I wrote 2 articles about the similarities and differences between product inspections and factory audits on the SynControl blog.

I thought it would be interesting to mention this here, too. Here are the main points I mentioned.

Main similarities: factory audit vs. product inspection

• They are done on-site, at the production facility. There are exceptions to this (e-audits, review of a few samples…), but they are exceptions.
• There are bribery risks. Following a code of conduct is a must.
• A checklist is usually the basis of the dispatched employee’s work. They tend to be more details for inspections.
• Facts and data need to be pulled from real-world evidence, as a basis for judgement and decisions.
• They often work in a team when there is too much work for 1 person.
• Reports highlight negative findings. This is a little less true for auditors who can also highlight good practices.
• Business decisions are made on the basis of audit and inspection reports.

Main differences: supplier audit vs. QC inspection

• Inspectors need to follow their checklist strictly. Some experienced auditors follow a more ‘free style’ approach, based on principles alone.
• Auditors need better social skills, in order to extract information tactfully from the auditees.
• Inspectors often work in stressful circumstances. There are often disputes with the factory staff.
• A single failed audit might be enough to stop, or prevent, a business relationship. It usually takes a succession of failed inspection reports to have that impact.
• Audits usually drive long-term improvement through corrective action plans. Inspections drive short-term fixes through correction plans.
• Inspectors need to take many photos. This is not always the case for auditors.
• Inspectors need to be familiar with the product being checked. Many auditors have no clue about the processes at play in the organizations they visit (and in some cases that’s a problem).
• Many auditors are certified.

—

Granted, these are broad generalizations. There are more commonalities between some second-party ‘tick-the-box’ audits and some inspections, than between those same audits some types of third-party audits. Different companies have different views of how a ‘factory audit’ is to be conducted.

As I wrote last week, some companies like their auditors to suggest improvement actions, while others don’t like that idea. Similarly, some companies want the inspector to follow up on corrections while he is in the factory and guide the factory staff on what to do, while others believe this can lead to undesired side effects.

Many people think auditors go on site, look at the situation, and suggest improvements. However, it is not that simple. Auditors acting as consultants can cause several types of issues. And yet, the line between these 2 roles is often very thin…

I have spent time working in each of these roles, and I wrote my observations below. Let’s look at each separately.

What is the purpose of an audit?

To establish to what extent an organization complies with a set of requirements (often based on an international standard such as ISO 9001 or ISO 14001, but that’s not always the case — a buyer can set up their own standard).

How does an auditor work?

An auditor follows a standard (often in the form of a checklist). For example:

• Have serious non-conformities been followed by a corrective action plan? Was it done in an appropriate manner?
• Are non-conform products segregated from conform products, in a way that prevents accidential mixup?
• Is the temperature in the reflow oven controlled in an appropriate manner? Is there a standard for that temperature?

These are not simple yes/no questions. There is a gradation in possible findings, from ‘not at all’ to ‘yes, always’.

At the end of the audit, non-conformities are written down and explained to the company’s management. Some ‘opportunities for improvement’ can be written down too, in addition, to non-conformities, but they are not the core of the audit report.

Now let’s contrast this with what consultants do.

What is the purpose of a consultant?

To guide an organization to improve in a certain way (as per the client’s objectives & challenges).

How does a consultant work?

A consultant typically supports the implementation of change by combining some of these approaches:

• Suggestions of an appropriate direction to pursue (if they only do this, they are advisors)
• Sharing of concepts and tools that will help support the change (if they only do this, they are trainers)
• Technical guidance along the way and/or accomplishment of some tasks (I’d call them implementers, and in an extreme contractors)

This is quite a mixed bag, to be sure. And there is sometimes some overlap.

Should a quality auditor give suggestions on what a manufacturer should do?

Many people would say NO. There are 3 main issues to watch out for.

First, an auditor is supposed to remain objective. If they emit a suggestion and the factory people apply it, he is not longer objective since he will be auditing his own idea. He will tend to rate it more favorably than he should. And, conversely, he will rate an idea different from his less favorably than he should.

