Three Simple Steps to Reduce Risks when Buying in China

A client asked me this question recently:

Is there any way I can get some assurance of the validity of the company as well as the quality of the final product before sending full payment? They have asked for a 30% deposit by T/T.

I get many similar questions from relatively inexperienced importers, so I thought it might be a good idea to share my response with my readers. Here is what I can advise, in a few paragraphs.

First, before you send an advance payment of 30%, you need to make sure they told you the truth about the factory (its size, what products it makes…), and how well organized they are. We can do this. I can confirm the price and advise the most appropriate type of audit once I know the factory address, the factory’s size, the type of product you intend to purchase, and the distribution channels you are going to use.

Second, make sure to negotiate the following terms: 30% advance payment before production (it will be hard to negotiate for less), and 70% after (not before) the goods are shipped to you (they will fax the bill of lading to you and you will wire the money). If they refuse that, make sure the 70% balance is paid after a quality inspection is passed. I also strongly advise to include the possibility of performing quality inspections on the purchase order form you will use (and a good template can be found here).

Third, send an inspector to the factory to check the quality of the products. If you let the supplier ship defective products, you won’t be able to return them for rework. At the very least, make sure a final inspection (before shipment) is done, since it is the only time the average quality, the packing, and the total quantity can be confirmed. In most cases, the cost is about 300 USD. If your budget allows for it, it is also good to inspect the products during production, as it allows to catch problems before it is too late.

Am I forgetting anything important?

How to SUSTAIN Improvements in a Chinese Factory?

When a Chinese factory is in crisis and its boss is open to new ideas, it is possible to make a lot of changes quickly. These improvements are usually driven by consultants or by a strong and experienced manager. And the problem is, once they are gone, the whole organization goes bad to old habits very quickly.

What Chinese companies really lack is the discipline to keep moving in the right direction, day in and day out, after the initial excitement is gone.

To be fair, this is not a challenge unique to China. Mike Rother applies the entropy rule (straight out of a physics textbook) to describe the natural trend of any organization to slide back after improvement efforts.

Why are improvements so hard to maintain?

There are always urgencies in a factory. A supplier delivers late, the customer can’t wait, and production needs to be expedited. A couple of key employees in a workshop leave at the same time. The local government is trying to extract more money. A shipment is rejected and needs to be reworked. A big customer is coming and needs to be entertained. And so on.

When a deadline is looming and there is not enough time to do everything correctly, something has to give. Maybe the supervisor is away and the workers take a shortcut, even though they know the rules very well. Or maybe it’s the manager who makes an exception, “just one time”. And the exceptional becomes normal.

More often than not, the real reason is a lack of training. Employees rarely understand the whole system. They might not even have noticed that cycle times have gone from 50 days to 30 days and that quality issues have been reduced by 80%. To them “improvements” were just “changes”. So they are not committed to keeping the new way in place.

Are there ways to avoid sliding back?

Yes, and the solution is twofold:

  1. A management system that makes any deviation from targets both obvious and visual to all
  2. Regular surveillance from the top of the organization, in order to maintain discipline

The management system is not very hard to put in place. Once regularly scheduled meetings take place, and if the boss is happy to have a “dashboard” (composed of meaningful KPIs), there is a chance the management system stays in place in the long term.

By contrast, the second element (regular surveillance) doesn’t come easily to the typical manager. As I wrote before, Chinese managers tend to stay in their office or in meeting rooms, while they should be where the action is taking place.

Regular surveillance is known in the lean literature as Leader Standard Work. It is composed of the following elements:

  • “Gemba walks” (managers walking daily on the shop floor)
  • Rapid detection of, and response to, abnormalities
  • Constant mentoring of middle managers and team leaders, who should be able to detect and solve most issues by themselves

This is why smart consultants sell improvement projects but also include a few training sessions and a follow up period for “maintenance”.

Do you see other effective ways to sustain changes?

Auditing a Trading Company in China: What Checklist to Follow?

In some cases, it makes sense for an importer to work with a trading company and to count on them for managing developments and productions properly.

Since a trading company is supposed to follow up on production and since all communication goes through them, it is crucial to ensure they are well organized. As I wrote before (in disorganization between importers and suppliers compounds), the difference between a well-organized trader and a disorganized one is huge.

Here are two common situations:

  • Disorganized buyer + disorganized trader + disorganized manufacturer = a huge mess.
  • Disorganized buyer + very organized trader/agent + disorganized manufacturer = few problems.

Unfortunately, it is difficult for a buyer to estimate how well organized a trading company is. A few clients have asked us to do this on their behalf. We wondered, since there are no production processes in a trading company, what should be checked?

Actually, a checklist based mostly on the ISO 9001 standard is a very good start. Our audit checklist is composed of four parts. I pasted some of the checkpoints below, as examples.

1. Quality management system

  • Is there an overall diagram of the purchasing-related process, and of the quality-related processes?
  • Do company employees have standard procedures to follow? If yes: are these procedures easily accessible to employees?

2. Management responsibility

  • Does the company measure customer satisfaction? (Example: surveys, rate of repeat business…)
  • Has the company written a job description for each position?
  • Do the job descriptions include the skills, education, and experience necessary for each job?

3. Provision of resources

  • Does the company have formal training programs, and can records be shown? If not, does it have a good way of giving necessary competencies to the right employees?
  • Does the company have a formal employee evaluation programs? Can records be shown?
  • Are samples properly identified, stored, and protected?
  • Are there testing/measuring devices in the office? Are they adequate to the products?

