When chinese manufacturers are sub-contracting and what are the risks

If you have already been long enough in China and involved in procurement and manufacturing, then you may have experienced (sometimes even without noticing it) some chinese manufacturer to sub-contract your production to another factory. Why do they do this, what are the risks and how to prevent it or manage it ? This is the topic of this post.

Why chinese manufacturers may subcontract and what are the risks

1./ Production capacity

When a Chinese manufacturer would not have enough production capacity to produce your order they may simply sub contract to another supplier to make part of the production. It is quite common that small manufacturer sub contract half of their production when they are in rush and don't have enough production capacity to finish their order on time. I highly recommend to perform a vendor audit in China before any order to be placed.
On this kind of situation, the risk are several:
- The production may not be even or uniform: since there are two production made into different place, there is a high chance the result may be different from one manufacturer to the other. For example, frequently in this kind of situation colorimetry of plastic part might be different on 50% of the production because each factory didn't use the same material, didn't use the same machine type, didn't have the same settings, didn't have the same quality assurance and quality control process in place etc... To avoid this, I usually recommend either to use buying office in China to supervise the whole operation or to use a production monitoring service from a china based third party inspection company.
- If your manufacturer is not transparent to where he subcontract the production, then you might loose traceability on your product, component and material. On this base, the quality control of parts might be more difficult because you have to work blind eyes with a mask. If you have some high constraints related to certifications and testing it might become a nightmare since part of your production may be compliant but not the other parts... To avoid this, make sure to perform an incoming material inspection at the earliest stage, and potentially perform a product testing in China directly.
- Confidentiality and intellectual property control might be lost. Indeed, if your chinese manufacturer subcontract the production and give access to his subcontractor to documents, design, and any other elements related to your intellectual property or to your final client, then you might expose yourself to some copycat and bypass trouble. To avoid this, and if you are unsure about your supply chain, then I usually recommend to perform

2./ Technical capability

Unlike what many people think, many chinese manufacturers are not developping product by themselves and are subcontracting the development to other companies. I talk about this issue in another post here : "Developping product with chinese manufacturer".
Same than for 1./ the problem are related to IP protection and confidentiality.

3./ They are just trading some products

Sometimes, you have to be smart enough to understand that a particular chinese factory is not the real manufacturer of the product they advertise in their catalog or show room.

We have been in this case in the past with a toy vendor. A toy factory was producing plastic toy. One of our client was interested by one of the toy they were advertising on a B2B platform as being their product. We contacted the vendor and started the sourcing and qualification process at distance first. Till that time everything looked fine. When we performed the factory audit service we were supposed to do in the toy factory, being on site we were still thinking they were the real manufacturer of the toy because when we arrived at their toy factory we found out they were producing many different kind of toys. At this moment, the manufacturer was still claiming he was producing the toy we were looking for.

By digging a bit deeper (since I am extremly curious and sometimes a bit suspicious), I discovered they were not the real manufacturer of the toy but were just trading it from a factory who was only 2 street away from their manufacturing plant. They had simply leverage their toy catalog and exposure to propose some toys which was not there by performing some trading activity.

How to prevent subcontracting and avoid related risks

1./ Audit deeply your supplier

This is very important to perform proper due dilligence to your potential supplier. The minimum is to perform a manufacturer assessment, but best is to perform a deep factory audit so you can have a very clear picture of your potential vendor.

2./ Make things clear by written agreement that they should not subcontract without your authorization

Be clear with your chinese manufacturer that they should not subcontract production to other without getting your agreement. Specifiying and writting black on white the rules of the games via a contract is essential. Make sure they understand it by asking them to chop your contract with their name and signature. Make sure your contract is in chinese or bilingual.

Specify to them that subcontracting in a non transparent way is unacceptable and would be subject to rejecting the production.

3./ Perform quality inspection during the production

Control, control, control ! This is the most important. Don't wait the last moment to just perform a pre-shipment inspection. You would better either employ a buying office in China to control your production or to ask a quality inspection company to perform some production monitoring and during production inspection. So that you can follow up and contol your manufacturing phase tightly without relying too much on your chinese manufacturer.

 

What is your experience with chinese supplier subcontracting the production ?

About Christopher Oliva 59 Articles
Christopher Oliva is an Engineer based in Shenzhen since 2008 involved in Product Development, Supply Chain, Sourcing, Quality Management and Manufacturing activities. With a Msc Electrical Engineering and a Business Administration background, an ISO 9001 Lead Auditor Certification, a Six Sigma Certification and a Quality Engineering Certification, he works as a consultant on mission and contract oriented to Product Development, Manufacturing Management, Quality Assurance & Quality Management System setup. He works in the product development and engineering field, and as well as an advisor and quality consultant for several quality control and quality assurance companies.