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5 Steps to Cut Costs in your Chinese Supplier's Factory

March 24, 2016

 by Renaud Anjoran

Many importers would like to help their Chinese suppliers get better and more efficient. Unfortunately, the probability of success of such an approach depends on the nature your entire relationship with those suppliers.

I was reminded of this a couple of weeks ago when discussing with a purchasing manager. He can't just jump into improvement projects. A cost-cutting approach has to be carefully prepared.

I tried to cut this approach in 5 steps to cut costs.

 

1. Choose suppliers that are a good fit for your company

This might come as a surprise to European and American people, but the majority of Chinese companies were set up with the objective of "getting rich quickly". There is no long term vision.Many business owners envision themselves relocating abroad with their family if the business flourishes.

Therefore, the first step is to take this into account in your sourcing process. If they reinvest nothing in their facilities and in R&D, and if the owner has a backward mentality, this is not a good sign. By the way, most of the progressive business owners are in well-developed industrial areas such as the Pearl River Delta and the Yangtze delta.

Another consideration is the factory's size relative to your orders. If you represent less than 40% of their production, they probably won't listen to your suggestions.

 

2. Foster a cooperative relationship with your suppliers

If this element is not in place, go no further. We have been involved in projects where the manufacturer had been repeatedly beaten down by the purchasers. Unsurprisingly, they were hiding all their data. They were saying "yes sure" while thinking "no way".

Professional purchasers tend to apply a supplier management system that evaluates each supplier in an objective manner. It is the basis for all quarterly/semi-annual/annual reviews and is fair to the supplier.

Another way to work in a cooperative manner is to involve suppliers in procurement and new product development from an early stage. For example, 'design for procurement' is very common in the apparel industry -- manufacturers can propose cheaper materials from their regular suppliers, and both sides are often happy with the new arrangement.

22 Signs Of Good Factory Management in China eBook

 

3. Gather as much "intelligence" as you can and challenge your suppliers

Let's say you visit several competing factories in the same city, and they have the same internal processes. Write down how many operators they employ, how many quality technicians, how many office people, how many employees in the warehouse, etc.

If possible, try to visit one factory that is very efficient, even if they are too big and you are afraid they won't be motivated to get your orders.

Then use these data as benchmarks -- for example calculate the direct/indirect labor ratio, the ratio of [warehouse & internal logistics employees] / production operators, and so on.

Then you should challenge your suppliers based on data. Why are their ratios not looking good relative to key competitors? There is a way to get better and they can't deny it. In essence, you are warning them about their cost structure and their long-term survival. This is why our initial assessment reports include a comparison of the factory with "industry average" and with "best in the World".

Note that this approach is much, much better than saying "we need prices to get down". Show them the numbers and ask what they are planning to do in the next year. Ask for a plan with actions in the coming month (or as soon as their busy production period is over).

If the supplier says "this is impossible", you know they are not open to a collaborative effort. Take it into account in your supplier management system and show them that it impacts the issuance of new orders. They might change their attitude in that case.

Use the data you have gathered during price negotiations: average operator wages in their area, prices of sub-suppliers' commodities, etc. (Note that it sometimes makes great business sense to establish a relationship with sub-suppliers)

 

4. Provide information where needed

From our experience, very few Chinese manufacturers know what drives their costs. You can ask a few questions to gauge this -- for example "How much are your costs of quality, and particularly external failures and internal failures?", "How much inventory do you have overall and how much is it costing you?", and so on.

We had to develop documents to explain some of the mechanisms that push a factory's costs up, simply because we met so many blank stares from Chinese factory managers. Be prepared to explain it, or bring a consultant who can do so.

 

5. If there is interest from the supplier's side, do all you can to support their improvement efforts

Let's say your supplier puts together a plan that goes in the right direction and is relatively ambitious. Well done! You have obviously done a good job so far.

Chances are, you will need to support the supplier. It may take the form of an adaptation in the way you work -- for example giving them a bit more lead time to allow them to "make to order" rather than pile up inventory in advance. It might require your designers to travel to the factory, understand the processes and the manufacturing constraints, and do some DFM (Design For Manufacturing). Or you might send an engineer (from your company or from a consultancy) to help them control their processes better. And let's not forget the many ways a new IT system can reduce manpower in offices.

 

These are just a few examples. There are many ways to cut costs. But my point is, don't go straight into an improvement project. If your suppliers hate you and are defensive, they won't accept any of your suggestions and they won't share any information with you.


 

22 Signs Of Good Factory Management in China eBook

Topics: Consulting Method

Renaud Anjoran

Renaud Anjoran

10 years experience in China.
President, China Manufacturing Consultants.
Audited and/or consulted for hundreds of factories in China.
Author of well-read blog, Quality Inspection Tips.

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