Three weeks ago, I attended the ”Made in Asia” seminar organized by the French Chamber of Commerce in Hong Kong. I am going to share two videos from this event, in two different articles.

Here is the video of the panel entitled “How human factors shake traditional sourcing models”.

Here are what I considered to be the most interesting insights:

• VF Corp. is starting, for the first time since a long time, to take decisions based on labor constraints. They have less options than before, and they don’t want to keep chasing the lowest labor cost. The challenge is to get more out of their current suppliers (how to get more efficiency, but also more attractive to good workers).
• High wage inflation. Low-cost Asian countries are somewhere between Bangladesh (90 USD for a sewing operator) and China (450 USD for the same job).
• VF Corp. runs about 20 factories in Mexico, making about 100 million pairs of jeans a year. The workers are paid 550 USD per month. But they produce jeans 3 to 4 times faster than the best Asian factories.
• In many electronics factories, the employee turnover is over 10% a month. The average tenure of the young generation is 10 months. The HR department is only taking care of hiring, and not working on motivation etc.
• In many factory jobs, a new worker can be trained in one hour. The jobs were “deskilled”, and as a result the workers are not interested in what they are doing. This is a problem in the electronics industry, much more than in the garment industry (where workers can keep learning new operations on new machines). The solution is to give multi-skill training, and to make the job content more varied (if possible, with cellular manufacturing structures).
• A bowl of noodles in the interior of China is often the same price as in developed cities like Shenzhen. Living costs are high, also in the interior.
• Chinese workers are paid by piece, unless South-East Asia or Bangladesh. It means China will always have bigger difficulties being compliant (in terms of social responsibility), even though other countries also deal with double books and 80+ hours a week.
• A big limit on the growth of the manufacturing sector in Bangladesh is the lack of infrastructure. There is not enough gas, electricity, roads…

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Information about the participants:

Moderator: Adam Salzer, Managing Director, Consulting, PwC

Speakers:

• Karen Ferguson, Executive Vice President, Human Resources, Schneider Electric
• Veit Geise, VP Asia Sourcing, VF Asia Ltd.
• Ian Spaulding, Managing Director, INFACT Global Partners
• Sunny Tan, Executive Director, Luen Thai Holdings Limited

One of our technicians took some interesting photos. She is stationed in a sewing factory that, unfortunately, subcontracts most of the orders we need to follow.

This “main factory” receives the fabric and cuts it:

And then they immediately put the cut pieces in a truck and send them to several subcontractors (which are generally small/cheap workshops). Notice that the white fabric is directly in contact with the ground…

After that, nearly all the sewing job is done in the subcontractors’ places.

And finally, the garments are brought back to the main factory. They are 90% completed and unpacked.

The main factory adds a few trimmings (e.g. buttons), cuts the threads, pretends to do a final QC check, and packs the goods. Done!

For more information about this subcontracting process, read about CMT (Cut, Make, Trim).

Three weeks ago I wrote How to improve your Chinese supplier pool?, where I argued that importers should distinguish 3 categories of suppliers:

I also posted it as a discussion on cha1n.com (a social network for supply chain professionals), and I got a really interesting comment by Andreas Willms. He explains how his company has managed its Chinese suppliers development. I am reproducing it below.

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Yes, I completely agree with you. Even under total-costs view, supplier development is worth it in many cases. Your shown measurements for each group are reasonable. But some points are open.

It is important that your grouping is reliable, objective and clear. How do you group your suppliers? We learnt to do this by hard facts; we don’t consider any soft facts anymore.

Hard facts could be delivery and quality performances as ppm, audit results and even price levels, etc. Indicators need to be defined for each and an accurate way to measure them must be found. Then you have to weight them and get a final number, points or percentage as result. We have 75% and 85% as the 2 limits between your named red, pink and white area.

The most important lesson we got is the importance of the right presentation to the maker. You can speak during dozens of lunches for hours about it, but a simple paper on the table with some clear words are worth more than all these discussions. The GM of a SME may be very impressed to receive a paper with a formal warning and consequences (reduced volume, stop of new inquiries, price surcharge, punishments, etc). They will ask how it came to the result and you can decide how much info you like to provide about. Later he can put your formal warning on the table in their internal meeting and demand improvements by his managers.

Of course you can give regular updates about their performance or provide certificates for the best supplier — or even invite the best ones to a “supplier day”. There are many ways to play this, but all need work and must be considered wisely.

