By David Dayton in 'Silk Road International'
Two great articles on the Chinese Economy.
Two new clients came to SRI this week requesting help with basically the same problem.
First was a company that had contracted out for some custom manufacturing of a stitched bag. They had done a bit of due diligence and had even visited the factory. They had paid for samples, approved materials and samples prior to production, negotiated good contracts that allowed them to keep a bit of the final payment until they had received production. They had done almost everything correct. But they didn't have on-sight QC and when their product showed up incorrect, the small percentage (10%) they had retained for just this kind of situation was not enough to compensate for an entire order of unusable product.
Second was a company making a molded plastic fashion accessory. They had visited a number of factories prior to contracting production with one. They had ownership of their molds and had specified that they sign off the quality of all component parts prior to the start of production and fulfillment. Their problem was that they paid for 100% of the tooling costs up-front and now that the samples were not correct they had no leverage with the factory to get the mold repaired.
Both companies had the same basic problem—without some sort of physical presence in the factory neither of them had any leverage. Once there were production problems (that cost time and/or money to resolve) the factory had no incentive to fix or replace anything. And since neither of the companies had a presence in China they had no means of enforcing any of their demands (or even their originally contracted standards).
I'd like to say that this is unusual and these two companies just had bad luck. But the reality is that this is more common that not. We deal with this all the time—especially when factories outsource part of the production that they've told you they are doing themselves.
Subcontracting without transparency causes many major problems, not the least of which can be financial. Delays, incorrect molds/production, incorrect orders and the inability to every demand any consistent level of quality are all to be expected if your "factory" won't tell you where things are really being made.
Besides the fact that factories don't usually do any due diligence on their sub-suppliers, they don't usually do any QC on components they buy either. The problems arise when they pay for goods with cash and don't do QC or have a personal relationship and so can't do QC because the other party will be offended. Unless you arrange for your own QC, most components are not checked by factories and that can turn into a problem that cannot be resolved without a lot more money (to replace the entire component order). But without some sort of either contractual agreement AND the ability to confirm that it’s followed, the factory has no real incentive to "insult" their sub-suppliers by doing QC (and really, asking to do QC on components that they buy all the time from their personal network is just that, an insult) for your little order if you're not there or didn't stipulate in your contract that you see the inspection reports.
Once molds are done, once production has started, the problems only get worse. As the factory invests time and money into projects there is more and more push back on strict QC standards and rejected project, not less. Tying payments to QC inspection reports helps a ton. As does being in the factory for critical production points (or having someone represent you there). Remember, if you're not doing your own QC or at least tying payments to QC reports, you've got no reason to expect that you'll get what you've contracted for—you have no way to enforce your standards and the factory has no incentive not to save as much money as possible.
This isn't just a mold and production issue either. It's the same thing if you're sourcing product or asking for samples. If there is no incentive other than your word that "I'm going to place a really big order—there is so much potential here for us to make a ton of money!" then there is probably no chance that you'll be anyone's priority project. You don't give them your express mail account, you've never ordered from them before, they don't know your company then they will wisely manage their risks (samples and shipping cost money) and tell you one thing ("We're going to send something out to you today.") and do another (do nothing!). Remember, foreign clients are now a serious RISK. The tables have turned in the last three years and you are now seen as a liability not an opportunity until you prove otherwise. Without significant leverage, budget-conscious risk-adverse Chinese factories will just not take the gamble.