Last week, I was happy to moderate a seminar organized in Shenzhen by the European Chamber. The three speakers, who were kind enough to come and expose their supplier development programs, represented very diverse organizations:

• A retailer (Kingfisher, with more than 1,000 stores, mostly in Europe);
• An industrial organization (Altra Industrial Motion);
• A high-tech company in the security field (Oberthur).

After looking at my notes, I noticed that a supplier development program follows logical steps:

I am going to describe each of these building blocks.

1. Selecting suppliers that can improve over time

Oberthur pays a lot of attention to the type of suppliers they work with. Here are two of their supplier selection criteria:

• Some manufacturers have a “culture” that pushes them to search for improvements, naturally and without the need for pressure coming from key buyers.
• Some suppliers have an interest in developing new products. Widening their product range is part of their strategy, so they are ready to invest time and money in a difficult development process (see part 2 below).

2. From quotation to the first production batch

The manufacturer needs to understand the buyer’s expectations, and the development of customized products can take a long time.

Is is how Altra Industrial Motion develops their new suppliers:

• Explanation of their requirements;
• Explanation of the proposed production process (they are familiar with production of the components they purchase);
• Analysis of the factory’s inspection methods, and corrections if necessary — they estimate that the cause of 50% of their quality problems is a lack of knowledge of proper inspection methods at the factory level;
• Feedback on pre-production samples until they are right.

3. Ensure a minimum quality level

If a supplier cannot reliably deliver products that satisfy the buyer’s quality standard, the priority is to push them to get their quality under control… or to stop the relationship.

But how to push a supplier to improve its quality, without spending a huge amount of work?

• By auditing their quality system, pointing deficiencies to their attention, and helping them implement corrective actions.
• By studying the most frequent types of defects, running a root cause analysis, and pushing for implementation of countermeasures.

This is at the heart of Kingfisher’s supplier development program. They want more suppliers to “self-inspect”. The objective is to avoid the cost of third-party inspections.

So they focus on their high-volume suppliers with low quality performance (see below chart). Their approach is: “we are going to pay for a program that will make you more competitive in the long term”. If the supplier’s boss is interested, they go ahead.

4. Pick the low-hanging fruits

Most Chinese suppliers have a lot of room for improvement. But they are not always aware of this situation.

The buyer can help the supplier pick the low-hanging fruits by apply a gentle mix of pulling and pushing.

For example, Oberthur has pressure to decrease prices on certain products every year. So they ask the supplier for a roadmap to reduce costs in the coming years (with details on how he intends to achieve these targets).

Another example: Altra Industrial Motion helps decrease the scrap rate once a production is under way (their suppliers do a lot of metal machining, so rejects and scrap are always a problem). This way, less material is consumed. The supplier’s cost is lower. And price increases are less justified.

Altra’s representative said something interesting: “our best suppliers are the ones we visited the most over the last 7 years”.

5. Re-organize production

When a supplier is willing to work on improving his operations, and doesn’t work for direct competitors, it makes sense to help him re-organize production for better results.

This step is comprized on several sub-steps that cannot be skipped:

1. The buyer should select a priority: quality, cost, faster production cycle and smaller batches, capacity…
2. Select a few KPIs, and track their improvement over the following sub-steps;
3. Pick a target, envision the future state that needs to be achieved to meet this target, and then make changes in processes and in the supporting organization to reach that future state;
4. Start over again with a new target, after the team got a sense of victory and has energy to take on another challenge.

This fifth step is all about lean production. It offers impressive results when done the right way. But it is not the first step in a supplier development program.

Do you agree?

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Names and titles of the three speakers:

• Eva Zhang, Field Operations Manager, Kingfisher Sourcing Organisation.
• Sebastien Binot, ECB Asia Sourcing Manager, Altra Industrial Motion (Shenzhen-China) Co. Ltd.
• Daisy Liu, Asia Head of Purchasing, Oberthur Technologies.

Looking back over the past few years, several trends have come and gone. One of them is the interest of most importers in moving production out of China.

2009 to 2011: low-cost Asia was fashionable

The context was clear: prices of made-in-China goods were increasing by 15-30% a year, and the future was not pretty.

The demographics (less young Chinese), the central government’s five-year plan, and the rise in the RMB/USD rate, all promised further cost increases.

Importers were advised to focus on strategies such as:

• China + 1: developing production in another country, and slowly transferring volumes there.
• Out of China: just get out now if you can!

As I wrote in New sourcing destinations in Asia: let’s be serious., some exotic destinations are still fashionable. But their business case is often pretty weak.

The hype around “reshoring”

In 2012 and early 2013, lots of articles mentioned a “reshoring” movement, back from China. Not only in the US, but also in some European countries. These articles were based mostly on isolated anecdotes!

