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Standards for Selling on Amazon FBA Platform Are Getting Stricter

I listened to an interesting podcast on Global From Asia. It is entitled Amazon FBA Trends in 2018 with Danny MCmillan and Will Tjernlund.

These two guests shared their experiences and insights on the ‘Fulfilment By Amazon’ platform. I took a few notes that are outlined below.

Amazon is now a huge platform

Outside of China, Amazon often represents more than 80% of sales for e-commerce companies.

Many companies depend excessively on Amazon and have been trying to develop other channels (eBay, direct sales with Shopify…), but it has been very difficult to surpass the amount of sales generated on Amazon.

Amazon’s platform now has so much power, they have gotten stricter over time

Regulatory compliance and quality standards are enforced more and more tightly.

I think this makes sense. Amazon needs to differentiate its offer from Aliexpress, eBay, and maybe tomorrow a more aggressive and international Alibaba. If Amazon is synonymous with safe products that always work, while also being price-competitive, why go look elsewhere?

All the compliance-related expenses (i.e. quality inspections and safety testing) will make it harder for small vendors to be profitable, though. If your batches are small, all your margin can be wiped out.

Will Amazon push for quality at the expense of quantity?

There are suspicions about Amazon deliberately trying to make it harder to get listed on their pages. “It’d be best if we had 40 yoga mats to choose from, instead of 4,000”.

There are also predictions that Amazon might increase their monthly fee – for example up to 1,000 USD a month to be a member – in order to get rid of small and/or unprofessional vendors.

The cost of pay-per-click to be featured in the top search pages has also been rising quickly. That’s one more obstacle for small companies that want to sell their products on the FBA model.

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How To Comply with Standards that are Impossible To Reach?

Importers are often stuck between a rock and a hard place. They are asked by customers or by regulators to comply with very tough (and sometimes unrealistic) standards, and at the same time they need to ensure business continuity — keep selling similar products and make a margin.

This is quite common when a retailer sets very tough standards for social compliance. For example, Walmart writes that they will terminate any business relationship if they find out production was subcontracted to an unauthorized factory. They know it is extremely common in their supply chain, and yet they adopt a hard line.

This is also at play when a country wants all batches within a certain product category to comply with a safety standard. I don’t want to mention the exact case a client brought up to my attention recently, but make up an imaginary example that will drive my point just as well.

Let’s say Australia wants no metal product to rust when it comes to certain applications, and yet many products are still made with metals that can’t be treated not to rust. (Again, I am making stuff up here.) Everybody keeps selling and hoping they don’t get caught.

In these cases, what is the very worst thing that can happen? Having a bad case noticed by the customer/regulator, and being blamed for negligence after an investigation.

And what is a good way of not avoiding it? It is a three-step process:

  1. Planning — what exactly are the requirements, and what are the risks in the current operations? Break down the risk in different categories.
  2. Mitigating risks — do something for the highest risks, and (if possible) set some targets for improvement in the future.
  3. Documenting and communicating — make sure there is a paper trail that can be audited, and (if appropriate) be proactive in communicating about your plan with the customer/regulator.

Let’s look into a couple of examples.

Example 1: unauthorized subcontracting

The 3 steps could look like this:

  • Planning: collect data about each factory’s capacity per week; communicate to the customer how many weeks each production batch will take; get a written letter from each factory that they understand the requirement.
  • Mitigating risks: hold pre-production meetings at the factory before each production run and do basic maths to confirm capacity will be sufficient; send inspectors to the factory during production to confirm they work on the right product and to check production status.
  • Documenting and communicating: keep written traces of the PP meetings, the inspections, etc.

Example 2: tough safety standard — “metal products that never rust”

In this case, we could have:

  • Planning: place your current metal products in 3 buckets (red, orange, green)
  • Mitigating risks: get all your suppliers to sign a letter that confirms their awareness of this requirement; plan for testing 5% of “green” batches and 30% of “orange” batches; add a label for users of the red products that metal might show signs of rust.
  • Documenting and communicating: get all your test reports archived and sum them up in an Excel table. Show trends on a few KPIs.

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Obviously, there are many possible approaches to this issue. These are just examples, but the overall idea (setting up a program that analyzes and addresses risks in an intelligent manner) worked well for a number of importers.

I left out the work with suppliers. Often, they have to make changes to the way they work, to the materials they purchase, and so on. This can also be a serious challenge.

Have you had similar experiences? Have you found another approach that works well?

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Sourcing from China 101, Part 13: The 5 Steps to Developing a Chinese Supplier

Many importers work in one or two product categories. They buy 80% of their volume from 1-4 manufacturers.

And many of them make the same mistake: they don’t try to improve their CURRENT suppliers. Instead, they spend time sourcing NEW factories and training them to their requirements, and consequently they are taking risks on the first order from a new supplier.

Is there an alternative? Sure.

A supplier development program follows 5 steps. And it starts at the sourcing phase!