That’s not really an issue for most buyers (after all, the purpose is to help the factory improve its processes & systems), but most people will probably agree that rotation of auditors (not always having the same one go to the same factories) is a good thing.

Second, how can the auditor know for sure what is the best for a factory he has only spent a few hours in? And, even if that auditor has spent very extensive time in the same type of factories and he is familiar with the production processes, (which is seldom the case), has he himself already implemented what he suggests?

I have met with insufferably arrogant auditors who think they know everything. What they do is alienate the auditee’s staff, and usually nothing good comes out of it.

Third, who takes responsibility when a suggestion from an auditor is put in practice and has unwanted effects? Imagine that a process is re-engineered, and then a high-tech component is down, which results in a whole line being down for 10 days, at great cost. Who will be blamed?

This is particularly worrisome when one adds the tendency of Chinese suppliers to blame any delay, quality issue, or price increase on any excuse they can find. Don’t give them extra ammunition…

What about the follow-up on non-conformities?

In a perfect world, after an audit of a supplier’s facility shows some serious non-conformities, the supplier would fill out a corrective action plan (CAP) on their own, share it with their customer, and would implement it.

In practice, 99% of Chinese factories are unable and/or unwilling to do this well. And most importers have little time to issue, refine, and then follow up on those CAPs.

So, who is tasked with that work? The auditing companies, naturally. And auditors have to work with factory employees on planning and evaluating countermeasures to problems they detected. The line between auditing and consulting can be very thin!!

If you have your own quality organization in the field, I suggest to separate the roles of auditor (finds NCs) and engineer (works with suppliers to make improvement). It is much healthier. I wrote about this before here.

Last week I wrote about the best way to have a Chinese supplier take responsibility. However, the most important question, I feel, is how to work with manufacturers that will keep improving over time.

And it all starts from supplier selection. If, at the sourcing stage, you don’t try to work with people and companies that will tend to improve, you are sabotaging all your other efforts.

Here are 5 areas I’d look at.

1. Is there professional management?

Or is it operated by the owner and some of his family members?

If the owner’s wife manages operations, a cousin does the accounting, another cousin does purchasing, etc., what is probably happening is that all these people are milking the business, (getting cash out onto personal accounts and investing in real estate).

One might object, ‘aren’t they family members, and won’t they work hard for the greater good of the company?’ Well, a ‘company’ is seldom seen as a golden goose in China. All they see is usually the golden eggs. From what I have seen, nobody extracts money from a business as well as a member of the boss’ family…

At the opposite end of the spectrum, good professional managers will try to put systems in place, to stabilize processes so they are not constantly distracted by ‘fire fighting’, and will keep at it for years. Some good owner-managers do this too. That’s what drives real improvement.

2. What background does the owner have?

If he was in a technical position, he is probably motived by improvement of the technical side of his business — that’s generally a good thing for customers. He will want to get nice equipment, he will tinker and find better ways to operate, and he will tend to attract and hire like-minded people.

If he used to be a salesperson (which is often the case), he might be focused on impressing and acquiring as many customers as he can. That’s when you see all these nice certificates that mean nothing, all these promises that never lead anywhere, many samples they have no idea how to produce. Not good.

Similarly, is the owner a self-made man? Has he got some higher education? These are good signs, in their own ways.

Or is he simply a “Ferrari boy” as we say, playing with daddy’s money? He probably never goes for a walk in the workshops…

3. What country is the owner from, originally?

I am trying to avoid stereotypes, but really I can’t skip this topic.

Is is part of a Hong Kong group? Generally not a very good sign.

A Taiwanese company is, on average, better at managing manufacturing operations in China.

What about in China? Are Wenzhou and Shantou people more sneaky? On average, probably a little, but I am not sure it is really important. Mainland China is such a mixed bag.