Plenty of challenges are awaiting those tempted by this solution. It does make sense in certain product categories (especially high-shipping-cost and low-labor-content items), but not in others.

Since 2012: back to reality

Most importers have realized that sourcing hard goods or electronics in Vietnam or in India was not always a good idea.

Relocating production is difficult, especially for SMEs. And it is risky (look at all the bad press surrounding brands that produce in Bangladesh, for example).

A funny illustration: the French Chamber in Hong Kong launched their first edition of the ”Made in Asia, Looking Beyond China” conference in 2011. In their latest edition (2 months ago), the general tone was “after all, China is not bad when compared to other countries”.

And, to the Chinese manufacturers’ credit, they haven’t been standing still. Some of them have moved production to cheaper areas, others have contained cost raises by improving productivity, and many have improved their offer’s quality / feature set.

Consequence: a renewed interest in optimizing China operations

And the logical question for hands-on buyers is: “how do I improve my supplier base?”

The seminar we organized recently (“how, as a buyer, I push my key Chinese manufacturers to improve their operations – experience sharing on supplier development programs”) was a nice success — two attendants flew in from Beijing, two came from Hong Kong, while others came from Jiangmen, Foshan, and Guangzhou!

Do you also see a growing focus of importers on improving their supply chain in China?

I often tell importers not to focus too much on the factory-gate price when selecting a supplier. There are so many other elements to take into account!

Recently I had the chance to attend a presentation (in a FCCIHK seminar) that emphasized this point. The speaker was Michael Mayringer, director of global supply chain, Bombardier Recreational Products (BRP), Powertrain division.

His company’s changes in purchasing strategy nicely illustrate three levels of sophistication:

Level 1: re-active purchasing price analysis

Until about 10 years ago, BRP’s “cost reduction programs” were mainly:

• Tactical “price negotiation”
• Very much focused on labor cost

This is the way most SMEs still interact with their suppliers.

Level 2: focus on cost, not just price

In 2001, BRP decided to optimize the material cost of its products in a more structured manner. They started to focus on cost instead of price.

They introduced cost analysis methods:

• Purchasing Price Analysis
• Value Analysis & Re-design
• Cost Process validation at supplier

They worked on establishing trust & openness with their suppliers. The objective was open book cost break downs. (Note that BRP is a rather large company, and that it might be very difficult for an SME to achieve the same objective).

These activities proved to be successful for a few years, but the returns were clearly diminishing. So BRP took a more pro-active approach.

Level 3: pro-active enterprise costing

They asked themselves this question:

Can we implement a holistic business process (Enterprise Costing) capturing the entire product lifecycle and involving the whole value chain as a sustainable strategy?

They had four objectives:

• Develop better cost-calculation processes, know-how, transparency, and management.
• Heavily focus on costs during the product development phase.
• Better align their technology, manufacturing, and sourcing strategies.
• Involve supply chain partners more early and more effectively.

Here is how they illustrate this new approach:

This approach is based on several elements:

a. Maximum value proposition

• Intensive early supplier involvement in product development.
• Rigorous application of “design to quality & cost”
• Search for improved customer satisfaction

b. New form of organization

• Cross-functional approach (horizontal based on type of product, not vertical based on functions).

c. Integrated part of Global Sourcing Strategy and Supplier Management

• The most cooperative suppliers were moved up to the level of strategic supplier or even alliance partner.

d. Innovation

• New products and new technologies were developed.

This third level is clearly a big step toward best practices. Can’t SMEs get a lot of inspiration from this example?

Here is my roundup of good articles that were published recently.

Choosing A China OEM Manufacturer: A Practical Guide

Steve Dickinson suggests some non-conventional ways to spot fake factories (trying to put up a show and impress naive buyers) and inadequate factories (trying to appear better than they really are).

These are good tips. As a complement, you can read an article I wrote before on the same subject.

Importing from China: Ways to Assure a Smooth Order

Jacob Yount gives us a list of routines that will help eliminate a lot of hiccups in the importing process:

• Educate the supplier
• Ask for proof
• Speak in Bullet Points, Pictures, Samples and Facts

These are good points, that certainly help in the interaction with suppliers. I would just add “go on site to really understand the situation”.

How To Stop China Counterfeiting, Or At Least Reduce It.

Dan Harris recommends 4 solutions (to be pursued together) for brands that want to limit counterfeiting:

1. Reduce risks that your manufacturer himself sells products through a back door
2. Register trademarks
3. Monitor marketplaces
4. Put pressure on the seller (they run legal risks in China, so this can be effective)

Upscale China fast replacing cheap China, says author Shaun Rein

Shaun Rein had made himself famous with occasional over-the-top positions on sensitive subjects. In this interview (and his book), he explains why China is getting more expensive and why importers should try hard to source from a second country.

