But there’s an unspoken assumption on their part that the deliverables for these activities are their own IP because they paid for it (or made the initial investment in the case of an ODM’s product designs that it sells to be white-labeled).
So if you have been working with an ODM or OEM and you request a costed BOM and the product’s mechanical drawings, not the industrial designs (which are usually too “rough” to be used right away and need refining so it’s all ready for production), in order to verify prices, they may refuse. This also raises the wider problem of you losing control of your own product IP when your manufacturer develops it and then won’t provide you with the drawings because they ‘own them.’ At this point, have you become just a distributor for your own product?
Enforceable agreements could be the key to your freedom
So, how to assure that your manufacturer is going to provide you with your project’s deliverables as and when you need them?
In general, signing a product development and/or manufacturing agreement with them that can be enforced in their country will ringfence all kinds of your expectations and lay out how the relationship should exist and who is responsible for what. It will have certain penalties if breaches occur, such as if the manufacturer fails to protect your IP, fails to provide the deliverables, or won’t release your molds.
It’s possible that some ODMs or OEMs won’t want to sign such an agreement, especially if you have a really cool and unique product idea that they can see a lot of value in ‘absorbing’ or your orders aren’t that large for them, but contract manufacturers shouldn’t have an issue with it. Just consider using a lawyer with local experience to create the agreement with the clauses you need and teeth to be enforceable so it can be used as encouragement by you to prompt your manufacturer to release information in the event that you need it and they’re reluctant to do so.
Go deeper 👉 Learn more about manufacturing agreements here.
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Conclusion
If you have the deliverables you need (product drawings, costed BOM) from your manufacturer or your own work to create them, verifying the costs they give you should be fairly straightforward.
If you do not have this information, can you get it? If they have signed an agreement promising to supply it then it should be possible, but if not, you’re in a challenging situation where you may have to take their word for it or pull the plug on working together and find a new supplier.
If you need help with a difficult manufacturer, let us know and we can provide some advice on how you can move forward and achieve your goals more smoothly.
Disclaimer…
We are not lawyers. What we wrote above is based only on our understanding of the legal requirements. Agilian Technology does not present this information as a basis for you to make decisions, and we do not accept any liability if you do so. Please consult a lawyer before taking action.