Returning to your measurements. Assuming that you don’t have endless resources you better define the suppliers who are worth all this time, energy and costs. A diagram with turnover and strategic importance will help you to concentrate on the important makers to start with and concentrate on.

Because to my opinion you can develop any supplier – who is willing to – to nearly any level. But you should consider who is worth the work; else potential savings perhaps not even cover the costs of it (in case the supplier does not commit strongly).

Last no least, it only works if your colleagues are actively pushing and following up. We are currently trying this by putting the average performance of the supplier they are responsible for in the annual targets. Besides this, we explicitly fix targets for key suppliers. Since we have the historical evaluation results of the suppliers, we can define the individual targets based on the past.

To set up an evaluation system is work, but once you have it could give you an objective picture of the performance of each supplier. Then you could start to develop as stated by you and see the results of your efforts.

Performing a quality inspection prior to a shipment is like a filter. It won’t catch 100% of the problems 100% of the time. But it should catch the BIG problems over 90% of the time.

More and more importers are disillusioned about the value of QC inspections. Many of them think (and, depending on who they work with, they are not necessarily wrong) that way, way less than 90% of BIG problems are detected.

And they usually think that bribery is the main reason for this lack of effectiveness. I don’t agree.

I listed below the major reasons why Chinese inspectors sometimes fail to notice quality problems that are BIG in their clients’ eyes.

1. Laziness and lack of discipline

Most professional inspectors are guilty of this.

For example, they don’t pick cartons from every side and every height of the pile, to save time but also to avoid bothering the factory.

There are actually 2 separate issues here:

1.1 They take shortcuts to go faster

A very common example: during the visual check or the testing, they often don’t check as many samples as they should.

As a result, their report is based on their guesses after checking a sample size that is much smaller than their QC plan calls for. The statistical plan is not respected, and in the worst cases the report means nothing at all.

1.2 They are unwilling to bother the factory

Many of them are tired of fighting. They want to work in a relaxed atmosphere, have a nice lunch, and avoid justifying themselves after complaints from the supplier.

For instance, they let the factory check (and repair!) the samples by themselves during the unpacking process. They pretend not to see this little game. And, of course, many problems are corrected before inspection.

Is this bribery? Yes and no. More about this phenomenon here.

2. Lack of training

When they need to check garments, some quality control agencies see no problem in sending inspectors who have a very superficial knowledge of textile products. Some sophisticated clients can suspect it after reading the QC report, but it is difficult to prove.

These inspectors are very slow in taking measurements, so they ask the factory to measure… and they write what they are told. Oh, and there are many issues that their untrained eye just can’t notice.

This is just an example. The same thing happens with electronics, ceramics, furniture, etc.

3. Wrong calibration

As I wrote last week, QC Inspectors cannot follow different quality standards.

Send an inspector who is used to checking cheap products for monitoring a production of goods to be sold in high-end boutiques, and what will he conclude? “Everything is fine”. The reason is, it is so much nicer to what he usually sees.

Unfortunately, the high-end buyer might see defects that are important to him and that were completely undetected during the inspection.

If you work with QC firms that work for cheap buyers (promotional goods, mass markets in South America…), don’t ask them to check high-quality products.

4. Poor timing of inspection

Many buyers don’t understand why ONLY a final inspection (after production is over) can confirm the average quality of a batch.

When everything is packed, the quantity can be counted, and products can be picked randomly. The factory can’t play games.

What often happens is that suppliers are late. The job gets done when only 20% of the goods are completed, and maybe 1 or 2 cartons are packed. It is easy for a factory to hide the defective products and claim they are not made yet.

What to do in this case? A re-inspection at the supplier’s charge. Naturally, most Chinese suppliers pretend not to understand why they should pay for a re-inspection in this case, since the job got done.

So you should think now about the instructions to your QC agency/staff: should they abort the mission in such cases?

5. Rushed job

When an inspector is under intense timing pressure, he is forced to take all the shortcuts he can. There are actually 3 separate issues:

5.1 The inspector’s manager decides on an unrealistic sampling plan

This happens when the client is allowed to choose the sampling size in an online booking system, or when the QC company does not dare to say no to a client. It happens often in peak periods, like before Chinese New Year.

I have seen sampling plans including 8 different product references to check for conformity, and a total of 315 pieces to check visually, in 1 man-day! The result is the same as in point 1.1: the job is not done fully, and the report means nothing.