Supplier development building blocks1. Selecting suppliers with the right profile

This is all about finding suppliers that want to improve, however, if you work with companies that are NOT trying to improve, the upside will be quite limited.

A large customer can push a factory to make improvements, but it’s quite hard (sometimes impossible) if that factory’s boss doesn’t care about getting better. Many of these bosses are only interested in getting bigger, by using their current operations and practices.

How to spot potential suppliers that are motivated to get better? Here are a few examples.

  • They re-invest profits in the facilities, the equipment, staff training, and so on;
  • They want to develop new products/technologies, and are willing to go through a steep learning curve;
  • They hire professional managers rather than members of the owner’s extended family.

2. Help during product development

This step is important if you purchase highly customized products.

The buyer needs to take the following actions:

  • Explain the product’s specifications clearly;
  • Translate what these specs mean, from a technical point of view (at the production process level);
  • Train their QC staff to check the specs during production and on finished products, and help set testing stations (this critical step is often forgotten);
  • Give detailed feedback on pre-production samples/prototypes.

For complex products, spending time in the factory and communicating directly (in Chinese) with the technicians is a big plus.

3. Ensure your quality standard is met

As your first orders move into production, the focus should be on quality. If production quality is not acceptable on your market, and if there is no improvement over time, there is no way to continue the relationship.

The question is; how do you get a supplier to improve its quality, without spending a fortune on inspection in order to catch all their mistakes?

You need to audit their quality system and their processes, and then evaluate what the priorities are. Here are a few examples:

  • The managers never get out of their offices, and don’t monitor discipline on the shop floor.
  • Incoming components & materials are not checked, or nobody knows when they should be rejected.
  • There are no procedures or procedures are insufficient/unclear for in-process inspections.
  • Work instructions for operators and inspectors are not accurate, poorly designed, or not respected.
  • Nobody has collected data about the most frequent defects and wondered what their root causes are in a systematic way.

The best policy for those buyers who purchase large quantities from one supplier, is to send an engineer to the factory on a regular basis (once a month), to discuss and show the supplier potential opportunities for improvement and identify where processes could be made clearer or better (don’t call it “audits”), I detailed how it works in this article.

Once a manufacturer has a strong system in place and inspires enough confidence, they can be allowed to “self-inspect” and to report their findings to the buyer.

4. Pick the low-hanging fruits

To an experienced industrial engineer, the typical Chinese factory is full of opportunities for improvement. A lot of small changes can be made to cut costs, without investing in any new equipment or breaking any walls.

By applying a gentle mix of pulling and pushing, you can probably help some of your key suppliers grasp some of these obvious opportunities.

For example, some importers ask key suppliers for a roadmap to reduce their cost structure in the coming years (with details on how they intend to achieve these targets). This is an excellent exercise to push suppliers to think of how to work smarter, and to run some tests.

Some other buyers know production processes better than most manufacturers they work with, and help them reduce their “costs of poor quality” (scrapped material, defects to rework, chargebacks from customers…).

Good communication and frequent visits are key if you want this effort to be successful.

5. Re-organize production

Step No.4 focused on the “easy wins” that require little effort and bring obvious gains.

Once you have accumulated enough of these easy wins and the factory’s management starts to trust you, it is time to become more ambitious.

Here is the sequence I advise you to follow:

  1. Select one priority — here are 3 examples: quality, cost, faster production cycle and smaller batches;
  2. Select 2-4 KPIs, and track their improvement over time;
  3. Pick targets for the KPIs, and envision the “future state” that needs to be achieved to meet these targets;
  4. Discuss it with the factory and get their agreement and buy in;
  5. Make changes to reach that future state, if possible by starting with a “quick win” that everybody can see;
  6. Start over again with a new target, after the team got a sense of victory and has energy to take on another challenge.

In the next two parts in this series, I will explain how “Lean”, a set of principles and techniques inspired by the Toyota Production System, can help you drive impressive results in quality improvement and in cost reduction.

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What Can Quality Professionals Do When Most Suppliers Are Off (CNY)?

Do you find yourself with some time on your hands, when your Chinese suppliers are enjoying their New Year holiday?

Why not take advantage of it and do some work that will be important to your company’s success?

Here are 4 suggestions.

1. Data analyses for better decisions

If you can easily extract all the issues from QC reports (or if you can use an intern to do that work), this will be well worth your efforts.

Ideally, you would classify the past issues per product, per supplier (and per factory if possible), and per month.

Then you can plot them on a few graphs. Here are a few examples:

  • A Pareto chart of the most common issues per product, per factory
  • Evolution of the frequency of occurrence of the 3 most common issues, month by month, for each factory
  • Compare your suppliers on a few KPIs such as % defectives, % of batches with serious issues, number of corrective action requests, average time to close a corrective action request

This information can help you put pressure on some suppliers, and ask them to improve in some very precise areas.