What seems to carry more weight is the place where the factory is located. It will tend to be more forward-looking if it is in Shenzhen than if it is in Fuzhou…

4. Has there been substantial investment in the facilities (equipment etc.)?

This point, obviously, has to be studied in relation with industry average.

In apparel, moving operations is easy (as the equipment is relatively simple and inexpensive), so they tend to look for new places with lower wages as soon as cost becomes an issue. They very, very seldom work on making their operations more efficient.

I guess one can say that, on average, if the investment has been low and the factory is low-tech, management pays less attention to operations. However, if high-tech means “some toys I can show to my friends”, it is usually a liability.

5. Can they show recent improvements to their processes and systems?

This one usually yields clear results, if you can interpret what they say.

If they only talk about some equipment they bought and they say nothing about routine operations, you know they are not focused on the day-to-day work.

If they talk a lot about some new testing equipment, this requirement (and maybe also the investment) probably came from a customer.

Now, if they mention some mistake-proofing devices, a new way of ensuring a process always runs in control, or the rebalancing of a line, it is AMAZING! Good job, you have found one of the few really savvy manufacturers in China.

—

Obviously, these hard facts need to be complemented by a good discussion with the boss. What companies does he look up to? Who are his best customers and why? What does he wish his kids will do in life? These questions will shade a lot of light on what type of leader he is and what his goals are.

I used to believe that Chinese manufacturers were great at sourcing their own materials/components. There are many reasons for this:

• They are based here and have teams who can go and visit local suppliers.
• They have extensive networks they can tap for suggestions.
• They consolidate buying power for many customers.
• They have mastered the art of selling to oversea companies. They know how to ‘make deals’.

And yet… After reviewing the way they manage their procurement, I have seen more mismanagement than maybe in any other function (production, quality, etc.).

I tried to analyze the main reasons behind this widespread problem.

1. Wrong objectives

1.1 Lowest unit price

There is a strong focus on getting a deal with the lowest price, rather than securing the lowest ‘total cost of ownership’. This has several implications that are highly detrimental to quality:

• The supplier agrees on a lower price in exchange for a higher quantity order. Much of that batch is kept in inventory and consumed by several orders. Do you think that supplier will accept to get the components back if the buyer detects a quality issue on 30% of the pieces 2 months after the transaction?
• The purchasers disregard the data from the incoming QC inspections (and routinely don’t even have such data in hand), so they select the supplier based on price alone.

1.2 Pleasing the owner’s network

Many business decisions are taken on the basis of non-economic factors. This is true everywhere, including in China.

Every factory owner is part of a close network of friends, usually from the same home town. And, obviously, family ties matter a great deal, too.

If a cousin, or a good buddy, makes a certain type of material, they automatically become the sole supplier. It is a no-brainer. The difference in price from the best competitor might be 5% at the start, and then go up to 15% gradually. And it doesn’t matter. To even discuss with that best competitor is seen as rude.

Oh, and what happens when bad components are received from that “special” supplier? They can’t be rejected, or that other party would lose face. They have to be used for production. Too bad for the customer.

(I am generalizing a bad behavior I have seen more than a few times, but I am absolutely not exagerating.)

2. Wrong incentives

2.1 Purchasers and hidden commissions

It is a well known fact that people who screen and select suppliers often get a commission ‘under the table’. A Chinese component supplier routinely asks “what is your commission, so that I know what price to offer?”

(Here I am definitely not over-generalizing. A totally honest purchaser, who has decision-making power but doesn’t use it for personal enrichment, is a rare bird in China.)

In many small and midsize factories, there is no centralized database of suppliers, parts, and purchasing prices. That’s right, the boss can’t even retrieve the Bill Of Materials (BOM) of a product they make!

Why do purchasers keep that information to themselves? To ensure lack of visibility. No visibility means no audits from management, which means a low risk of getting caught.

In the end, this means both higher pricing and a suboptimal choice of suppliers.

2.2 Hiding information from customers

Another very annoying trait of many Chinese business people is their desire of keeping information close to the vest. They see transparency as a very bad thing.

