ISO/TS 16949: Great Improvements Over ISO 9001

Over the past few days I have been learning a lot about the ISO/TS 16949 standard. We are working on the development of adequate auditing services to clients in the automotive industry.

This “technical specification” (TS) goes much further than ISO 9001, and is closer to quality management best practices.

What is this TS about and where does it originate?

As mentioned in a previous article, a car maker (e.g. GM, VW…) can’t switch a supplier once a car model is in production. So they have to ensure they work with well-organized manufacturers. They have no second chance!

The TS is a set of minimum requirements for car component manufacturers. It was originally developed by “Big Three” in the US, and then European car brands joined this scheme. Even a few Chinese car brands recognize it and use it.

It has to be relevant and applicable to a very wide product range, from the textile or leather of the seats, to wood parts used in luxury cars, to lighting and electronic systems, to the rubber of tires, etc. So overall it is rather generic — but less so than ISO 9001, which also applies to service providers.

What elements from the TS are particularly interesting?

I noted a few requirements that are absent from ISO 9001 but that, I think, are

  • The factory layout should be designed to make material flow easy. The premises must be in a state of order and cleanliness. There is a mention of the need to focus on lean manufacturing principles, and the term “continual improvement” replaced ISO 9001’s “continuous improvement”.
  • The factory must have contingency plans in case of emergency (power shortage, key equipment failure…), to reduce the likelihood of shipment delays.
  • The factory must review quickly (in less than 2 working weeks) the engineering specifications received from customers.
  • Many more elements must be considered during the design and development process — for example, failures noticed on vehicles on the road, the impact on worker safety in the factory, etc. The use of FMEA (an excellent but rather difficult preventive action tool) is mandatory.
  • The factory must provide on the job training to all staff for new/modified jobs that have an impact on product quality.
  • Work instructions must be written down for all operations that have an impact on product quality.
  • Someone must have authority to stop production if quality issues appear — even during the night shift.
  • Acceptance sampling based on AQL limits is not allowed. A whole batch must be rejected when 1 defect is found, then the supplier has to check the entire batch piece by piece, and a corrective action plan needs to be implemented.
  • The factory must apply the “core tools” of the auto industry — for example the quality plan needs to go much more in depth than what an ISO 9001 auditor could accept, and new product developments need to follow a much stricter process.

Is it as easy to game as ISO 9001?

Probably not. It is managed by an industry body which authorizes much fewer certifying bodies than are authorized for ISO 9001. It reduces the likelihood of auditors and audit program managers following substandard practices, as is oftne the case during third-party ISO 9001 certifying audits.

What do you think? Any experience with this standard?

Inspecting During Production vs Monitoring Production

Some buyers realize that they need to keep a close eye on production is important, and that catching problems earlier is far cheaper than later. This is an approach I strongly encourage.

There are two ways of checking production closely:

  1. Taking several snapshots along the production cycle, by performing 1-day inspections,
  2. Looking at the movie as it unfolds, by stationing 1 technician in the factory for a certain period.

Let’s look at these two solutions one by one.

1. Inspecting During Production

The idea is to send a technician or engineer to a factory, generally for one day each time. When to do it? The key is to identify the main risks in production. Here is a generic representation that applies to many product lines:

Inspection during production

(Note that the production of sub-suppliers can also be inspected. It doesn’t necessarily all take place in the same facility.)

Three things can be confirmed:

  • It is basically an inspection of the components, the process, and/or the product. They are compared to the buyer’s specifications and/or to best practices (hopefully the inspector is an experienced engineer and performs a process audit).
  • The production status and allocated capacity can be checked and compared to the supplier’s promises.
  • The place of production can be confirmed, as well as what processes are done in-house vs. at a subcontractor’s.

If serious issues are found, the following sequence can be followed:

  • The inspector issues a CAR (Corrective Action Request),
  • The quality manager can push the supplier to prepare a CAP (Corrective Action Plan) and give comments about it,
  • The inspector checks if the CAP has been applied effectively.

(Note that most Chinese inspectors are capable of issuing a CAR and then checking if a CAP is effective, but fewer of them can confirm the CAP proposed by the supplier — in most cases this is done by a quality engineer or a quality manager.)

For more information about inspection during production, read this article.

2. Monitoring Production

Instead of sending an inspector at several times during production, for large or complex projects it makes more sense to station one technician/engineer in the “main factory”. He will do everything that an inspector does (see part 1), while keeping an eye on what happens every day.

Typically he also goes to the main subcontractors to check production status and quality. But sometimes the supplier refuses to disclose this information. The business environment in countries like China is not very transparent…

Since this stationed technician can give a “movie” rather than a few “photos” about the situation, he can set up a Gantt chart that shows, for each production step, expected and actual dates. It looks somewhat like this:

Production monitoring Gantt chart

Another advantage is that corrections and corrective actions can be monitored (and reported) in real time. And, if the relationship is not too conflictual, the technician generally learns a lot about the supply chain and the main challenges of each party — sharing this information with the buyer is often priceless.

Have I forgotten something important?

How Can Inventors Develop a Custom-Made Product in China?

From time to time, I talk with an inventor who is planning to have his/her new-to-the-world product made in China. And they often need to get from initial designs to production… Which means they need to get the “development” done.

