The Cost of Mr. Zhu

Locating quality suppliers is always the challenge when doing business in China. While visiting with several suppliers in Dalian, I went to one of my favorite suppliers - Mr. Lu. Mr. Lu was capable of quoting from engineered drawings, and providing quality prototypes and samples, but not capable of sustaining product quality during production runs. These inefficiencies required Mr. Lu to invest in his infrastructure in order to establish operating systems that would produce sustainable quality during production runs. The new operating systems would earn Mr. Lu the privilege of quoting on long term purchase orders (3 to 5 years) from several American companies. In general, the commitment required to establish the new operating systems will take Mr. Lu about 6 to 12 months of tutoring, auditing, and persistent sampling. If successful, Mr. Lu would become a great quality low cost supplier, creating long term revenues and relationships with several American companies.
The downside to Mr. Lu's successful transition is his lack of capacity and scalability. Most Chinese suppliers, like Mr. Lu, end up failing in their second and third year because their American customers get greedy for gain and assume that 6 months of success with Mr. Lu gives them a green light to unload a wagon load of purchase orders. This wave of purchase orders is generated from an over zealous American executive who loves to reduce the annualized PPV (price part variance) regardless of the suppliers capacity and scalability. And, why not? The over zealous executive just received a whopper bonus for realized annual savings of 60 - 70% after freight cost for buying product direct from China. The only way to prevent the failure described above is to provide the American companies with a clear understanding of the supplier's capacity and scalability and teach the Chinese supplier how to do forward planning.
Part of Mr. Lu's forward planning was quantifying his machinist labor content. By that time, Mr. Zhu had grown to 16 machinist and 2 inspectors. Before I tell the per hour labor cost of Mr. Zhu's machinist, I should explain the following: The employees were 16 years of age or older (80% grown men and women), uniformed, housed, and fed three squares a day. Although I could never convince Mr. Zhu to provide safety glasses to his employees, he did compromise by providing fatigue pads at every work station. Employees could not work more than a 12 hour shift, but could work a six day work week. Every employee was required to take off one day a week. Employees were given appropriate breaks, could eat at their work station, and smoke anywhere they preferred. Outside the PPE (personal protection equipment), the shop resembled and operated like several manufacturers I had audited or consulted in the states.

Mr. Zhu's Hourly Labor Rate - (16) Machinists:
Machinist Hourly Rate $0.35
Total Machinist Hourly Rate $5.60

Mr. Zhu's Labor Breakdown Per Machinists:
Machinist Hourly Rate $0.35
(72) Hour Work Week $25.20
Monthly Net $100.80
Annual Net $1,209.60


Don't be shocked! The annual rural income of $1,209.60 is double the Chinese national average of $480.00. This is the equivalent of an American employee who doubles their income with one job change! Learn more on China suppliers by going to www.chinabizsuccess.com.