4. Product realization

  • Does the company prepare/have perfect pre-production samples for each product?
  • If the customer requirements are changed, is this clearly recorded (on the samples’ identification, on the specification sheet’s version…)?
  • At the end of the pre-production development phase, does the company have a document that includes criteria for acceptance of bulk production (example: a specification sheet with expected results and tolerances)?
  • In case of repeat orders, and in case a component or a process is modified in the new batch, does the company ask for the customer’s approval? (Ask for emails representing such cases).
  • In case a batch is found non conform to customer requirements, does the company inform the customer and ask for the next step to follow? (Ask for emails representing such cases).

How do you evaluate trading companies?

Tips for Selecting Chinese Suppliers of Injection Molded Products

As I wrote before, the China sourcing process of two importing companies can be very different, while still making sense in each buyer’s context.

When it comes to purchasing injection or rubber injection-molded products, buyers generally want to qualify potential suppliers before sharing confidential information and requesting quotations.

Here is what the sourcing process typically looks like in this case.

  1. Search potential suppliers on websites like Global Sources.
  2. Review the websites. Look for what equipment they have for making the tools. Check if the equipment is capable of doing the job (an engineer with tool making experience can usually do this.)
  3. Look at the products they make. Are they similar and of the same size as what needs to be produced?
  4. Make initial contact. Get them on Skype or on the phone, and have a good chat. Ask lots of questions to see if communication will be easy. Do not engage in a technical project with a supplier that communicates poorly.
  5. Discuss the project without giving up too much detail; see if they are interested in the RFQ (Request For Quotation) process.
  6. Send out the RFQ. You might want them to sign an NNN agreement first.
  7. Check how much detail is included in the quotation. Ask for any missing information. Here are a few points for the molds: what tool steel is used, what is the hardness, how many shots (life expectancy)? And here are a few points for the molded parts: weight, material, number of cavities.
  8. Plug the details into a spreadsheet and see what the prices are like.
  9. If a potential supplier is price-competitive and is good at communication, ask for a few customer references (if they accept to share some) and send an auditor for checking their facilities.

And then starts the next phase: the development of the mold, the inspection of that mold, the setup for sampling and then for mass production…

Did I forget anything important?

 

 

 

Difficulties of Relocating Production in the US

Best Quality & Sourcing ArticlesHere are some interesting or useful articles that I found recently.

Walmart’s ‘Made in USA’ push exposes strains of manufacturing rebirth

In January 2013, Walmart promised to favor US-made products. But those companies trying to “reshore” production face many obstacles. Rebuilding manufacturing capabilities and a network of component suppliers will take many years.

Certain parts still need to be imported from China (e.g. small motors, plastic injection molding equipment, computerized cut-and-sew tools). But there are already a few success stories.

China biggest robot market in 2013

It is now official. Based on recent statistics, robot sales in China are the highest in the world. Only a quarter of these robots were made in China, but local production is picking up fast.

Robot sales are rising in many Asian countries (Korea, Taiwan, India…), in the US and Canada, Mexico, Eastern and Western Europe, etc.

Dongguan to Accelerate Replacement of Factory Workers with Robots

After Guangzhou, Dongguan city has planned a big push in favor of industrial robots. This initiative includes the creation of several “robot industry parks” and the acceleration of robot adoption by local manufacturers.

Mainland industries bribing their way to quality-control certification: Xinhua

An undercover report by Chinese state media (Xinhua) reveals how common it is for Chinese manufacturers to obtain certifications (from ISO 9001 to organic food) without complying to standards.

I guess this won’t be a surprise to long-time readers of this blog. I have written about China’s deep-rooted bribing habits many times.

Inside Shenzhen: China’s Silicon Valley

This Guardian article focuses on hardware startups that are locating en masse in Shenzhen city. It makes sense since many components are made locally and there are good assembly factories. There are already accelerators/incubators, as well as a high number of startups. And the city is moving in the right direction.

Why Suppliers in China Quote Incorrectly

Jacob Yount explains why Chinese suppliers (especially small suppliers) don’t spend much time and energy on quotations. A first quote is only a rough indication of the price. This article is a good overview of communication disconnects between manufacturers and importers.

How To Manufacture In AND Sell In China Without A WFOE

After registering certain IP rights and with a solid contract in place, a foreign company can put a Chinese manufacturer and a Chinese distributor in direct contact, while keeping control of the process and earning a profit.

However, I can imagine why importers would have hesitations. With this setup, Chinese companies can guess the foreign company’s profit and be strongly tempted to circumvent the contract…

Fashion: A better business model

This article, originally published in the Financial Times (behind a paywall), describes the business model of Zara, the largest fashion retailer in the world. They have managed to compress the design & production cycle from 18 months to a few weeks!

Meet ‘Crazy Jack,’ China’s E-commerce Titan

See how an American early employee of Alibaba did his best to describe Jack Ma (the company’s founder) in a positive light. It makes for an interesting glimpse inside the Alibaba Group’s culture.

Scio Pocket Molecular Scanner Is a Google-like Device for Physical Objects

A new company has designed a device performing chemical analysis on the fly… and on the cheap!

Unfortunately, they are starting with applications for food only. In a few years, if it really works, this device will probably be part of every inspector’s toolkit.