A few days ago I talked to the quality assurance manager of an American brand name company. They have progressively outsourced production to China. And they sell mostly to large retailers in the US.

An uncomfortable situation

This is how they have to manage their business:

• On one side, their large customers keep pushing for low prices, and expect deliveries to be on time. They impose very strict procedures, and penalties are charged for most deviations.
• On the other side, the Chinese manufacturers don’t seem to understand the importance of all the requirements (quality of workmanship, packaging, respect of schedule, etc.) They are often not organized to be highly reliable, but they also don’t try as hard as they should. Some factories actually don’t cooperate with the third-party inspectors, and do everything to discredit them.

The best solution for the American company would be to set up their own manufacturing facilities to produce the bulk of their needs. They purchase rather low-tech products, and the investment wouldn’t be huge for them. After establishing proper procedures and training the workers, quality and delivery issues would be much more manageable.

Unfortunately, they source many different products. They would have to be able to perform many different processes in their own facilities, and it would drive costs up very fast. So they have to keep buying from many manufacturers.

They still have a long way to go. As my contact told me, they switch suppliers “to save a few pennies”. Their suppliers are aware of it, obviously, and act accordingly. This importer does not have the profile of the perfect customer (see How Chinese Factories Treat Their Customers), so their suppliers don’t make much efforts.

How to improve relationships with Chinese suppliers?

Here is the advice I can tell this importer:

-1- Rethink what type of suppliers you should work with

Avoid switching suppliers to save 3% or 5% on the purchasing price. New suppliers come with hidden costs (qualification, training, and close follow up at the beginning) and extra risks (quality problems and/or late shipments).

You should try to limit the number of suppliers you work with. This is especially true in China, where new suppliers often give a low price to get a new buyer, only to raise prices the following season. On the other hand, working with only 1 supplier for each product category is often a bad idea. What if they suddenly close down? What if they feel that you have no alternative, and they take advantage of it?

You should also make sure you work directly with manufacturers. Intermediaries often pass themselves for the factory, pocket a 5% commission, and only add a layer to the communication process. They should be avoided if possible.

Once you get information about factories, avoid those that seem really large or really small. Don’t be a very small fish or a very large fish in their pond.

-2- Avoid antagonistic situations

I don’t know of any way to sugar-coat a price negotiation with a Chinese factory. They tend not to be receptive to promises of long-term deals. But they are definitely sensitive to higher volumes. This is one of the benefits of working with fewer suppliers, and you should use this weapon in your negotiations.

Your suppliers have a strong aversion to final random inspections, and it will probably never change. But you can do something to reduce the pressure they feel. You can tell them that inspectors only record information, and decisions are always taken by your company independently of the inspector’s conclusions.

The factories regularly try to discredit the inspection company, so you might want to organize yourself random audits of the inspectors’ work (either with your own staff, or another service provider). Your suppliers should recognize this effort, give you some goodwill… and be more reasonable in what they report.

You might also be well inspired to start doing in-process inspections (during production), at least for your most sensitive shipments. The advantage of these inspections is that they help the factory by noticing quality issues before it is too late. It might save the manufacturer many days of repairing work. I advise to frame it this way: the purpose is to help, not to twist arms.

To further show your suppliers that you are serious about helping them with in-process inspections, you can have them performed by another service provider (since the inspection company that inspects finished batches is already perceived as a policeman) or by your own staff.

-3- Create constant communication with key executives in the factories

Large importers often aim at representing 30% to 70% of a factory’s annual production. It means they have some power in front of their supplier, without taking any unnecessary responsibility. And it allows the buying organization to keep in touch with each factory without spreading too thin.

If you concentrate your buying power on fewer factories, as I described above, you should be able to send your employees regularly to meet with their key executives. Most foreign buyers don’t keep regular contact with their suppliers, and this is usually detrimental to the timing and the quality of their production. If you are a distant figure in the minds of the factory managers, do you think they will spend a lot of attention on your orders?

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Any other suggestions, anyone?