In this episode…
Renaud talks you through a common query that we get on a regular basis when customers ask us: “How do I get my suppliers to improve?”
A recent survey of importers found that 70% said that their biggest challenge was working with suppliers to improve performance. So, with this in mind, Renaud goes through the topic based on training that he gave for European Chamber of Commerce in China members on improving suppliers with a focus on product quality, delivery times, price, and more.
So, how to spur improvement in your Chinese suppliers? Hit that play button below!
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🎧 How To Improve Supplier Performance? 🎧
✅ Introduction. This episode’s topic: Why supplier improvement is a big challenge and how to achieve it.
✅ In these cases, supplier improvement is very difficult or impossible. For example, if buyers treat the supplier like an enemy and push them for an annual decrease in prices even though they’re used to annually increasing them. This makes the relationship very conflicted and the supplier is unlikely to try hard to accommodate you over other customers who don’t fight them on price all the time.
Another example is where the supplier’s management is very positive about working together, but the staff and managers on the shop floor are always busy handling problems, fire-fighting if you like. This may mean that their processes and staff need attention, perhaps training for the latter so they can find problems and prevent them from occurring in the future otherwise this supplier won’t improve.
Finally, some suppliers will be stuck as they can’t find sub-suppliers to provide certain processes like metal plating to suit your project, perhaps because the order is too small. In this case, there’s not a lot you can do to improve the situation.
✅ How to plan your supplier improvement project?
- Focus improvement activities on your key suppliers, rather than those who have little impact on your business.
- How are their systems and processes? If they’re loose and unstructured, like with a small family-run factory, handling them is very different to a large 2,000 person factory with different layers of management. Maybe they will benefit from being educated about basic processes with a hands-on approach, whereas a larger concern will need an impetus to tweak what already exists using their own staff and management and you can be quite hands-off.
- Tackle the most problematic suppliers as this will provide the best results for your business. A good supplier will make working on improvement easier and will be more receptive and quick to adjust and learn, but it’s the suppliers who negatively impact your business with bad quality problems and late deliveries, for example, who we need to focus on most urgently.
- You need to make your needs very clear. So specifically informing the supplier that you are looking for better quality, fewer delays, slower prices increases, better communication, etc.
✅ Why being a hand-off buyer doesn’t help you drive improvement.
You send a PO, you don’t know the supplier, you’ve never visited them – this is being hands-off.
Visit, build a relationship, source some competitors, analyse costs to see if there is an issue there, negotiate better from them. All of these steps can help you get better results from suppliers without pushing for improvement.
Maybe consolidating more orders into one supplier and letting them know that they’re a key supplier will enable you to negotiate better terms etc from them. Perhaps it’s also possible to now find and fix the sources of any issues or standardize certain processes now that you’re a trusted and important customer.
✅ Translating what you want into KPIs – 2 or 3 critical KPIs that you follow up on with the supplier’s management once a month or quarter are a reasonable target (not 20 or 30).
Some common quality KPIs would be:
- % of defectives in ppm and its improvement.
- The number of returns from the market.
- The number of corrective action requests opened and how quickly they were closed.
For delivery times some KPIs can be:
- % of on-time deliveries VS late
- Which products/parts are on time VS which are not (if different ones are ordered)
- Lead time (do they hit a faster target over time?)
For cost consider these KPIs:
- How fast the costs rise
- Price reductions
- Prices for key components paid to sub-suppliers (this gives you good visibility over the supply chain)
And for service/responsiveness try these KPIs:
- Engineering change request speed
- Do they accommodate emergency orders
- Development of new products
Whichever are most important, follow up on them consistently. A good reference material for this is an article on HBR.org about Chrysler Keiretsu which shows how Chrysler implemented systems to get suppliers to suggest savings, take responsibility for the quality, and deliver just-in-time in order to reduce costs.
✅ The cost of quality – suppliers need to be shown that they’ll save money by improving quality in order to motivate them to make changes. Scrap and rework may be happening, but it’s often not tracked, even though these activities cost a lot of money. So translate them into RMB there in their factory, because if you penalise them later or charge back poor quality products this also makes them responsible for COQ, but they may feel it’s unfair and become unhappy.
