I will cover the different aspects of the factory that you can audit in future articles. Today I am writing about your subjective impressions, and they are just as important!
Are they a good fit for your company?
I mentioned the importance of a good “fit” between the manufacturer and the buyer before, but now is a new opportunity to double-check this point.
I generally suggest to evaluate the following factors:
- Significance of your orders (if they represent 0.5% of their capacity, why would they care about you?)
- Main focus (do they currently work on high volume and low quality orders — think Walmart — or lower volume and higher quality orders?)
- Internal competencies (does only the salesperson read English? do they subcontract the most critical process step? Etc.)
- Seasonality (are they generally very busy at the time of year when you’ll need them to make your orders?)
- Key personnel (if the production manager or the chief engineer leaves, will everything fall apart? Or is there a mature organization in place?)
- Contact person (will you work with a smart and experienced sales person who is not already overworked?)
- Respect of intellectual property (when you look at other importers’ designs in the showroom, is the salesperson eager to sell them all to you?)
Let’s take an example. You have the choice between 2 factories:
- Factory A is very large and well organized. Plenty of procedures, testing equipment, professional management, and a long list of big customers. The orders you are planning to give them are pretty small for them. You are in contact with a junior salesperson.
- Factory B is much smaller. Their boss is excited by the prospect of getting your business and he promises to follow up closely on your orders. You would represent 50% of their annual output. But they don’t have a structured quality department and their organization is pretty immature.
Which one to choose?
- Generally, A will be more expensive and less flexible, and will be more reliable quality-wise if and only if they don’t subcontract your orders (which are insignificant in their eyes). Oh, and you might have to wait until their other, more significant orders have shipped out.
- And generally, B will be cheaper, very flexible, faster, but unpredictable when it comes to quality.
- You should probably choose A if you are in a hurry, provided that you can follow up on their orders very closely. If B’s pricing & terms are acceptable to you, though, they might be the best choice, especially if impeccable quality is a must.
Now, let’s look at another key aspect of the factory you are looking at. How to estimate production capacity and ensure they can make your order in a reasonable amount of time (and not over 5 months, when you expect them to ship out after 1 month)?
Observe one line that is making about the same product as you intend to purchase. Ask for the output of this one line in one day. Then, based on what you see in a few minutes, calculate whether it makes sense.
Are they well managed?
After working closely with a number of Chinese factories, I have noticed some seemingly small signals that one should pay attention to. If you see several of the 6 signs listed below, you can bet the factory is poorly managed and you will run into serious issues:
- The boss keeps sipping tea with friends in his office and never gets out on the production floor
- Managers can’t give responses to precise questions, since they are ignorant about processes
- There is a lot of office space for production supervisors, who do emails rather than training their staff and fixing issues
- Many people, or small departments, have individual offices — it makes communication harder and corruption easier
- There is no effort at visual management (metrics shown on walls, equipment, TV screens etc. and used for managing operations) and few people know what is really going on
- Production operators are paid by the piece, not by the hour (this seems like a great thing to most factory owners, but in fact it is a strong obstacle to improving their organization)
(By the way, we expanded this list to 22 signs of good/bad management. You can get that free e-book on the CMC website.)
If possible, you should have a conversation with the boss. Ask a few questions and gauge whether he will drive his business into the ground. Here are 5 positive signs:
- He has technical expertise in his key products and processes. (If he used to be a salesperson before setting up his company, it is generally not a positive sign.)
- He looks at the market trends and focuses on what the market wants.
- He has a strategy. He doesn’t go after all opportunities (customers at very different quality and pricing levels, etc.).
- His strategy involves looking for ways to avoid direct price competition. He is honing a competitive advantage such as R&D capabilities, a brand, etc.
- He is looking for profit and stable business, not only for fast growth.
- He is not willing to depend on one big customer. He wants to avoid high risks.
Is the factory well set up?
A few years ago I wrote a list of things you can observe when visiting a factory:
- Is the production floor clean? Are products in direct contact with the ground?
- Are the workers’ toilets clean?
- Have they invested in new equipment recently?
- Does the owner have an expensive car while production equipment is old and poorly maintained?
- Are there lines on the ground, and nameplates for each workshop/department?
- Do the workers wear protective equipment (masks, gloves…) when they perform dangerous operations?
- Are the operators afraid/nervous when you stop and look at them?
- Are the operators mostly young (more into their work, more adaptable) or old?
- Do the workers perform only 1 simple and repetitive operation, in front of a conveyor belt? Or do they tend to work on 1 piece for more than 30 seconds?
- Is production organized in islands (bad) or in line (better)? Is there a lot of work-in-process in the workshop? (You can read about the different types of production organization here).
- What operations are they performing? If it is only packing, you are wasting your time (the real action is somewhere else).
- What other customers do they serve in the countries you sell to? Have a look at the labels on the packing line, and then at the shipping marks in the finished goods warehouse.
The key is to not only ask questions and listen to what they say, but also OBSERVE. A factory visit tends to be heavily scripted, and 90% of buyers ask the same uninspired questions. Have your own agenda and you will get a much better idea of how good they are.
A few more pieces of advice
If this is the first time you come to China, you should keep this in mind:
- In case you get help from a Chinese person during the visit, you should contact the factories first by yourself, and then to make it clear that you are in control of pricing negotiations. Otherwise the factory representatives will ask the assistant what her commission is, and they will build it into the price they give you. This is quite common!
- Don’t worry much about cultural sensitivity. Suppliers know you are not Chinese and they DON’T expect you to be polite. They have seen many other foreigners before, they have watched many Hollywood movies, and they know your culture better than you know theirs. They will respect you if you ask the hard and smart questions. Most Chinese factory owners disrespect and abuse people who don’t dare to say no.
What do you think? Did I forget anything important?