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Path: Sourcing
News & Advice >> Import
from China Advice >> The four levels of Chinese factories

The
four levels of Chinese factories

Posted: August 27,
2013

by Renaud Anjoran

Over the years, I noticed that it is possible to lump most factories in one
of four categories:

Level 1: the recently-created and unstructured workshop

Level 2: the semi-organized factory that got out of level 1 but that is
still struggling to keep quality & timing under control

Level 3: the factory that made big efforts to get organized, with the
objective of pleasing large customers

Level 4: that rare bird that applies lean
manufacturing, and that avoids level 3′s rigidity

In this article I am excluding Chinese state-owned enterprises, which are a
breed on their own.

Most manufacturers are at level 1 or level 2:

Level 1: the unstructured workshop

Typical profile:

0-200 workers, engaged in simple processing (often assembly)

Managed by the owner and his family

No quality system, no quality control staff

No ability or time to work on complex prototypes before production
starts

Focused only on “making production” fast and on the cheap

Can accept small orders, as long as purchasing components in small
quantity is possible

Seldom works directly for export customers

Count on other manufacturers or trading companies to get business

Result: very low costs and low MOQs, but needs to be followed very closely by
customers.

Level 2: the semi-organized manufacturer

This category is a mixed bag. Some export 100% of their output and are very
familiar with their market’s quality & safety standards. Others focus more
on the domestic market or the most price-sensitive countries (Middle East,
India…), and should be avoided by importers from North America and Europe.

Still, it is possible to draw a somewhat typical profile:

200-800 workers

Has grown out of the “disorganized workshop” stage

Has had to hire a few professional managers because of the growing
complexity of operations

Has had to hire a few QC employees, to avoid big disasters

But still, low concern for quality among staff and managers (in most
cases)

May have English-speaking salespeople if direct relationships with foreign
customers is a goal

May still get orders mostly from trading companies and other
factories

Result: costs are relatively low, and quality & timing are relatively
unstable. The owner’s motivation for your orders still determines their
reliability.

Level 3: the organized manufacturer

Typical profile: 800+ workers, owner is often from Taiwan or Hong Kong.

They have tried hard to comply with demanding buyers’ requirements:

Every aspect of production is specified in detail

Production is checked thoroughly by QC department

Hopefully, strong staff discipline to follow the system

Customers’ IP rights are more strictly respected

I described this type of company in more details here.

Result: few quality issues, but high indirect labor costs (QC, middle
management) and low flexibility.

Level 4: the continuously improving manufacturer

Typical profiles:

Part of a large multinational group, or

Midsize factory with a process-oriented general manager.

They follow the lean model:

Regular improvements to material flow and to each processes

Errors are prevented or
corrected at the source

Staff is trained and supports the philosophy

Result: high customer satisfaction (close to zero defects; production cycle
below 5 days) and relatively low cost (high productivity of operators, limited
QC staff and rework).

Unfortunately, these companies are a very small minority.They usually do not
advertise themselves on B2B directories. They are very hard to find.

What kind of Chinese factories should you work with?

First, a couple of rules to keep in mind:

If you work with a supplier that is too
large relative to your orders (e.g. you would occupy 1% of their annual
capacity), you will be quoted high prices and given poor service.

If you work with a small supplier that cannot produce the quantities you
order, they will be forced to subcontract production and you will probably be
in for a disaster.

My general advice would be as follows:

If your orders are very small, you might need to work with a trading
company that will place your orders in a level 1 factory and follow
production

If your orders are large enough to work directly with a manufacturer, but
not big enough to be interesting to big factories, go for level 2

If your order are considered large and even big companies actively fight
for your business, go for level 3

If you are in a very quality-sensitive industry and you cannot afford even
1% of defects, spend time and search for level 4 (but you might not find any
in your vertical)

What do you think?

Renaud Anjoran is the founder of Sofeast Quality Control and
helps importers to improve and secure their product quality in China. He writes
advice for importers on the Quality Inspection blog. He
lives full time in Shenzhen, China. You can contact him at [email-masked].

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