Posted on Thursday 12 October 2006

Last night while chatting with a friend, I was once again reminded of a post I have been meaning to write for a while entitled QC Failures Start at Home.

Quite often posts on QC failures focus on various other blogs (China Law Blog, Diligence China, and others (including us)), are about how to protect yourself through due diligence and contracts from a supplier. However, rarely does the post address the fact that many of the problems associated with supplier relationships go much further than that, and that often many problems could have been avoided had a stronger investment by the buyer been made in the QC process.

Quality control is a process by which (through the process), quality is not only maintained, but hopefully improves over time. That is not to say that a Casio will become a Rolex, but a good quality control process will reduce inefficiencies and identify areas that can be improved upon (sometimes, by complete accident).

However, while many are simply overwhelmed with stories about Chinese suppliers who have not met quality, many simply are unwilling to invest fully in a quality control process when so much is at stake.

In the past month, I have heard the following stories:

Distributor of hand tools that placed 3 container order following the successful delivery of samples and negotiating a fair deal. The order was placed by the C.E.O. who knew little about the process of buying from China, and 4 months later his first container was full of unsellable product. The other 2 had yet to arrive…. Buyer of marble tops placed a first order while still in country following the successful visits and negotiation of several sites. The first container was delivered on time, and to spec. however, with each following container, the quality was deteriorating measurably due not only to a surely supplier, but also the fact that no inspections were occurring Manufacturer of outdoor seating moved a significant amount of manufacturing to China without any member from home office overseeing the process in China. Several months after the first order was received and installed, the product faded to the point where the entire order had to be replaced. What all of these cases share in common is that not only were these orders let unsupervised, but the companies did not invest in their quality control processes. Another thing they shared is that they risked losing customers, they lost time, and replacement orders came at a cost of time and money.

Another thing they all share now is a deep mistrust of working with Chinese suppliers, which while understandable, is not 100% justified given they had not put in a quality control process that would allow them to spot problems before (1) they were fully invested financially, (2) they had reached the point of no return time wise, and (3) they lost customers.

With a strong QC process, there is always time and there are always outs, but in each of these, months had been lost and making that up when your customer is waiting to take possession is impossible (unless you have a safety stock larger than the orders in your supply chain).

So what should they have done?

1) In the beginning, a decision should have been made to either put in a local team in-house or find a firm that would represent them.

If order sizes or frequency do not warrant an in country team, then find an agency, consultancy, or other 3rd party that you can trust to represent you. Create terms that tie them to the quality and timeliness of deliveries.

Often times, while a trading company may offer a hirer level of unbiased QC than a manufacturer, payments still occur before shipment…. at that point, the buyer bears the entire financial risk of a bad shipment no matter what a contract may say

2) Take the time to understand the QC process of each supplier and then work that into your home based process. Make sure they are meeting your process, not the other way around.

this process will let you gain a better understand not only where problems may crop up, but also, how a supplier is prepared to deal with such problems.

3) Structure payment terms so that a significant portion of the money is delivered after successful inspection of production samples (samples take off the line in mid-process of order fulfillment) and so that some portion is remitted following final delivery and inspection.

Note: with a China based team or agent, this can occur in China, and Chinese manufacturers will be reluctant to give those terms if shipping outside of China

4) Make frequent site visits, with multiple yearly visits by home based team being made with local team.

You wouldn’t drop your kids off at kindergarten on the first day and come back a year later… of course not…

Visibility is security, and putting eyeballs on a supplier’s operations is the best way to ensure that quality will continue to be met. Multiple trips per order are best, and often times it is here where people get lazy….

5) If language barriers exist, bring your own translators who are impartial. Make sure they have experience in manufacturing environments and have a list of technical terms used in the industry ahead of time. DO NOT rely on a supplier to provide an unbiased translation.

Chinese suppliers are in it for the money, plain and simple… that is no different than any manufacturer anywhere in the world. Your best interests are protected by you, and using your own translators is one of the ways that you protect your interests.

Wrap Up:

Sometimes, while it is more convenient to believe to the contrary, problems do not just occur because a supplier failed to provide a quality product. In fact, in many cases, it is quite often the opposite… a proper quality control process was not establish, was not followed through, and risk was not shared properly.

Whether it is moving into the factory or it is just making sure the process, payments, and assessment are known and followed, companies need to invest in the process before the first container is shipped.

If a particular order is too small to warrant an in-house visit, pay a 3rd party. While it is a cost that in hindsight not be needed (if looking order by order), the costs of inspecting each shipment are actually an investment in the construction of an overall process that ensure the ongoing quality, and thus brand of the company.

article reprinted from http://www.allroadsleadtochina.com/?p=84

Posted September 3, 2006 by David Dayton

I spent 12 hours in a factory on Monday resolving concerns, fighting with resistant engineers, negotiation with managers, hobnobbing with the owners over lunch, discussing solutions with line managers, reviewing standards with QC/QA folks and generally working though every single production issue imaginable to try and jump start a stalled project. What did my 12 hours get me? A signed agreement that the factory will deliver the promised product a month late and I won’t be charged for it! I was quite pleased. Really.