Unfortunately, labor costs are also on the rise in other Southeast Asian countries (see End in sight for Asia’s cheap labour). Not to mention political instability in Egypt, PR risks in Bangladesh, and so on.

Japanese carmakers turn to Chinese parts for China market

The strong competition on price on China’s car market is driving auto makers to use cheaper parts, made of cheaper materials and not as durable (extreme example: a visor that melts in the sun).

The same phenomenon is at work in many price-sensitive markets in the US and in Europe. Retailers refuse to increase prices, and it forces importers to cheapen their products.

A new brick in the Great Wall

According to the Economist, “China has plans of its own” when it comes to the 3D printing technology.

It would be funny if a Chinese university made a big breakthrough, if Western companies reverse-engineered and copied it, and if Western producers used it to make products in small series (on an as-needed basis), resulting in a drop of imports from China.

Nesting challenges await reshoring manufacturers

Global Sources did a bit of research, and makes a list of difficulties awaiting American companies that decide to “reshore” production. If you are tempted by this solution, make sure to read this article.

It is the rare importer or trader who doesn’t have direct competition. And what makes a company more competitive? Quite often, its supplier base.

• Maybe they are getting higher quality products and fewer shipment delays, without paying a higher price.
• Maybe they are enjoying a great deal of flexibility, with low MOQs and quick production runs, without sacrificing quality.
• Maybe the supplier takes part in the development process in a way that ensures easy renewal of a collection.

But the question is: how to select the right suppliers, and then how to push them to improve?

This is exactly what we’ll try to answer in a seminar to be held on 10 May in the morning, in Shenzhen:

How, as a buyer, I push my key Chinese manufacturers to improve their operations – experience sharing on supplier development programs.

We already have two great speakers with success stories to share. More information here.

See you on 10 May!

Last week, The EU Chamber of Commerce in China organized a seminar on the topic of ERP implementation for SMEs.

I found it pretty interesting and took some notes:

What are the alternatives for an SME?

• Keeping all the data in Excel spreadsheets. However, it is not adapted for companies with too much complexity (number of products / customers / parts / suppliers / production sites…),
• Simple ERP programs such as Open ERP and many others,
• Complex ERP programs such as SAP or Oracle.

Is it easy to push users to switch from Excel to an ERP?

It is very hard. During the transition, top management needs to show a commitment to the ERP, and all managers need to have a look at the ERP’s reports every day.

A few tips from a speaker:

• Identify employees who are enthusiastic about the change and who are curious. Make they “key users” (see below).
• If necessary, fire the few who will always resist.

What to do before setting up an ERP?

The preparation usually takes about 6 months. Here are the steps:

• Select a project manager inside the company, who will work with a consultant and drive the implementation.
• Modify the internal procedures. Simplify the flow as much as possible. Think lean. Write down the new procedures and follow them.
• With an ERP consultant, decide where the ERP needs customization and where the company’s procedures cannot fit the ERP’s natural logic. It is important to minimize customization to save money but also to avoid headaches when a new version of the ERP comes out.
• Prepare the data. Beware of the data imported into the database. It is better to carefully cleanse the data (removing anything unnecessary, and correcting mistakes) before importing them into the ERP.
• Train a few key users (one in each department) who will prepare the data, train the other users, and do a lot of testing before the new system goes live.

Is everything set after the implementation?

The implementation never ends.

If a customer has a special requirement, some reconfiguration might have to be done. If capacity changes, some configuration is necessary. If customizations were done and the ERP needs an updgrade, some IT guys might get a headache.

Three mistakes to avoid

A lot of information will be in computers, but don’t forget about visual management. Put up charts so that everyone can see progress on key metrics. All employees might not use the ERP, but they can all understand simple graphs.

A “big bang” approach might be tempting, but it will consume all resources for a certain period, and Chinese managers are not very good at defining their needs exactly before the implementation. It is better to implement it slowly, one step at a time (with products, then sales, and so on), and to correct the course when necessary.

Chinese companies are required by law to submit accounting books in Chinese. And some regulations are a bit different (for example, how to value inventory). Don’t use an ERP that doesn’t output accounting books in Chinese!

Compatibility with lean manufacturing

The first two speakers came from companies far down the path to a lean enterprise. They said their ERP systems did not prevent them from conducting continuous improvement. One speaker mentioned that an ERP tends to push the company to think in terms of workflow rather than functions — a very good thing indeed.

