Your Factory Changed a Component Without Telling You. Now What?

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You're listening to China Manufacturing Decoded from the Sophies Group.
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Hello welcome back to episode 352 of the podcast today and renault joins me,
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and renault back in episode 339,
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which was a couple of months ago now we discussed price wars amongst chinese
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manufacturers and how pressure to reduce those costs leads to certain problems
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like quality fade And that,
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you know, might mean that factories are substituting materials or components,
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but doing it on the quiet.
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So that's the issue that I want to explore with you today in more detail.
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So why unauthorized substitutions happen and how buyers can uncover them and
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what they can do to prevent them.
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So is this something that you frequently see happening?
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It's something that every buyer is afraid of i'm sure right
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and it can take many forms if you buy
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electronic products i don't know maybe a i don't know tablet well you never
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know the spec you know of the whatever
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the memory how much memory you're going to have or how many megapixels of the
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camera and things like that
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if you buy i
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don't know like clothes well
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maybe they try to save by making everything a little bit smaller
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right or maybe they try to save by making a substitution such as it could be
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the main fabric let's say but the main fabric it's kind of easy to to catch you know
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but maybe some of the smaller accessories right buttons and so on it's not so
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much of a problem actually in garments but if you buy
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You know, yeah, pieces of steel that are used to do, I don't know,
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scaffolding, for example.
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Yeah, that, you know, they might use a cheaper grade, right?
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A cheaper grade of steel.
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Or they might just make it thinner and or shorter, right?
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Like, all of this is basically a way to cut costs. So
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it's not uncommon, let's say, when you deal with relatively small factories
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where maybe the owner or the owner's wife or the owner's cousin is buying the materials,
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trying to save for the family or something.
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Or in general with factories that are that tend to operate at the lower scale
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of prices in their industry so cost control is is the entire game basically
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of factories that are about to go out of business
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Well that that kind of led into my next question because i was gonna say all
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right if factories are making these changes why would they want to change something
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that's already been specified and approved.
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So you've mentioned cost being a major motivation.
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I mean, could it be because they believe that they've got a better alternative
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and they just don't feel the need to inform their customer, for example?
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Okay, there's a lot to unpack here. First, you said something that has been
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specified and approved, it's not always the case, okay?
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Professional buyers will make sure that things are specified black and white
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you know referred to in some kind of contract or po etc etc okay
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smaller buyers maybe less organized buyers may not cross every t and dot every i so
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the factory might think they have a lot of freedom right so there's the first first
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first kind of issue here is that there might be a disconnect
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And sometimes that's really really really the wrong attitude the wrong approach
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but a buyer will come to China we're saying Wow you know we found a manufacturer they really
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could be a trading company right but they really know what they're doing they
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know the product inside out maybe they know Oh, you know, some of the big names in our industry,
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maybe they're working with them.
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You know, wow, that's amazing. I can learn a lot.
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And then their attitude becomes, well, you know, you know that.
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So just make sure it's acceptable in the market to, you know, where I sell the goods.
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And that is really the wrong way. Okay. That's really the wrong way.
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When you deal with, let's say, the average Chinese factory, do not do that.
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Okay, because then you cannot complain if they substitute. They say,
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well, you know, we tried this nicely.
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Let's try something else. Yeah, we believe it's fine too, right? Very bad.
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After that, you said, why would they make a change?
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Well, sometimes the customer themselves say, hey, we need to cut the price that we pay you, you know.
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Again, that could be a disconnect where the supplier might...
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They wrongly understand, find a way to make it cheaper so that the price can be lower. Okay?
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But the buyer doesn't say it this way, but that's, you know,
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that's the way it's perceived. Well, in their mind, it's, you know, it's simple.
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You know, you want to pay lower price, you know that quality cannot be the same,
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right? It's pretty obvious.
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There's a high context culture, right?
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What's his name? Ofstader would say. so
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if the buyer doesn't clarify the context
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it is assumed you know that the receiving party is responsible for providing
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the missing context so okay you want to pay more well it means you're okay with
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you know cheapening the product a bit yes
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That's a subtle distinction isn't.