Now this factory is world class—in terms of production capabilities, machinery and facilities, that is. They have over 3000 employees, are privately owned and some minority owners are Japanese technology companies who are also the biggest customers. But problem solving, customer service, real-time communications and “win-win” are concepts that management has yet to embrace (or even define).

This is nothing new in China, of course. While China leads the world in growth rates, largely on the back of manufacturing for export and domestic infrastructure, it is in no way anywhere near the top in the “science” of business management and customer service. In fact it’s probably one of the world’s worst.

For example, China has gone from almost no cars in the 1980’s to the second largest market in the world twenty five years later. Ditto for the airline industry, home computers, beer and many others. But the average education level is still less than 6th grade. Technical skills and science are a focus for education in China but the application of that education, the ability to use abstraction and social sciences education are more than a little weak. Specifically, while China pumps out 3-4 million college grads every year, less than 10% of them are of the level necessary that they could work in an international company.

What this meant for me at the factory on Monday was simply this: the factory can manufacture just about anything that I want, but if there are problems or if quality standards are not meet, resolving concerns and meeting international standards are difficult requests to accomplish. Changes are often difficult to accommodate even with Western educated engineers—even when the changes are coming from the factory engineers themselves in response to production problems.

In China the typical answer to production problems or QC issues goes something like this: First, try to convince the client to accept the completed, but inferior product. Second, if that won’t work, stall, delay, and find whatever excuse there is to force the client into a time crunch so that the inferior product looks better and better in relation to a whole new production run. Third, if the client is still insistent on original standards, negotiate new prices. Fourth, present new samples, new production schedules for approval. If new samples are not approved return to step number one.

In most Chinese companies the mentality is still “duck and cover” when there are problems. This is not surprising when the costs of mistakes are often taken directly out of the responsible party’s salary. And since upper level managers are never told bad news, when they are finally brought in it’s usually pretty late in the game. That’s where I was on Monday.

Discussions about our production started with the engineers saying how badly the factory (they themselves) had underestimated the difficulty of the project and how much it was costing them. No matter how many times I hear this excuse it always shocks me. Basically, their saying: We were dumb, it’s our fault, but we’re not going to take responsibility for it. But this seems to be a standard line regardless of factory size and international experience.

The conversation then moved to how difficult and inflexible my standards were. Of course I’d been hearing this same story for the last week as various sample products were rejected, so I waited until they were done before reiterating the same standards that we’d established together months earlier. Now, it’s not like these standards were new or had changed—they are listed clearly in the PO that the factory signed (I know, that’s my mistake—I assumed that a signed contract actually mean something!).

There was no mention of why there were delays or problems, rather just how much it was going to cost to finish the project. Managers, new to the discussions on Monday, were initially angry with me for not being flexible enough, changing standards and not giving them enough time. At this point, when I was being falsely accused, it was time to go on the offensive. I brought out all the contracts and PO’s, the photos, the samples, and every fax and email the factory had ever sent us concerning this project. I knew going in that the managers had never head the whole story and probably hadn’t even ever seen the PO. My strategy was to answer every single objection and misrepresentation with the facts. Since I knew that I didn’t have the clout (small $200,000 order) or the inside track I had to help the managers see the whole story and “shame” them into honoring their previous agreements. To get the mangers on my side I also had to give them a way out—and that way out was to identify two engineers as the culprits.

Throughout the day there were some moments of joking, some angry yelling, a lot of discussion of specifics by me each time they voiced a concern over price, process or standards. By Chinese design it was a contest of wills—who was going to give in first (sometimes called the “iron ass” strategy)—and I was already 3 months and $100K into this so I wasn’t about to cave.

In the end, I got what I expected to get—I got them to retract their demands for more money and to complete the project according to the previously agreed to standards. Basically they’ll complete the contract late and not charge me for it.

So what’s the Chinese Dichotomy? It’s the contrast between the most modern technology and the absolutely parochial mentality of some of the people running it. It’s the size and incredible growth of the Chinese market and the scarcity mentality that still pervades both domestic politics and business in China. It’s the advanced education necessary to use modern technology and the simplistic short sightedness of single project profit maximization. On a physical scale, it’s the few hundred million urban residents with money, education and exposure to the world vs. the eight hundred million rural peasants. As one of my friends described it “it’s like the Flintstones meets the Jetson’s.” That’s China—same planet different worlds.

article reprinted from http://silkroadintl.net/articles/blog_entry.php?id=18