Here is the typical reasoning. A factory buys components, assembles them and packs them, and ships them out to a foreign company. The source of those components needs to be kept secret. Otherwise, the buyer can do 2 things:

• Have a rough guess at the assembly factory’s margin.
• Go to another factory, give the list of suppliers, and ask for a competitive quote. It makes it too easy for competitors!

What the typical supplier wants to avoid is questions like “you are not doing a good job, and yet you capture a profit of 15%; please tell me why I shouldn’t switch to a competitor of yours who can supply the exact same product for 10% less.”

—

Does it make sense? Have you noticed the same issues?

If you have followed the advice of part 2, you may have found a few interesting suppliers. The next step is to confirm that they told you the truth and that they are reliable.

Even if you place one-shot orders, you should spend a little time to check if a potential supplier is legitimate. You don’t want to fall victim to a scam, do you?

There are three main ways you can verify a manufacturer:

1. Background checks

You want to avoid scammers who will run away with your deposit, but also manufacturers who told you lies about their size, trading companies that pretend to own a factory, and so on.

You can gather some information for free on search engines and on B2B directories, as I detailed in these 2 articles:

• Background checks on Chinese suppliers
• Background checks on Hong Kong suppliers

If possible, ask potential suppliers for customer references. Ideally, you could talk to one or two such customers on the phone. Ask them how long they have been working with that manufacturer, and ask them to identify the supplier’s strengths and weaknesses.

This is a particularly subtle part of the verification process, for two reasons:

• Many of these references will be fake. Or maybe they did produce for Disney, but 3 years ago and through another factory that subcontracted the job out to them.
• Many legitimate manufacturers will refuse to communicate the contact information of any customer, for fear that you work for one of their competitors.

Another approach that works well is to call… the supplier salespeople themselves! We have found that they lie much less on the phone than in emails. And they tend to simply hang up the phone — or become aggressive — when they are asked questions they are not comfortable answering.

2. Factory visits

At the entrance of every trade show in China and Hong Kong, the organizer should have a notice warning visitors of the following:

• Do NOT believe the facts and photos shown on brochures.
• Do NOT give importance to ISO 9001 certifications.
• Do NOT trust what salespeople tell you without checking it.

For an order of 2,000 USD, I can understand why you wouldn’t spend time visiting the factory. But, for large orders, failing to verify the manufacturer’s claims is asking for trouble.

If you visit the factory by yourself, your hosts will try to impress you. Instead, use your eyes and try to grasp the situation and understand the overall environment. An example of what to look out for during a factory visit can be found in this article.

If you can’t visit the factory by yourself, a solution is to pay a quality assurance agency for a quality audit. Companies like ours have auditors in the main manufacturing areas and do this type of mission routinely for importers.

Also, if a QA agency is focused on serving SMEs, they will offer an entry-level audit service around 300 USD. (If you are looking for such services, we’ll be happy to serve your needs at Sofeast.)

Image source: https://www.youtube.com/AAA Factory Tour

3. Face-to-face meetings

Let’s say you took the time to visit the factory. Should you rush through the visit in 2 hours, and try to visit 2-3 factories in a day?

If you have found a factory that seems to be a good fit for you, you need to spend time there. You need to get to know them, and vice versa. Business is often done around a dinner table.

Image source: https://www.languagetrainers.co.uk/

Let’s say you have a problem down the road, and you only know the salesperson who handles your account. You will wish you had had dinner with a manager, so that you would have a second person to call!

So, the first reason for socializing is the need to know a few more people from the factory and the second reason is to gather information.

In an informal setting such as a dinner, try to ask a few questions to gauge the owner’s long-term commitment to his company. If he mentions he is investing heavily in real estate, this is not a good sign.

You can see other examples of questions to ask in this article.

End of the verification phase

At the end of this process, if all runs smoothly, you will have one best candidate—to use for a trial order—and a few others to keep as backups.

In the next part we’ll talk about the way to handle these second-choice suppliers.