2. Building a supplier management system

Now that you have a few KPIs related to quality, why not work with your colleagues from purchasing… and help them do the same?

Here are some other KPIs your company could collect:

Supplier Management System

Now the purchasers are armed with a set of KPIs that go way beyond what they’d naturally tend to look at (the FOB price).

Another benefit is, the simple fact that a supplier knows you are tracking them will push them to take actions to improve. It is human nature. They might not take the right actions, or not apply them in the right proportions, but they will probably try something.

3. Improve your checklists and other work instructions

I bet you often need to repeat the same things over and over. For example, you are asked to validate QC reports that raise an issue but don’t a clear-cut “passed” or “failed” result simply because the checklist was not clear.

So, why not review the documents most often used and update them? You will certainly have many things come to your mind as you read them. Add examples (if possible, both good and bad), special cases, escalation procedures, etc.

4. Other suggestions

Many people in importing businesses feel the manufacturers and the testing/inspection houses should work on their internal quality systems. But in reality importers also need to get their house in order.

For example, are your approved samples well catalogued and in good condition? How about your testing/measuring equipments, are they well maintained and calibrated?

Do you talk regularly to your company’s customers, gather their feedback, and draw a few insights for top management?

Maybe the best you could do is familiarize yourself with the main production processes involved to make the products you buy. These days there are many good Youtube videos on the most common processes. As you watch them, ask yourself: ‘what are the key process controls that I should ask my suppliers to report on, to ensure they know what they are doing?’

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What do you think? Any other ideas?

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Sourcing from China 101, Part 12: How Closely Do You Follow Your Productions?

Up until now, I have written advice that is targeted at certain types of importers. I call them the “hands-on buyers”, and I know them well because many of them are our clients. They tend to follow productions closely.

However, let’s not overlook a good half of the buyers — the “hands-off buyers”.

My point here is really this: there is no one set of “best practices”. As far as importers are concerned, there are at least two types of buying strategies that can make sense.

First, let’s examine what hands-off buyers do, and why it makes sense in their situation.

1. The hands-off buyer

Let’s take an example. You purchase promotional goods that are then given away.

One day a customer will ask for a bottle opener. The next, you will need to look for caps. Then paper bags, and then pens, and so on.

All these products are made in different factories. As your business grows, you end up with tens of suppliers and tens of products!

It means you can’t get familiar with all your suppliers. You can’t become an expert in every product category.

(By the way, promo item buyers are not the only ones in this situation. Think of mail-order companies or retail chains that deal with thousands of SKUs!)

2. Why it can make sense to be ‘hands-off’

Buyers who place one-shot orders are forced to take high risks. They can only focus on a few risk mitigation strategies.

If we revisit the advice I gave you since the first part of these series, here is the typical hands-off buyer’s sourcing strategy:

  1. Supplier identification and screening: Buyer becomes expert at completing this stage efficiently.
  2. Factory verification: Very light. Buyer is not building a long-term supply base.
  3. Cultivating backup suppliers: Only possible with off-the-shelf items.
  4. Negotiating the right terms: Very important for the purchaser to get this right.
  5. Keeping leverage in your hands: Buyer becomes expert at managing financial risks.
  6. Writing detailed specifications: Not realistic. Buyer has insufficient product expertise and little time.
  7. Following up on production schedules: Always a challenge, especially with small suppliers.
  8. Checking product quality early: Only realistic if the amount is very high or if the customer cannot be disappointed.
  9. Checking every shipment in the factory: A must. Manufacturer is not trusted at all.
  10. Building good rapport with suppliers: Not realistic. Relationships are often adversarial.

3. When does it make sense to be hands-on?

If you can work with a few manufacturers, it makes sense to spend more time and effort developing the relationship. You can spend more time in the due diligence phase, to ensure you work with good partners.

It reduces your risks in two ways:

  1. You work with better-qualified suppliers who understand the relationship might span five or ten years.
  2. You probably deal with one or two product categories, so you know your product and its production processes better. It allows you to distinguish good manufacturers more easily, and to understand what might go wrong in the manufacturing stage.

4. What do ‘hands-on’ buyers do that is special?

Being hands-on is the only option for buyers who need bespoke or heavily customized products. It forces you to work closer with the supplier, and to commit to longer-term business.

There is a risk to watch out for. You might get “locked” in a relationship with one manufacturer, who knows it will take you 6 months to ramp up another source and get good products. They might become less serious about quality or deadlines, or they might increase prices too fast.

This is why a backup manufacturer is so important. It allows you to keep pressure on your current supply base, and it gives you a good option out if required.

Another special characteristic of hands-on buyers is that they push their suppliers to improve. And, in most cases, they are frustrated by the resistance to their suggestions.

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For many importing companies, pushing key suppliers to improve has become more critical over the past 5 years.  And this trend will only get stronger. After all, if they don’t become more efficient or if they don’t improve their quality, most Chinese factories will have to close!

That’s why I will cover this topic in the next 3 parts of this series.