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It Yeah, right. And from what I read, if you then sue the supplier in China,
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and you happen to be in a court with a Chinese judge, they might say, well, that's fair.
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Yeah, you know, nothing bad with that, right?
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Or at least they would receive it as a valid argument, let's say, at least.
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So be very clear, right?
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If you say it's got to be cheaper, or if you say, I know the exchange rate is
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getting unfavorable, or I know that the materials are getting more expensive,
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you know, memory cards these days, you know, memory chips, right? Or a lot of other things.
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But I cannot pay more than X, right?
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Basically, you're telling the supplier, what you're thinking is,
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just find a way within your own operations to get some efficiencies maybe squeeze
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your own suppliers on price
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I don't care if you make a profit I cannot pay more than that that's it but
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the product must stay the same right but what they receive
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on their side on the receiving end is oh
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Cheapening of the product you know yeah then let's try to find something that
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is reasonable you know if they want to pay 10 less let's cheapen the product
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by about 10 but you know not more than that because it's not fair
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right i don't uh depends on what kinds of gains they might play or might what
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what kind of reasoning they might have
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another thing that might happen also is that some Chinese suppliers are what
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I would say are not reliable suppliers, not suppliers you want to deal with.
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They kind of play games and maybe they are a little bit like gamblers.
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There's always bad apples in every market in every country, right?
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So I'm really not knocking on Chinese but there's something that sometimes we can find and they will
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knowingly cheapen the product even if the cost of the materials is not going
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up even if the customer is not pushing them or whatever right they will try to cheapen the product
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just to find the limit okay and that's
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that's something that what's the author's name Paul Midler yeah Paul midler
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explains in his second book what's
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wrong in china so if you want to have a kick you can you can read that
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and he says some factory bosses really hate the idea of leaving money on the table and so they will
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you know if you want i don't know a component with whatever 20 different i don't
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know layers let's say okay
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Then they would start with 20 because they think well the first time they're
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going to check okay and then they're like if 20 was okay 19 is going to be okay right
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and then next time they didn't say anything if 19 was okay then 18 is okay right
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maybe we'll go directly to 17 because yeah they're not checking now we know right
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and then at one point the customer might come back and say hey you know you're cheating us all right
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but and then maybe oh sorry yeah whatever, I'll give you a discount for next time,
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made a mistake, blah, blah, blah, right?
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And then they're like, ha, so they cannot accept 15, but like 17 was okay,
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right? So they want to calibrate it.
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Okay, so there's always bad apples on every market, right?
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And in China, sometimes it takes this form, so you got to be careful.
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And that's what Paul Midler also is the one who wrote in 2007, I believe,
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after the mattel lead paint you know lead paint on toys that that big scandal
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he wrote an article where he explained okay this is what you know i would call
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quality fade is where they knowingly
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basically cheapen the product right and in most cases cheapening the product is
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buying cheaper components or materials
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yeah i'll leave that's what i'm in mind
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I'll leave links to these in the show notes right you mentioned checking and
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we're going to come on to that in a couple of minutes but,
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a kind of obvious question here right but some,
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buyers they might be thinking well if my manufacturer has given a replacement
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component for example which looks identical the finished product still works so,
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why should i be so worried about that,
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yeah, maybe cosmetically, that's the truth.
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However, I think that you would strongly suggest that that's not the right attitude.
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Well, first, if they are in a highly regulated industry, you know,
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they're going to get into big trouble.
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Try to do that with automotive parts or medical devices or something like that
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is really not going to fly. Okay.
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Now, let's say it's consumer products, not highly regulated.
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It really depends. If you have, I don't know,
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Some mechanical gears, let's say, and then they're supposed to be made in an
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engineering plastic that's really going to withstand whatever,
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10,000, let's say, cycles. Okay, fine.
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But then suddenly you chippen it, you use some, let's say softer plastic that,
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oh, I should not say softer, but plastic that will
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degrade much faster under the force of the moving parts.
