It often makes sense to let your supplier handle the final assembly, final testing & inspection, packing, and shipping processes (which I will collectively refer to as “assembly” in this article).
Here are a few examples of cases where this is true and also some examples and reasons why you, the importer, might take a more hands-on approach…
Examples where it makes sense to let your supplier handle assembly
- In some industries (e.g. cut & sew garments), the “assembly” itself actually includes most of the work in the supply chain and has a huge impact on the final product’s quality & appearance.
- The supplier is well organized and can do a good job of assembling the products.
- As the buyer, you are comfortable with the idea of relying fully on one supplier for a product line. You let their company structure the supply chain as they see fit and manage it. You don’t want to be “hands-on“.
I think one could say this is true mostly of simple products that are purchased “off the shelf” (with no customization). Checking what the factory does with AQL inspections is usually the right choice in that case.
When and why the importer needs to be more involved in the deeper supply chain
However, in some cases, the importer should be involved deeper in the supply chain. If a lot of fabrication work is done on components, many things can go wrong at that stage. You might want to find, qualify, and manage some (all?) of the component suppliers yourself. Especially if the assembly is very simple and could be done in many workshops in an interchangeable manner.
If you let the assembler manage everything for you, it is convenient. It means they should do all this:
- Find and select the sub-suppliers
- Explain to them what needs to be done
- Negotiate pricing and other terms
- Manage payments
- Push for on-time deliveries
- Check the components before using them
- Provide feedback on quality etc.
From my observations, a tiny proportion of Chinese manufacturers does all this reasonably well. They are often obsessed about the purchasing price, at the detriment of all other dimensions of performance (quality, timing, etc.). Another issue is the friendly relationships they entertain with their suppliers (who are often from the same hometown, if not from the same family). Some important steps (e.g. incoming QC) are skipped in the interest of preserving these close links…
Another problem is, the assembler is seldom transparent. They are afraid a buyer contacts the sub-suppliers to get pricing information and negotiate their margin down. They also protect their sources to prevent a buyer from switching to another assembler and re-using the same component suppliers – this is not a big issue for wood furniture or plastic injection, but is a very big issue in some cases:
- In electronics: a sub-supplier wrote the firmware and kept the source code;
- In metal machining: one process is very hard to “get right” and the sub-supplier somehow managed to get a yield above 95%;
- In textile: only one supplier makes the lace the buyer’s designers really love AND usually has stock, which means it can be purchased in small quantities.
How the importer can benefit by finding and qualifying sub-suppliers upfront
An alternative is to do the work of finding and qualifying sub-suppliers upfront.
In this model, you take responsibility for most of the tasks I outlined above. It does give you (or an agent on the ground that you pay for that service) some extra work. But you enjoy two benefits.
Better visibility & control
First, you have a much higher level of visibility and control. You are no longer at the mercy of one supplier. Here are two examples:
- In the traditional model, if one component supplier (e.g. the LED, the charger, the buttons…) or one processing supplier (e.g. metal plating) does not perform in a satisfactory manner, your supplier is slow in reacting and wastes a lot of time and resources. In the new model, you can go and find a replacement if needed, or help the factory in question control their processes better.
- Chinese suppliers frequently switch components without letting you know. In some cases, it has an impact on your product’s performance and/or lifetime, not to mention the problem of certifications that might no longer be valid. If you manage your sub-suppliers, this is much less likely to happen.
I listed the risks induced by an opaque supply chain before. When you think about it for a while, it is scary.
Second, the higher level of control I described above allows you to keep pricing down in the long term. This is especially true for highly customized products that require 6 months of pre-production development. I will list two examples again:
- If you are at the mercy of one company that structured and controls your supply of a product, you don’t know how much each component costs. If one day they say “the price of these two components rose a lot, and our own labor and rental costs also increased, so the product price is now 25% higher”, you will negotiate from a weak position. You don’t know the makeup of their costs and you can’t verify their claims.
- I have seen buyer-supplier relationships in highly regulated industries where only a few Chinese factories are licensed. They know the buyer has little choice but to buy from them, so they make no effort on quality and they command a fat margin. This is also true of suppliers that think “the buyer knows it will be a lot of work to develop the product again from scratch with another factory”.
Deciding who should do the assembly
Now, let’s say you want to select the sub-suppliers. Who should do the assembly?
The problem here is, most companies that are used to doing assembly and export paperwork are unhappy with a low margin. If there is only 5 days of work for 3 workers, they will still charge thousands of dollars. That’s because they are accustomed to being in the position of managing their own supply chain and commanding a healthy margin. That’s not the type of assembler you want to work with.
Another issue is trust. Would you deliver components (which might be worth tens of thousands of dollars) to a company you don’t know?
Yet another issue is the focus of their production organization. If they are set up for large batches and they pay their staff per piece, nobody will be happy with a small batch. (The operators will complain that it takes them time to get very productive and the batch is too small for that effect to kick in.)
Fortunately, there are a number of foreign-owned manufacturers that rent large buildings, have extra capacity, and pay their staff per hour. They are generally happy to get extra work and can accept a relatively low price per piece, under three conditions:
- The assembly work does not require any skills or equipment they don’t have;
- The buyer, or an engineering firm hired by the buyer, prepares the control plan, the work instructions, and the overall delivery plan for components;
- There will be a regular flow of work of the same nature (i.e. it is not a one-shot job).
Maybe some buyers can share some related experiences?