Also, if you receive a bad batch of products, give immediate feedback on poor quality – perhaps their staff can come to do rework at your facility if you have one in China, as then they see it directly rather than just being told.
✅ Hidden costs – Here’s a selection of hidden costs that suppliers often don’t pay attention to or associate with poor quality.
An example is them putting an engineer on solving a problem. This engineer’s time isn’t tracked, but it has a cost. Time is taken for a quality engineer or manager to fill out your corrective action requests and also costs money. Management time for finding solutions to problems. If a line is down, operator idle time. Uncertainty about component quality from suppliers leads to keeping an extra inventory, but this is often not factored in as a cost. Reduced capacity due to rework. Lost orders, customers, and reputation is the most expensive of all.
✅ The impact of the cost of poor quality on your organization – poor quality from your supplier has an impact on your costs. You can put pressure on them and reject higher prices as they can be shown that dealing with them is expensive for our company due to quality issues, and perhaps you’ll also issue some chargebacks.
These costs can be:
- Quality inspection costs
- Admin costs to follow up with the supplier (such as with corrective action requests)
- The cost incurred if you send bad quality products to your customers
- Late deliveries (due to fixing bad quality)
- Expedited shipments to get good products in their place
Some buyers don’t follow up on the above and communicate with suppliers, and that’s a missed opportunity.
✅ Time and attention needed for improvement activities – A supplier’s staff and factory managers may be busy fire-fighting, so it’s hard to get them to focus on improvement activities. You will need to find a way to work with them over, say, 6 months or a year, and follow up continually, otherwise, the countermeasures probably won’t stick. Guiding them to do proper root cause analysis and then choose the right countermeasures to address the problems found is a must.
✅ Which manufacturing processes to work on based on the issues you have found with suppliers
- Process capability issues: If you are getting defectives due to a specific process, such as poor plating, then focus on that process by collecting data about the CTQ points and charting it, examine the amount of variation, keep tracking it, and make changes to the process one variable at a time, and so you can see the cause and effect strictly and learn from it. A regular measurement cycle can be implemented to do this.
- Issues aren’t detected quickly enough: This may be due to mixups on the line such as operators having too many pieces in front of them, then working on the line setup is needed. Re-engineer the lines, improving the flow of materials to be one-by-one if possible, and including the right testing and inspection points where needed and a fast feedback loop.
- Human mistakes: Suppliers tend to say there is nothing that can be done about 2 or 3% of mistakes due to human error, but this is usually not correct. Mistake-proofing can be implemented to make mistakes impossible or at least detect an issue and give the operator fast feedback. Doing this is usually pretty simple and cost-effective.
✅ Conclusion: How to drive lasting improvement in your suppliers
- Make it specific – pick a few KPIs, monitor regularly, and give formal feedback to their management every few months. If the performance isn’t good, you can summon them and use the data to show why you’re displeased and put pressure on them to improve.
- When buying similar items from a number of suppliers, use the data from inspections to compare each supplier and use it to show them that they need to improve and become better than their competitors if they want more orders from you.
- If issues are found, escalate the problem quickly. Push them to find the source and maybe pay inspection companies to do a 100% inspection. This will get their attention. As a more drastic measure you can also use punishments, such as chargebacks or threats to reduce orders ‘next year,’ but be aware that this tactic may negatively affect your relationship with them.
- Evaluate if the supplier is truly a good fit for you, especially if there have been problems. Consolidating the supplier pool to have a few key best-performing suppliers may be better than having lots of different ones, for example.
- Soft skills: Having a purchaser who is able to have tough conversations with suppliers without upsetting the apple cart. If they’re able to sell the idea of making improvements, for example, why reducing the cost of quality is a win-win, this is a very valuable member of your staff.
- 28 Common Problems Chinese Suppliers Cause Importers
- Chrysler Keiretsu
- A Good Way To Analyze Data to Drive Process Improvements
- How To Manage Chinese Suppliers based on Facts & Data
- 3 Key Process Improvement Tools You Need To Start Using: Flow Chart, FMEA, Control Plan
- How To Switch To A Newer, Better Chinese Manufacturer? [eBook]
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Kavuma Ian says
Wow, this is extremely informative and elaborate. Thank you.