The importance of evaluating a factory’s finances

One of the largest toy makers in the UK, Hornby, a company which specializes in model trains, has been having problems with their factory in China. These problems go back to 2006 when the factory had some financial issues that were impacting production. The problems continue today as the factory faces myriad challenges including the rising costs of plastic and other raw materials and an acute labor shortage. What this represents for Hornby is five years of lost sales – both from reorders of existing product and from the inability to get new prototypes to market.

It is very important to consider your vendor’s financial circumstances when you do business with them. If a factory is having financial problems you can be certain that your orders will be impacted. The factory may not be able to make timely payments for the raw materials necessary to make your product, or they may buy substandard raw materials. Factory management will be pre-occupied and will not involve themselves in production of your order. Small details will be forgotten on the production end meaning that big problems will surface when product is delivered to your DC or to your customers. Facing financial problems factories will resort to severe cost cutting. All of this will have an impact on your order, from late deliveries to serious product quality issues.

The question is how to tell if your factory is in good financial standing or not? It is not realistic to expect that the vendor will be up front with you about their financial state. Of course, you could ask to see the FTY’s balance sheet– a reasonable request when you are about to go into business with a new vendor – but books can be cooked, and in some factories they are cooked with all the skill of the most exquisite Peking Duck. Still there are ways to evaluate your vendor’s financial standing as follows:

1.) Is the factory busy? If not that may be an indication that they are having financial problems. Moreover, if they are not busy, chances are very good that they have laid off workers. You have to ask yourself then if the FTY is going to be able to hire back the workers to do your order. With the labor shortage in South China nowadays it is no given that workers will return.

2.) Do the factory’s facilities seem to be in good order? Many small factories in China are in a constant state of disarray. But if there seems to be a lot of broken machinery (you can find out just by asking the vendor to turn machines on for you) then this is a clue the vendor does not have the money to repair the machines or the orders to warrant the repairs. A red flag.

3.) Are the workers young or old? If they are older, the FTY probably does not have the money to pay younger workers.

4.) Are workers paid on time? Are they paid overtime? This is where it is very helpful to know some Mandarin. Factory management will not tell you this, of course, but workers will.

5.) Does a factory ask you to pay for samples?  This may be a sign of extreme cost sensitivity, which is not good for you.

In short, you really have to be very careful about entering into a relationship with a factory that is having financial problems. Otherwise, their problems become yours.

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2 thoughts on “The importance of evaluating a factory’s finances

    • Kathy: Glad you found the post useful. Yes, it is difficult when you have to choose between:
      1.) a factory that is busy and may not be able to give your orders the priority you want them to.
      2.) a factory that is not busy, can devote all its resources to your production but that may be having
      serious financial problems unbeknownst to you. They then use your 20-30% down payment on an order not
      to buy raw materials for your production but instead to shore up other areas of their business.

      Generally I would stay away from factories that are not busy unless you have a very small order
      or would be right there on-site for the entire production.

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