Finding a good factory
By: Uncle Ming
Tags: Manufacturing, Kickstarter, Pros And Cons, Dilemma, Price Analysis

Factories are a dime a dozen. They come in all shapes and sizes. The Internet has further enabled many small factories to surface and have a presence on the world market.

But not all factories are “good” factories.

What constitutes a good factory depends a lot on your needs.

Some people are looking for a factory they can partner with that mirrors a lot of the processes that the customer already has, but just in a cheaper location with cheaper labor. Those factories are typically smaller family owned factories with good manufacturing procedures in place, but perhaps struggling to be cost competitive. They aren’t big and don’t have much customers but they offer a lot of value in terms of being flexible to change and being open to outside input. They may value doing things right, over doing things fast.

Some people are looking for a factory whose reputation precedes them. They’re looking for a large factory with a large labor force that can finish an order within days. These factories can make a product very cheaply if it matches it’s area of expertise. But they expect larger orders so they can turn a profit quickly. Because of this they can make big profits despite having small margins. They have lots of machinery, have many departments, boost about ISO9001 compliance and even look good in brochures. While they can finish an order quickly, they need orders given to them weeks or months in advance because they’re always busy and their capacity is always booked up. Because of their size, they are often already audited by social compliance auditors which many customers ask for nowadays.

Some people are looking for factories that are as cheap as they come. Some factories are just a rented space in a nondescript location with 1 or 2 workers and 1 or 2 machines and a little desk and a washroom. While this would stretch what people would perceive as a “factory”, they exist and people give orders to them and receive goods in return. And they’re cheap because sometimes they don’t have a business license and don’t pay taxes. Who cares about a business license when you’re only making “kitchen brooms”, right?

This (prejudiced) classification serves to show that not all factories are created equal and each have their advantages.

When considering a factory, there are a few details to decide.

Full Packaged Service or Purely Making Only

There are 2 broad categories of factories:

One type is purely “making” only and requires you to supply and transport all the raw materials to them. They may also require you to pick up the finished goods when done, although some include this delivery for free because they get to bill you immediately instead of waiting for days for you to pick up the finished goods.

These types of factories are plentiful because the cost of entry are low and the risks are low since they don’t need to be responsible for the raw materials. If they make any errors, they only risk the making cost which is essentially the labor costs, electricity and rent. Depending on your industry, these factories may be specialized in a few types of machines only. If you need access to a wide variety of machines, you need to be prepared to pick up partially finished goods and ship them to other similar factories to complete other operations.

Depending on what you are manufacturing, you may need a local base to coordinate them. But if you are manufacturing something simple, these factories may be adequate for your needs and you can get a better price since you are supplying your own raw materials.

Be wary that these factories may not have experience shipping goods overseas. They may think it is as simple as dropping a package off at Fedex, but international trade may require certain business licenses and export permits which the factory may not aware exists. You may need to guide them on the matter.

The other type of factory is the Full Package Service factory, which is larger and more familiar with producing goods from start to finish and understands how to export goods.

These factories would typically order all raw materials themselves and assume all the risks associated with it. This also means their prices are relatively higher due to the added risk and their Quality Control would also be higher since it is in their interest not to waste raw materials unnecessarily.

Most large retailers use these large factories for multiple reasons:

It moves most, if not all, of the risk of doing business to the factory. It allows retailers to make many products in the same factory which allows them to negotiate better prices. Large factories are known to be more reliable and less likely to bail on retailers, because they need the large retailers as much as large retailers need them. Only large factories will pay to be audited for Social Compliance because it costs a lot of money. Large factories are less likely to break the law or are less likely to be persecuted by the law. Large factories have bigger accounts at their local bank and can accept L/Cs. (L/Cs allow the factory to borrow money from their bank to pay for raw materials, which therefore lessens the need for factories to ask the buyer for a deposit to cover raw materials. However, after the global financial bubble burst, L/Cs have become unfavorable.)

Most people use full packaged factories unless specific circumstances require otherwise.

Social Compliance

You may already know about social compliance from watching the news about factories that collapsed because of poor fire safety code and workers that commit suicide inside their factory.

If not for the bad publicity that goes with it, it may be important to know for one’s own peace of mind that their product didn’t inadvertently cause someone else harm.

Keep in mind that mostly only large factories will agree to be audited for social compliance. They have the resources and desire to be audited as it is beneficial to them too. If your products appeal to the human side of things, you may want to restrict yourself to using only factories that have been audited by reputable auditing firms against international social compliance standards.

For smaller factories, they may not have extra staff on hand to work on social compliance. One misconception of passing a social compliance audit is that as long as the factory has not done anything illegal, they will be fine. However, passing an audit requires the factory to maintain records for things like individual working hours and overtime, equipment inspection records, medical emergency records, have some people trained in first aid, have regular fire evacuation drills, etc. Just claiming that “no one has ever had any medical emergencies before” is not enough. An auditor will require seeing a physical document called “medical emergency records” for the audit to pass.

Bear in mind that if you ask a factory that has not been audited before to be audited, they may ask you to pay for the audit cost.

Fly-by-night and Dead-end Factories

When the cost of entry for building factories is low, you inevitable get a lot of factories whose management doesn’t understand how to operate a factory to survive in the long term.

These factories may survive for a few months to 2 years before they realize they weren’t making any money. Suddenly the benefactor wakes up and cuts off funding to a factory which kills it overnight causing all factory resources (including customer’s production) to be auctioned off to settle debts.

The biggest fear in using new factories is whether the factory will suddenly close down and you lose access to what has been produced.

Or perhaps you are manufacturing a product so cheap that you don’t care if the factory shuts down, because they are giving you such a good price on it.

Or perhaps you are manufacturing a product that sits close to the human body, so you want a factory that will stick around for many years so that you can turn to them for questions and assistance.

Either way, identifying dead-end or fly-by-night factories requires looking at telltale signs:

Is the factory floor busy with other customer’s orders? Is the factory sitting on goods that haven’t moved in a long time? Are the workers working or are they idle? Are the workers working quickly or do they look to be dragging things out? Are most workers there new (worked for less then 3 months)? Is the factory building well maintained or falling apart? Are the machines sitting in dust and cob-webs? Are the machines too new and appear unused (with original wrapping still attached to some parts)?

Summary

When deciding whether a particular factory is right for you, take the time to get to know the factory and identify whether they fit your needs. Don’t just go for the lowest price.