THE REAL COST OF CHINESE MANUFACTURE

A prominent news story highlighted potential pitfalls of Chinese manufacture – the recall of toys by Mattel and Fisher-Price.  Indeed, there is a lot more to this article than just the headlines and many of the factors that apply to China apply equally to offshore manufacture in many other ‘low-cost’ countries.

HIDDEN COSTS

Reputation

With the product recalls there is a very clear cost.  It will be expensive to the companies involved to recall all the products and offer full refunds.  It may be possible to reclaim some or all of these costs from the Chinese manufacturers but that is unlikely.  In addition to the very obvious monetary cost there is the damage that will be done to consumer confidence in the brand.  For some companies an event such as this could prove fatal.

Quality

This has been largely covered above.  How can you be sure that the correct materials are being used?  Visiting the factory may help to put your mind at rest but be warned, it is not unknown for Chinese manufacturers to put out the correct materials and generally tidy things up when they know their customer is visiting.  As soon as you leave the factory they revert to their former practices.

If faulty product is delivered it may prove very difficult to get the manufacturer to accept that it is faulty and replace the batch free of charge.  Even if an agreement is reached there is then the logistical problem of waiting for replacement product to be manufactured and shipped.  Four weeks at least by sea from China.

Logistics

Lead times.  Current market conditions demand rapid response for many products and components.  Even if the manufacturer can start work immediately there is still the question of shipping time.  Some of this can be compensated for by increased stockholding but has the cost of this been added to the price quoted?

Management Time

When a decision is taken to source products and components overseas frequently the only consideration is the price quoted.  The obvious add-on costs, such as shipping and duties, are taken into consideration but what about administering the overseas supplier.  More time, and therefore more staff, are usually required just for the day-to-day administration.  What about factory visits?

If there is a problem someone may need to visit to resolve the issues plus regular visits are often desirable.  Are these additional administration and travelling costs added to the price?

Counterfeiting

This can cover a multitude of factors.  It has been proven that British safety certificates have been forged by some factories producing toys (Source: The Sunday Times).  Some of the paint used on the recalled toys was counterfeit, hence the presence of lead.  Then there are numerous tales of unscrupulous Chinese manufacturers making cheap imitations of products (relatively easy when they have access to the real thing), and passing them off as genuine in some markets.  This latter point does not just apply to fake Rolex watches, etc but also industrial products and components for aircraft which could have disastrous consequences.

Summary

In conclusion, this is not to say that all Chinese manufacturers are bad or out to defraud their customers.  The recent spate of horror stories may bring about a will to change Chinese manufacture for the better.  However, it does serve to illustrate some of the pitfalls of offshore manufacture and the need for close control.  This all adds costs, costs that are frequently hidden and not taken into account when comparing prices with UK based manufacture.

There is evidence of some companies moving manufacture back to the UK and the events of the past few weeks will prompt others to consider this action.  It is worth pointing out that some of the costs and potential problems highlighted above can apply equally to other low-cost countries, not just China.

Finally, the low quote rule can apply to a UK based manufacturer as well.  It’s unwise to pay too much but it’s worse to pay too little.  When you pay too much all you lose is a little money…that is all.  When you pay too little you sometimes lose everything because the thing you bought was incapable of doing the thing it was bought to do.  The common law of business balance prohibits paying too little and getting a lot…it can’t be done.  If you deal with the lowest bidder, it is well to add something for the risk you run and if you do that you will have enough to pay for something better.

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