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And suddenly after 100 cycles, you already start to, you know,
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to see there are problems and then it just suddenly doesn't work at all.
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So that really causes an issue with the reliability of the product,
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and you might have a lot more bad reviews, warranty returns, etc.
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There's so many examples. You use, I don't know, maybe a motor or
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Maybe just some electrical parts that have a certain rating and supposed
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to function as expected within a certain load, let's say, and then you degrade them.
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Well, the product might break very early or it might break after three months, okay?
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The product might also become critically unsafe if these parts were actually
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safety-critical parts, right?
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And non-compliant also, right? So if it can lead to a failure that can lead
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to a safety hazard, basically.
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That's pretty serious. Okay, pretty serious.
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And just to go back to the example of Mattel, the toy company in 2007, well,
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their supplier was using paint with lead because I guess it's cheaper and also
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it dries much faster, so it's more convenient, right?
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What happened? Like major recall, you know, millions and millions of dollars
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wasted plus a big hit to the brand and we're still talking about it now 20 years later right?
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I'm sure they're so pleased.
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So yeah right so it really depends on on what it is right imagine you buy a
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car and then oh you know they just changed something about the brakes
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or the airbags right and well you'll be pleased right well sometimes consumer
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goods can also come with their own safety hazards and now you you you really
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don't want anybody to mess with that
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Sure yeah so that's important advice to heed so just now you're talking about
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checking right and if some buyers aren't checking maybe that gives a bit of
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a longer leash to manufacturers to play games and that's that was the point you were making,
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what sort of checks can we do to discover unauthorized changes such as those
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that we've been mentioning.
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Well you need to start as usual from a risk analysis and how these issues could be uncovered.
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Sometimes it's a simple inspection before shipment, right? And we found so many of these issues.
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And the customer is sometimes totally shocked, like, what could I do?
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Everything's been made already, maybe, you know. But at least it's not shipped yet.
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Hopefully you haven't paid most of what you owe the supplier,
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so you still have some leverage.
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Otherwise, you might need to pick some samples, send them for testing.
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Same thing, right? Suddenly, oh, they're doing PCB assembly in a S&T shop that
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still uses lead-based solder paste. Ouch.
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Okay. Now the whole product is non-compliant to ROS, among others, right?
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So for some of that, you need to do some testing, right? It could be simple
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testing, like picking up on lead, or it could be more advanced testing.
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So, yeah, basically you need to keep track of it.
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In some cases, it might just be doing a quick WeChat call and saying,
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hey, go there and pick up this one and measure this and show me.
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In some cases, that works.
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If you have something very, very specific in mind, it reduces the risk a little bit, right?
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So you need to put filters in place to catch these issues from time to time, at least.
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You may not check everything all the time, of course, except if your production
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batches are pretty large or a lot of money, but you need to have some kind of
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plan basically based on risk.
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Yeah. And audits, inspections, some of the services that might help with this,
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that's something that we've been doing for a couple of decades.
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So do check out the website for those.
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If we are in a situation where the manufacturer has already made,
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you know, a bunch of units, thousands of pieces, right?
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And we find out that there's been a component substituted for whatever reason,
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this is kind of an emergency situation. How would you triage that? What would you do?
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Well,
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first you need to know the impact of that, right?
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Maybe it's only a small risk.
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And maybe in your market, you know, okay, we cannot use these products maybe
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for like this and this very discerning customers, but for the customers is okay,
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or we're just going to use it for ourselves or something like that.
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So in some cases, you could just say, hey, with a discount, we can buy it,
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you know, something like that.
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Or we just refuse the whole batch and you remake it. What do you prefer, right?
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If you still have a lot of leverage based on the status of payments and the
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contract and so on, then you can push a bit harder, right?
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They have to understand that, yeah, there should be a bit of a penalty.
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So that's one thing. If you really cannot take this product, then, well,
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I mean, if you cut it before shipment and before you send the whole payment,
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at least you haven't lost everything, right?
