In this episode…

We conclude the mini-series we’ve been doing where Renaud provides you with the advice you need to source from China yourself. 

We’ve covered the entire process from finding great suppliers, negotiating, manufacturing, communication, relationship-building, improving quality, and, now, controlling their costs. If your supplier’s costs increase, the price you pay will surely follow, but, if you’re in a position where they’ll take your suggestions, there are some easy wins that could reduce costs for everyone. Let’s explore them here.

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🎧 How to keep your supplier’s costs under control? – Sourcing from China (Part 9) 🎧

Show Sections

00:00 – Greetings

00:58 – Brief recap of last week’s episode about the EU Ecodesign regulation

You can listen to both parts on this topic here (Part 1) and here (Part 2).

04:31 – Why should we be concerned about our suppliers’ costs?

Your products are made from a variety of inputs: materials and components. Each of these has its own cost, so if they rise for your supplier (assembler/manufacturer), it affects the unit price of your product. Many products’ costs are mainly made up of their component costs, such as automobiles.
If your suppliers start raising your costs because their own costs are ballooning, how long can you last before you start raising your sale price to consumers which could lose you business?

07:45 – Who may be able to influence their supplier to undertake work to take control of costs.

Importers who only constitute a relatively small percentage of a supplier’s orders probably can’t influence suppliers easily in the case of a cost increase. In this case, selecting a smaller supplier where you’re a more important customer may help you to get your message across.

10:28 – Using sourcing as a tool to control costs.

Most importers can do the following sourcing activities to control costs: Know the market price your supplier is paying. Double-source so you have options.

How factory owners or key customers can get their/their supplier’s costs under control?

12:48 – 1. You find out what is driving their costs by visiting.

The reasons for cost increases may be ‘hidden’ at first. Investigate them on-site yourself or by sending a consultant to check what is happening in the factory. For example, if a lot of rework is being done, that will probably mean that the cost of poor quality is high and they need help to improve the quality system.

15:47 – 2. Stop buying in large quantities and making large batches.

The supply chain setup may need to be changed, although old hands won’t like to make changes.

Suppliers like to make deals, so they can buy materials or components in large quantities to get a lower price, but they lose a lot of working capital, end up borrowing and paying interest, renting more warehouse space, and there’s a risk of finding out quality issues in bulk buys too late to return it.

This also can result in them producing in large batches which they like to do but is not always the best way cost-wise. Issues are, for example, slow production, finding out problems with products only after a large quantity has been made, and more likely delays.

21:39 – How to make suggestions to the supplier that they will listen to.

Start with some suggestions about manufacturing improvements in order to gain respect as they will like to see your technical suggestions lead to better results and see you as an expert. 

You may strike a deal with the supplier where they pass a percentage of any savings made from improvements you or your consultant suggest to you.

26:34 – 3. Tackle manufacturing aspects that are hidden costs.

Mapping material flows can quantify wasted labor, for example when materials/products go between floors and buildings numerous times during production. This is a cost that can be reduced by reconfiguring the material flow.

Automation can help reduce costs and quality. For example, an automated packing machine that always adds the correct pieces for a product that comes unassembled into the package.

Design for manufacturing/assembly is also a great source of savings, so improvements in manufacturing or putting the product together in a more streamlined way can be fed into the design and this will help save money and time later on.

29:21 – 4. Hidden office costs.

Office costs can be more than production costs. IN production headcount is often kept to a minimum, whereas in the office it’s common to find a lot of people doing manual processes on a spreadsheet instead of using an ERP properly. An ERP used effectively could render them redundant as well as automate tasks, prevent mistakes, and improve transparency, so of course, they are not fond of it. This leads to a bloated office workforce, all of whom are being paid more than people in the factory.

35:11 – How does India differ from China?

Renaud saw that some factories had tried to implement better management practices than commonly seen in China, including simplifying processes and making things visual. They tend to use software more in India than in China which is possibly a plus point when it comes to ERP implementation.

36:44 – Summarising keeping costs under control.

If your supplier won’t listen to you, the advice in this episode is not helpful. Examine the supply chain, manufacturing, and office systems. Manufacturing systems are probably easiest to change by looking at the processes, material flow, getting better tooling, training staff better, etc. These can have a good ROI and are visible.

38:11 – Mini-series wrap-up.

To be a good buyer there has to be a balance. Show the key suppliers you know the processes and limitations. Push back if something is unreasonable. That you’re committed to the relationship and provide feedback and help when appropriate. This makes them believe you’re a good customer and locks in better performances. Driving too hard a bargain could undermine your relationship. Place some orders when they’re less busy to help their business and improve quality and lead times. Become a partner, not just a customer.