They were actually more fervent users of technology that Toyota itself (the inspiration of the lean movement). Toyota factories typically have no computers on the shop floor. They do track what they buy and what they sell, but they don’t want to use the “material requirement planning” module of an ERP.

Debates about the need for one ERP system

All speakers mentioned the need for a common database for the data of all functions of the company. I should mention that not everybody agrees with this (see Michel Baudin’s take on this).

Similarly, all speakers mentioned the need for an ERP. Kevin Meyer, in Forget SAP, Run Down to Staples, makes a compelling argument against ERPs in manufacturing operations.

Any reactions to this?

The term “ethical sourcing” is in fashion these days. And it seems to be a step in the good direction, since it puts responsibility on the sourcer (for example, Wal-Mart and the importer/middleman, if any).

“Social compliance” implicitly placed responsibility on the manufacturer. I think it is clear to everyone that compliance to international standards is not going to happen on a voluntary basis in China or in Bangladesh…

Is ethical sourcing something positive, like “fair trade”? I don’t think so. Too much hypocrisy. The best comparison would be the organization of the Tour de France race. (I am serious… bear with me!)

1. Demands for ever higher performance

The Tour de France takes riders through harder and harder journeys… but expects all competitors to refrain from using illegal performance-enhancing chemicals.

Similarly, big-box retailers try to get prices as low as possible and don’t hesitate to switch suppliers to save a few pennies. And yet they expect manufacturers to cut no corner when it comes to worker safety and compliance with local regulations. Good luck with that.

2. Double standards

Do these large retailers treat all their suppliers the same? Of course not. When they buy directly from an Asian company, they request lots of audits. When they buy through a company that is incorporated in their own country, they know that company will take some of the heat in case of a disaster, so they are more tolerant.

For example, I heard about a case where a Chinese manufacturer was banned from doing direct business with Wal-Mart… But they made products sold to Wal-Mart through an importer!

Similarly, many suspect that the “favorites” in the Tour de France are given a bit more leeway. I am not sure that’s true, though.

3. A very dirty industry

If only one rider took illegal substances, wouldn’t he be 15-20% faster than the others? This proves that doping is not a problem isolated to only a few competitors.

In a similar fashion, about 50% of social auditors get bribes regularly. There is just too much money at stake (“if we pass it, we get orders in the millions”). And it is easy to miss a few non-compliances in a social audit…

Accounting firms used to preform most social audits in China 15 years ago. Was it a good idea to give these jobs to the quality control firms, who are already challenged with bribery issues in their inspection activity? Not sure.

4. Inadequate testing policy

After a social compliance audit, a manufacturer gets a rating – typically, all the criteria of the SA 8000 standard and local laws are weighted about the same. But I think it should be different:

• Some criteria should be critical, and should be a cause for failure of the audit — for example, a worker cutting fabric without protective gloves, instances of child labor, insufficient safety exits in case of a fire…
• Some others should be considered as “nice to have” — for example, respect of local regulations regarding working hours (what is the problem, really, if the workers can easily quit a factory and join another one?)

In the Tour de France, competitors are encouraged to get dope, and then to do a blood transfusion just before tests. This is the same as manufacturers fabricating a double set of books in order to fool auditors about the number of hours worked. Ridiculous.

5. The pressure mounts after “Lance Armstrong admits” moments…

… but actually nothing changes on the ground.

In this video (shot more than a year ago), the CEO of a major garment company (owner of Tommy Hilfiger and Calvin Klein brands) says that a 2012 fire in Bangladesh would be “a catalyst for dramatic changes”.

And what happened 8 months after that video? Another fire in Bangladesh that killed 112 people. But now it is different, isn’t it? Wal-Mart and the others are really taking measures, and it won’t happen again? Who believes that?

Etienne Charlier, at Procurasia, just had a very nice infographic designed. It is presented as a list of criteria to be followed by a company BEFORE starting to buy in China.

According to Etienne, sourcing in China is a good idea for your company if…

• You can purchase large volumes at a time
• You can afford to place orders months before getting the products
• You can find  competent manufacturer, confirm their fitness to your needs, and start production, all within a few months
• You can accept to adapt your product to the local production methods and to the materials commonly found in China
• You intend to buy products that undertook significant machining and/or assembly transformations
• You are not at a big risk of creating competitors or of getting your designs knocked off
• You want to build extra manufacturing capability, rather than replacing what you are currently making domestically

Here is the infographic:

I can think of a few extra elements:

• The decision is still economically justified if the FOB price is 20% higher in two years.
• You purchase a high mix of products. Chinese factories typically have a lower level of automation, which means higher flexibility to make a wider range of goods (within their area of competency).
• You can adopt a project management organization, and micro-manage what happens half-way around the world.

What other criteria would you add?