5.2 The inspector himself compresses the time of the job

After a few rushed jobs (see point 5.1), inspectors know they can get done in 2 hours.

Some of them conclude that they can do one job in the morning (for their employer) and one in the afternoon (on a freelance basis). This is a highly dangerous habit!

6. Corruption

Yes, corruption happens. Especially in situations with the following characteristics:

• The sums at stake are quite large,
• The importer puts a lot of pressure on the supplier to ship in time,
• When there is a problem that is acceptable (according to the inspector’s judgment), but is not in conformity with the client’s specifications.

I already described the way corruption works in a previous article. The point is, it is not as frequent as most people think.

7. Unclear or incomplete specifications

If you don’t communicate detailed requirements, and if you don’t ensure that the inspector has a reference sample in hand, you are asking for trouble.

This may seem obvious. But tens (hundreds?) of unprofessional importers commit this mistake. In the China sourcing game, letting another party guessing some information is never a good idea.

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Oh, and how about factory interference? I am not including it in this list, because an inspector who doesn’t cut corners (see point 1.1 above) will avoid it. And, if it can’t be avoided, the job should be aborted.

What do you think? Am I forgetting an important element?

Two weeks ago, I wrote that different importers have different quality standards. I even listed 3 tips to explain your quality standard to QC inspectors.

So, is it enough to explain what the different standards are?

The more I think about it, the more it seems unmanageable for a professional inspection firm to assign the same inspectors for different buyers who have vastly different standards.

The spectrum in the importers’ requirements is pretty wide. To simplify, there are 3 cases:

• Case 1: buyer has very, very minimal expectations. For example, he purchases bags for a very low price, and sell them in a discount store in the Middle East.
• Case 2: buyer is happy with “what would be acceptable in a supermarket in Western Europe or in the US”.
• Case 3: buyer sells in a high-requirement channel that does not tolerate any visual defect. For example, he purchases bags that are given away to each shopper in Chanel shops.

The issue is the calibration of the inspector’s judgment. And it creates HUGE problems:

• If he is in the first case mentioned above, and he is too tough: he will have a strong discussion with the factory, who will not accept to be held at too high a standard.
• If he is in the third case mentioned above, and he is too lax: the importer might receive some products that passed QC but that can’t be sold.

Let’s take an example — the quality of a print on a garment. The dots you can see below are about 8mm in diameter.

This is clearly a defect, even for the cheapest buyers:

But how about this, if it is always present on 80% of the products?

This second example is quite ambiguous. Let’s say an inspector of garments in Fujian province (where garments are ALWAYS of low quality) is checking this batch. Remember, this inspector has seldom seen garments with  perfect finishing.

Will the inspector count it as a minor defect, and have a long discussion with the manufacturer (who got paid a very little price, barely breaks even, and doesn’t understand why this would be a cause for rejection)?

Don’t count on it!

Over the past 20 years, an entire industry has appeared in China to offer quality inspection services. It was a response to the lack of reliability of most suppliers, as well as their refusal to take responsibility for problems found after shipment.

But I am wondering if the inspection market is still growing.

Long-term trend of the third-party QC inspection market

Phase 1:

Some large companies start buying directly. Quality control firms like Bureau Veritas or Intertek hire thousands of inspectors to cope with the demand from large retailers (and the importers who sell to these retailers).

Phase 2:

This trend gains speed. The growth of the inspection market is explosive, as more buyers find out that buying directly in China is pretty risky.

The market price goes down. For example, Asia Inspection offers a flat price below 300 USD for even the smallest clients, and is quickly imitated by tens of new entrants.

Phase 3:

In their rush to respond to demand, third-party QC firms seriously lack imagination. Some importers become frustrated with final inspections:

• When problems are discovered, it is too late; when no problem is found, it is useless,
• The only way to find problems earlier is to inspect during production, which means doubling the QC budget.

Hundreds of companies are essentially offering the same service. A handful (ProQC, InTouch) try to offer a better service than Bureau Veritas or Intertek. Many competitors are cheaper, and sometimes better, than Asia Inspection and SGS.

All this competition focuses attention on price. Some buyers accept a lower reliability, if they can slash their QC budget by 40%. They hire their own inspectors, or they work with cheap Chinese inspection companies.

The increased pricing pressure seems to indicate that the market has matured, and is about to decline. Maybe I am wrong, but the signals are here.

Phase 4:

More and more purchasers decide that inspections are not the best response in all cases. They explore new options to reduce their QC budget.

