How to ensure Chinese manufacturers use correct components?

by CIL1

How to ensure Chinese manufacturers use correct components?

by CIL1

by CIL1

Within the Electronics industry, there are hundreds of components with minor similarities that can fulfil various applications and functionalities. Insufficient quality inspection or using the wrong components can affect certain functionalities of a product even though there’s a minor difference in the internal circuits/chips.

Dealing with Chinese manufactures can be a headache when it comes to production requiring professional internal raw materials management. The managerial levels vary depending on the manufacturers’ structures, approaches as well as professionals.

In China, negotiation is possible. However, you can be surprised by their mistakes and “solutions” after several rounds of negotiations for quality issues or defectives.

One of our clients faced a difficult situation like above.

Unfortunately, when executing a quality inspection and quality issues occur, both sides, including the client, have to compromise between accepting defective products or financial losses most of the time.

This situation or similar can be prevented with the proper purchasing and materials management.

Here’s how:

1.The use-case scenario: manufacturer’s improper quality inspection and raw materials management

The product our client purchased from a manufacturer involved various components in assembly production. For specific functional purposes of a digital product, every client has different assembly requirements, resulting in complex stock management at the manufacturer’s side.

Lacking professional raw material stock management skills, the manufacturer mixed up and misused the critical component-chip-that shares the exact model name as some others but with slight differences in applications and functionalities.

The minor discrepancies in the same batch of the products weren’t noticed in the quality inspection until some end consumers complained and asked for a refund due to the slight differences in digital functionalities, causing financial losses as well as reputation damage to the client.

The manufacturer was unwilling to take the responsibilities with financial compensation or new production by explaining that the slightly different functionalities didn’t affect the product’s overall experience.

As a result, our client got trapped in a vulnerable situation as they didn’t have the details written in black and white before production.

2.Problems encountered: production delivered with the wrong chips

  •  The manufacturer mixed up the chip and applied it to the same batch of the product, resulting in slight differences in functionalities.
  • Minor focus on possible differences in functionalities during the quality inspection.
  • End consumers complained and returned the products due to the difference in overall experience in functionalities, causing significant financial damage, including shipping fees, bank charge, labour costs, refunds to end consumers, and more.
  • The client could not sell the products as new or sell the product at all if the user experience was severely affected.
    • Actually, as a company, the client couldn’t sell the products because “second hand (defective)” products would easily make a negative impact on the name of a brand. Moreover, a company that “has a name” wouldn’t sell secondhand products (packages were opened) to other traders, even though at a lower price.
  • The manufacturer was unwilling to refund or compensate for the client’s financial losses caused by their mistake.

3.Origin of the problems: lack of purchasing and materials management

One of the critical skills in raw material management involves selection and quality inspection of the materials needed for production. Proper raw material management means the abilities and capabilities of how a manufacturer manages the raw materials (components) at the right level, the right time, the best cost, most importantly, the right place.

(1)The manufacturer lacked proper skills in IQC and materials management:

In this situation, the manufacturer was not able to manage the components at the right place – mixing up different versions of internal circuits. It turned out two versions of chips slightly different in functionalities were applied to the same production batch.

Meanwhile, IQC (Incoming Quality Control) is vital to control the quality of the incoming materials and parts before and even during production. With incoming quality inspection, a manufacturer can evaluate whether the correct components are applied or assembled properly to meet clients’ requirements accordingly.

(2)The client was not aware of the needs in risk assessment for this purchasing:

First, the client was not aware of the different versions of chips in the warehouse, as the manufacturer didn’t mention it before.
Plus, with insufficient risk management experience in purchasing, the client didn’t have the details of functionalities written in black and white, leaving room for the manufacturer to use that (product still fulfils its purpose) to against the complaints.

As a result, the client was not aware of the needs for quality inspection on the functionalities of the finished products.

(3)The manufacturer wanted to maintain the margins:

Before the client returned with this quality defect, the manufacturer didn’t inform them about the version difference of chips for different clients in the warehouse.
From a manufacturing business perspective, the manufacturer insisted that they were obligated to neither inform the clients about the different versions of chips nor compensate for this minor difference in functionalities.
Furthermore, the manufacturer usually would try to maintain their margins. Any returns or new production may cause significant financial damage to them.

4.A practical solution to a successful purchasing: by IAAD China Working Method

In this case, the source of the problem was the mix-up of the chips.

We can find practical solutions by implementing several practices according to the book IAAD China Working Method.
Solutions vary in different situations and issues. You may take this case as a reference to apply the key of the solution to the same or similar cases with customized strategy, when necessary, to prevent repeated issues.

(1) Agreement – IAAD China Working Method

To avoid the same or similar issue, the key is to understand the possible versions of chips at the manufacturer.

It’s vital to have all the detailed information and functionalities of your chips and the differences from the versions for other clients of the manufacturer that could be easily mixed up to the same product. With this, you would be able to describe your chips in details in agreement with terms and conditions.

A few steps you can follow:

  • Investigate the differences between all available chips at the manufacturer’s warehouse and what they differ from your versions.
  • Describe the detailed functionalities of your product in the contract:
  • List down all functionalities in details clearly so as to avoid the manufacturer find possible excuses saying that the product meets the functional purpose fulfilment.
  • No differences in functionalities shall be allowed.
  • Mention which party shall take the responsibilities and obligations in case the wrong chips are applied in the production or any issues or defectives caused by it, such as minor difference in functionalities.
  • Mention the compensation to the case, including who, when, and how.
  • Make sure the manufacture agrees on the agreement written before production starts.

(2) Assessment – IAAD China Working Method

Once the agreement has been signed, you can start to proceed with the quality inspection (assessment) during the production to see whether the functionalities are compliant with the requirements. Another important reason to implement the inspection before shipping: even if any problems found during the production, it’s still possible for the manufacturer to replace the wrong chip.

Before shipment, the manufacturer still has financial interests to solve the problems. Otherwise, after balance payment and shipment, you will lose the negotiation power to make any requests even though you’ve written all details in black and white, because it will cost the manufacturer a lot to take the legal responsibilities. When the manufacturer is not willing to take responsibilities agreed, they would consider alternative options that might not be beneficial to you.

On top of that, you would probably get trapped in a never-ending negotiation with the manufacturer. Most importantly, it will cause you trouble in a significant financial loss as well as damage to the name of your company and brand.

Conclusions:

A few key takeaways for the solutions:

  • Learn the possible versions of chips that could be mixed up to the same products by the manufacturer.
  • Investigate the differences between all available chips at the manufacturer’s warehouse and what they differ from your versions.
  • Create and sign an agreement with the manufacturer by listing all the details of functionalities, obligations, and compensations.
  • Execute quality inspection to see if the manufacturer is using the correct chips before shipment.

To learn more about China’s supply chain environment within the Electronics industry, contact us or read the book IAAD China Working Method.

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