Unfortunately, some inventors have no idea what the development phase entails. Here are a few questions I ask them:

1. What type of engineering skills will be needed?

  • Mechanical
  • Electronic
  • Electrical
  • Etc.

What type of factory do you need to work with?

  • Small?
  • Medium size?
  • Large? (Only possible if projected volumes are quite large, pretty much from the start)

Who should do the development?

  • An R&D company
  • The OEM manufacturer
  • A trading company with very strong engineering skills

Then I explain the common challenges that await them in China, a few of which are below:

  • OEM factories don’t like projects for which design is not complete, and won’t assign good engineers to projects that (in their mind) are not 100% sure to lead to large orders.
  • OEM factories generally don’t invoice customers for new product developments — that cost is factored in the product price.
  • Chinese companies tend to believe the IP rights of the products they have developed are theirs — even if they assure you that’s not the case when you interview them. When the time comes to give you critical files, they might say no.
  • If development is done by engineers who are NOT familiar with Chinese production, then the designs are “sent over a wall” to a manufacturer who might say “this is impossible to make”. It means you may well have to start the development phase again.

Fortunately, there are a few solutions. Here are a couple of shortcuts that have worked well for certain startup buyers that couldn’t commit to huge orders:

  • Finding a manufacturer that already makes products that are similar (in terms of key components and production processes).
  • Working with an engineering/R&D company based in China that can guide them through manufacturing.
  • Working with a 50-100 people factory that has good engineers for the first orders, and then moving to a different manufacturer if volumes pick up strongly.

For further reading on this topic, you can read 6 tips to design products to be made in China.

How Adidas Footwear Helped Suppliers Increase Labor Productivity

Last month, Mr. Guenther from Adidas Footwear’s Manufacturing Excellence department gave a presentation on the topic of “Dealing effectively with increases in labor costs in a labor intensive industry”. It was one of the best presentations of the last sourcing conference organized by the European Chamber.

Adidas Footwear works with a number of suppliers that own a total of 48 factories. They have to source about 25,000 articles every year. So they have to maintain a massive buying organization.

Every factory working for them employs 2,000 to 10,000 employees. A total of 180,000 operators work on Adidas shoes across the world — they are present in China but also in many other countries.

As all importers have noted, fully-loaded labor costs have increased. The trend has actually been accelerating, from 50 USD a month in 1990 to 550 USD a month this year. Only 20% of their products’ costs come from labor, but in aggregate it represents very large sums.

They set up a “Manufacturing Excellence” department with the goal of offsetting labor cost increases by a raising efficiency. How have they tacked this challenge? By adopting a lean manufacturing approach.

Their strategy can be broken down in 4 themes:

1. Design for manufacturability (DFM) – simplify, standardize, modularize, and automate as much as possible. Designers are changing the way they work, and it helps reduce the labor content of one pair of shoes.

2. Technology for processes – manufacturers are adopting CNC stitching and other higher-tech equipment.

3. Labor organization – whenever possible, factories are shown how to convert batch & queue organizations into assembly cells. (More information about this here.)

4. Leveling of orders – everybody benefits if factories have a relatively stable demand and can keep trained workers all year long. Adidas has made changes to their order planning to smooth out the peaks and lows in their demand.

Overall this is an excellent approach, and it seems to bring in strong results. And I am positive that midsize importers can apply all of this at their own scale and benefit from lower costs.

VAT Rebate for Exporters in China: How Does It Work?

Most importers buy their goods under FOB terms and don’t need to worry about the export procedures, which are handled by their suppliers. But, in some cases, the Chinese exporter tells a story to justify a delay, and the purchaser needs to understand the mechanisms at play in order to understand what really happened.

So here is what I understood about the VAT (Value Added Tax) system, and the rebate that applies to exported products.

The VAT rate that applies to manufacturing activities is 17% in China. And the Chinese government give a VAT rebate to exporters — by the way, this is not unique to China, and many other countries collect no VAT on sales to foreign companies.

China gives full rebate (the whole 17%) on export sales of a few product categories. For other categories, the rebate is lower, or even 0%. It depends on what industries China wants to encourage.

To collect this rebate, the exporters need to show that they have paid the VAT on the parts they purchased, and that they have exported the finished products. From what I gathered, they typically get the refund several months later.

Can all exporters prove that they have paid VAT on the parts, before exporting products? Of course not. A friend tells me of many Africans who buy products on the market in Guangzhou and ship them to their country — they have to work with a freight forwarder who will sell them a “maidan chukou”. This document is, from my understanding, an authorization to export without the usual formalities.

Similarly, the manufacturers of electronics in Shenzhen who buy parts illegally from Hong Kong (without paying any VAT) have to work with a freight forwarder to get their goods shipped out “under the radar”. The forwarders, who often have an I/E (Import & Export) company on the side, monetize the rights to get shipments out in this manner. They typically have an export license with a very wide product scope, so they can handle many product categories.

What are the implications for foreign buyers?

  • In at least 95% of cases, the importer is better off buying under FOB terms, to avoid all these declarations.
  • Smart buyers will note that it is safer to work with a Chinese company that has an export license, rather than having one company take care of production and another one handle paperwork. What happens if the “paperwork” company gets into trouble with the government at the wrong time? Do all these intermediaries respect the confidentiality of your data?

Did I get this right? I am not the foremost expert on this topic!