For example, by adapting the quality control plan to each type of supplier, as I proposed here.

• For the good suppliers, skip-lot QC is enough,
• For the new or worst suppliers, it is essential to invest more attention at the beginning of the production cycle:

What do you think?

About two months ago, I was discussing with a French importer about his requirements regarding the glue in his products.

He buys packaging for wine. Air pollution is a common cause of corked wine (yes, it doesn’t always come from the cork). So he insists on using water-based glue. And, on their side, Chinese manufacturers reject this idea because water-based glue is too slow to dry.

Chinese suppliers will have to comply because California state just passed a regulation to that effect (and other states and countries will probably follow). But, for the time being, they ignore it and push back on their customers’ demands.

This also the conclusion of a recent article from Global Sources, focused on the European ban on BPA:

Some BPA-free alternatives are already in place in China. For example, glass, PP, PES and PPSU are being used instead of PC to make baby bottles. This is in response to regulations in several markets — including the US, Canada and the EU – that ban the substance in feeding bottles.

Within this line, PP has emerged as the child-safe “alternative of choice,” even though it is softer than PC, has lower clarity and warps under high temperatures. Meanwhile, high costs are deterring broader PES and PPSU adoption.

For other product categories, manufacturers have not yet found workable alternatives. Fujian Hongbo’s Chen notes that there is no substance that can replace BPA in thermal paper. Lin of Ningbo Yonglin makes the same observation regarding epoxy resin.

And my conclusion to this story is this: if importers aren’t careful, they will keep purchasing BPA products for a long time. To avoid this risk, see my advice for testing against regulatory standards.

So, is it hopeless? No!

First, Chinese suppliers will accept the change once most of their customers ask for it and are ready to pay the price.

Second, some importers are already getting their way. Last week I heard the operations director of Mothercare (a major distributor of toys in the UK) explain how one of his large suppliers (HaPe, in Ningbo) had accepted to use water-based glue.

Actually, the supplier worked hand-in-hand with the glue manufacturer. They increased the proportion of pigment in the glue, to make it faster to dry. The price was higher, but production was much faster and more convenient than with the regular water-based glue on the market.

I recently had a good talk with Wouter de Roos, from WSDR. Wouter is a consultant who helps importers optimize their operational effectiveness. His goal: better margin for less risks!

I asked Wouter 4 questions:

Q: What are the most common mistakes you see small and midsize importers do?

Mistake 1: Sourcing based on cheapest FOB price only instead of value for money! Many people forget that the cost price of a product is more than only FOB. You can monitor this by making a clear after calculation for your import and compare it with your initial calculation.

Mistake 2: Many companies forget to standardize everything in a ‘workflow’ what can be standardized. So the same common problems keep repeating themselves ever and ever again with different members of the team. A lot of time will we absorbed by solving these small problems, instead of focusing on your main tasks of the job. Think in company interest and not in personal work habits!

Q: What is the average cost of the inefficiencies in an importer’s supply chain? I mean, if the average importer takes measures to improve the way it manages its internal operations, how much would he save? 5%? 10? 20%?

Some loss of margin are sometimes a part of the business model. But I can say we can save easily 15-20% with midsize companies only by getting rid of Excel- and inbox “mania” by introducing a simple standardized workflow and common rules for how to communicate with each other.

Q: When you write “I can say we can save easily 15-20%”, what does it represent? The total costs of the importing company?

Yes, 15%-20% of general costs.

Changing some processes on the purchase side can mean that you ensure an easier processing in logistics, or less costs of capital in the financial department, and so on.

You always have to look at the total of company processes.

Basically you can influence your margin in 2 ways:

1. Doing the same orders more efficiently with less resources (less people etc)
2. Doing more orders with the same resources.

The combination of the two means that you are on the way to Operational Excellence.

Q: For an importer sourcing mainly in China, in which case do you advise to create a China sourcing office?

Interesting you mention the term: sourcing office. In my opinion sourcing is different than buying. Although it is very closely related.

Sourcing has more creativity in the job and is translating the vision of the company and ‘product identity’. Extended knowledge of your ‘buying customer’ is important to find product innovation which is sometimes not found on the ‘drawing table’ in the EU headquarters. In my opinion sourcing must always be done by product management. So the answer is ‘NO’ for solely an own sourcing office with only local Chinese employees.

A simple buying office is another case. Buying is executing the developed product conforming to the specs, and against the target FOB price, quality and lead time. This is much easier to standardize and can be done by a local office.