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But it might be a difficult conversation.
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And what happens to the products that they made, maybe under your brand,
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that you don't want to buy, are you going to ask them to get their destruction
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done and certified somehow?
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Are you going to witness that? Or are all these products going to go in Taobao or wherever?
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It's shipped to Pakistan and Nigeria.
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And then you can expect warranty requests from these countries you know
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yeah it can happen right especially if things don't seem to be fair so that's
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why communication is very important
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they need to know that they messed up they need to know that yeah there's consequence
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to pay and it's normal like they messed up right it needs to be clear
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I mean if it's serious I guess you'd look to potentially start looking at switching
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manufacturers after that,
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maybe there's no way back but if it's a mistake then,
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you know keeping good lines of communication open and preventing this from happening
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again maybe that's the better option i guess it depends on the on the situation
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right i mean if if we've got a like a smaller importer,
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realistically they're not going to have a full-time quality engineer in their
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suppliers factory right so how are they going to control those potential substitutions,
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especially if there's been an issue in the past.
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Well, hopefully they have a backup manufacturer, and depending on how to talk
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with the supplier that messed up that way goes,
00:21:03.181 --> 00:21:07.951
they might decide to go with the backup supplier. And if the backup supplier
00:21:07.951 --> 00:21:09.535
does well, well, that's it.
00:21:09.843 --> 00:21:13.419
The initial supplier is forgotten about.
00:21:14.621 --> 00:21:20.151
That makes a lot of sense. Now, there are cases where this is not possible,
00:21:20.151 --> 00:21:24.511
right? Maybe they buy it, but it's not even their product.
00:21:24.679 --> 00:21:29.347
It's an ODM product that they can only buy from this one factory.
00:21:30.195 --> 00:21:36.488
Well, in that case, right, they see you as maybe just a distributor of their products.
00:21:37.069 --> 00:21:38.963
Not so good. Not so good, right?
00:21:40.273 --> 00:21:46.466
Not many options for you. So that's one of the risks of relying on an ODM supplier.
00:21:48.039 --> 00:21:51.576
You can get to market much faster with much less investment.
00:21:52.943 --> 00:21:58.540
Product is basically already there, ready to sell, but you don't have a lot of control.
00:22:00.394 --> 00:22:04.712
That's a whole other podcast episode, Renaud, right there. Maybe we'll cover that in the future.
00:22:05.947 --> 00:22:10.987
Yeah, yeah, yeah. Different control depending on the kind of supplier, that's for sure.
00:22:11.177 --> 00:22:17.917
Yeah, yeah. Good. Okay, so I think we've pretty much expanded on these kind
00:22:17.917 --> 00:22:19.736
of unauthorized substitutions.
00:22:20.304 --> 00:22:23.521
I guess we're not what we're not saying is like every single,
00:22:24.617 --> 00:22:29.197
change or alternative is is a problem sometimes maybe it's not a problem if
00:22:29.197 --> 00:22:32.349
you're actually discussing this actively with your manufacturer and,
00:22:32.889 --> 00:22:38.327
and you know the components or materials are actually tested and validated and
00:22:38.327 --> 00:22:43.657
and eventually approved by yourself but it's when these decisions are happening without,
00:22:44.217 --> 00:22:50.177
you even knowing perhaps right and so renault's been through the potential drawbacks and and,
00:22:50.957 --> 00:22:55.307
problems that you're gonna get if this happens but also we've talked about some
00:22:55.307 --> 00:23:00.229
of the ways to prevent it and to identify if it's happening so thanks renault.
00:23:01.063 --> 00:23:01.952
Cool thank you
00:23:02.600 --> 00:23:06.517
And thanks everyone for listening there's a lot more practical guidance in our
00:23:06.517 --> 00:23:11.627
blog on our website and you can always reach out to us for help as well and
00:23:11.627 --> 00:23:15.539
do check the show notes we'll be back next week as normal thanks.
00:23:16.996 --> 00:23:19.817
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