It seems like 90 percent or more of the time when a company gets defective product from their Chinese manufacturer, the manufacturer blames a subcontractor. Now I know that in some of these cases there was no subcontractor and in many more of these cases, it was not the subcontractor’s fault. But we have always been of the view that subcontractors increase risk and, when possible, should be avoided. Far far too many China product sourcing problems stem from subcontractors.
In The Six (Not Five) Keys To China Quality, we spoke of why we typically write our OEM Agreements with Chinese manufacturers to preclude their using subcontractors:
We typically put a provision in our OEM agreements (which we nearly always do in Chinese for better enforcement in China against the manufacturer) mandating that the Chinese manufacturer cannot subcontract out the manufacturing. We have been doing this for years and, as far as we know, no manufacturer has ever violated this provision. I know many of you are dubious of this record, but hear me out. Let’s say the Chinese manufacturer has 30 customers for whom it manufacturers product. Let’s say only four of those customers have a no subcontracting provision (my guess is this number is more like to be two, but for the sake of argument, let’s go with four here). The China OEM manufacturer gets really busy and has to subcontract out some of its manufacturing. It can subcontract out the product manufacturing of any of its 30 customers, so why wouldn’t it choose to subcontract out the product for the 26 customers who have no contract provision prohibiting subcontracting? I call this the bike lock theory of Chinese law because the no-subcontract provision operates like a good bike lock. The thief can still steal your bike, but why would he when there are so many easier targets out there?
And when a subcontractor is necessary, we write into the OEM Agreement (and if there is a Supplier Manual, in there as well) that only subcontractors previously agreed to in writing by our clients may be used, along with a clear-cut liquidated damages provision for any violation.
I thought of the above today after a client of ours that supplies product to China told me of how Wal-Mart has adopted a “zero tolerance” policy regarding unauthorized subcontractors after a fire at a subcontractor to a Wal-Mart supplier in Bangladesh led to 112 deaths.
Bottom Line: If possible, your OEM Agreement with your Chinese manufacturers should prohibit subcontracting. If not possible, your OEM Agreement (and your Supplier Manual) should make very clear that only subcontractors authorized in writing by you will be allowed. It (or they) should also make clear that any failure to abide by this policy will result in a stiff penalty (labelled as liquidated damages in your OEM Agreement) or, better yet, a termination of that particular supplier.
You have been warned.