I wrote before that the vast majority of Chinese manufacturers find it natural to subcontract certain orders. There are two main problems with this:

• It seems like a disproportionate number of quality issues occur on batches on which a key process was subcontracted.
• Walmart and other retailers are driving transparency and are ready to cut a supplier out if production is found in a non-approved factory. You can expect this trend for openness to gain in momentum in the coming years. This is tightly linked to “ethical sourcing” (social compliance) policies.

What should you do to avoid this potentially damaging practice?

How to reduce unauthorized subcontracting

There are a variety of reasons behind hidden subcontracting. But the key is, you don’t want to give so much work to one factory that they can’t get it done internally. In that case, you are forcing them to subcontract!1q

1. Factory data collection

It is important to know certain data about each factory you are planning to use:

• Capacity for the products to be made in their workshop;
• The tendency to subcontract (with a bit of luck it can be detected during an audit, for example, if the packing department’s output data can be compared to those of the main production processes);
• Peak and low seasons.

2. Factory planning & capacity improvement

Let’s start from the assumption that your suppliers do want to make everything in house. They might still resort to subcontracting for several reasons, including:

• Poor planning system and unexpected delays in production;
• Insufficient capacity to produce all orders.

Fortunately, there are simple solutions to these two problems. Some consulting firms provide guidance to manufacturers.

Obviously, factories don’t want to pay for that service (or for any type of service, really). But some buyers pay 50% of the fees and push their suppliers to pay the other 50%.

3. OEM Agreements with each supplier

Each supplier should be authorized to place production only in designated factory(ies).

This clause can be included in a legally-enforceable contract that calls for specified penalties, should the supplier subcontract without written authorization. More info on this on the China Law Blog and in this post from Sofeast.

(The goal is not to “punish” the suppliers, but to ensure their incentive is to subcontract orders from other customers rather than your own.)

This contract should also allow your company, or any quality assurance agency you appoint, to visit the factories without getting prior confirmation from the suppliers.

4. Pre-order confirmations by suppliers

Before you give an order to a supplier, this procedure should be followed:

• You give a pre-order to the supplier (with quantities, types of products, and desired ETD)
• Supplier enters dates in retro planning, evaluates how many workers would be taken for how long, and accepts/declines the pre-order;
• You try to accommodate the supplier’s timing requirements.

(I am aware it might not be possible — but try to think of the little adjustments you could make on your side to make your supplier’s scheduling job easier. It does have an impact on whether they are forced to subcontract or not).

5. Followup of production planning

Requesting each supplier to give a forecast on a few milestones (e.g. receipt of all materials, start of cutting, start of sewing, etc…), and then asking them for weekly updates, is excellent to keep some visibility over their planning. It makes unannounced visits (see point 6) frighteningly effective.

6. Regular but unannounced monitoring

Sending inspectors during production without announcing their coming is an excellent way of keeping pressure on the factories.

The main focus would be reviewing the production status. If the planning they promised is not respected, the factory should get under tightened scrutiny for 2 weeks or until suspicions appear unfounded.

(You might not need to carry out surprise audits, but it is a logical thing to do once you have a doubt. Don’t rule it out entirely. It is pretty common in the food industry.)

Disclaimer

We are not lawyers. What we wrote above is based only on our understanding of legal requirements. QualityInspection.org does not present this information as a basis for you to make decisions, and we do not accept any liability if you do so.

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