I wrote before that the vast majority of Chinese manufacturers routinely subcontract some orders. The problem is, they usually do it without disclosing the reality to their customer.
Why do they subcontract production to another factory? Sometimes it is a necessity to meet the customer’s tight deadlines. And sometimes it is a way to cut costs, by placing production in a cheap workshop that has virtually no control over quality. This can result in a quality disaster (very common), a PR disaster (if the goods are made in a prison, by kids, or in a place that burns down), and/or an IP rights disaster (when many factories are learning how to make your product and then start to sell it to anybody).
As a result, more and more companies made this practice forbidden. Think of Walmart and their “zero tolerance policy”, or Nike and their tough supplier contracts.
But how can your company prevent its suppliers from subcontracting? I jotted down some ideas below.
1. Work with the right people
This may sound a bit touchy-feely, but the factory owner(s)’s attitude is extremely important. If he is not motivated by your business and is very focused on his short-term financial needs, he will take short cuts. Even if the factory is large and very structured. Even if the owner is from Taiwan or Hong Kong. Make sure you are a good fit for the factory.
2. Know the factory’s capacity regarding your type of product
For example, a factory only has one line that can make your product and your order quantity will make it busy for 6 month. Or your peak buying season is the same as that of their other customers (e.g. they make BBQs for North America). This factory is probably not a good fit for you.
3. Don’t compress timelines in an unreasonable manner
If the factory needs 15 days to get all the components, and then 30 days for its own production, you can’t compress these lead times (unless, naturally, you show them how to plan and execute better). If you set a shipment date that can’t be pushed back and you hold production because some approvals are not finalized, you are placing the manufacturer in a position where they have to subcontract.
One useful tool is the production plan. You can request that your suppliers describe in an Excel file how many operators and how many machines will work on your order, for what daily output (if possible at the level of each process step), and for what ETD.
4. Challenge the reasons why they can’t produce faster
Very often, the owner wants to buy the parts from his friends/family. The better solution is to double- or triple-source the parts that have the longest order lead time.
Similarly, a simple value stream map exercise can show where the bottleneck(s) are located in their production. In many cases, elevating the bottlenecks is not complicated and not expensive. But the managers are often unaware of what holds their production numbers back!
5. Qualify and develop backup suppliers
If two manufacturers are ready to make your order, you have a good option in case your best choice is short in capacity. More details here.
6. Make use of legal tools
It is common to sign a contract that makes it forbidden to subcontract. If your contract is legally binding in China, and if some other customers don’t have such a contract, the manufacturer might think twice before subcontracting your order.
7. Monitor and enforce
Take advantage of inspections during production for two purposes:
- Checking quality and catching issues early
- Verifying that all production is taking place in approved facilities
For even stronger monitoring, conduct unannounced factory visits.
8. Keep an eye on production inputs
Do you direct the use of some suppliers? This is an opportunity to get information (through these sub-suppliers) on the rate of ordering and the delivery address(es). If you don’t want to manage your supply chain this way, you can do it easily with some labeling/packing materials.
What do you think?