Better Cooperation With Suppliers In China Offers The Following Benefits
By engaging in supplier development with selected Chinese suppliers, importers can:
1. Avoid price increases down the road
Many Chinese manufacturers give a quotation, take on a new project, and then increase the price based on the material consumption and labor content they observe on the first batch they make. So the question is, how to help them keep their costs low?
The response is twofold:
- Help them reduce scrap. We see many situations where the pass yield is below 50%, and where most of the rejected products have to be scrapped. This is obviously a very important source of costs and needs to be addressed, but the production staff might not have the expertise to find a suitable solution (e.g. better process control, preventative maintenance, better tooling, etc.).
- Help them make manufacturing easier, better, and/or faster. If the labor content is high, or if many quality issues are likely to appear during manual work, it makes sense to help the supplier organize that aspect of production. Note that the factory owner might be convinced that process automation is the solution, but there are good alternatives that don’t require investing and can bring great results.
2. Strengthen their supply chains
When did Toyota cars really get better than most of their competitors’? In the 1970s, when they started to work on supplier development. A car maker (Toyota, GM, Honda, Ford…) typically buys around 80% of the total manufacturing cost of a car from suppliers, which means having great suppliers is a must.
Doing the design and the assembly right is not sufficient. These car makers rely heavily on their tier-1 and tier-2 suppliers – as these suppliers produce higher-quality parts, the end product gets better too.
The benefit is not only better quality, though. A more reliable supplier will ship components more often on time. Fewer quality issues and delivery delays means your purchasing department can switch to a just-in-time policy and reduce inventory, which in turn reduces costs and lead times significantly.
3. Attract the best suppliers
If your company’s offering is focused around an industry (e.g. furniture, auto, luggage…) and you truly help your suppliers, the word will get around. Your competitors will want to work with the factories that work for you. Your suppliers will tend to grow faster and be more profitable. It means you will have a wider choice of potential suppliers – especially those forward-looking and willing to improve – who will be motivated to work on new product developments, give fair pricing, and in general play the long game.
4. Allow for tighter collaboration with key suppliers
As you provide help, you send a signal. You are investing, and you expect to work with the supplier for many years. You are not looking for ‘one-shot’ deals. You are a partner, not a mere customer.
As we wrote in 5 Levels of Best Practices in Procurement from China Suppliers, Ikea’s purchasing prices have dropped by 35% from 1995 to 2004. How did it happen? By reorganizing the purchasing department, but mostly by working much closer with suppliers in certain product categories.
All of this is described in more detail in the presentation you can download below:
5. Get immediate savings
This one is tricky, since suppliers probably don’t want to open their books – especially if your purchasers have a history of using any excuse to request price reductions.
However, certain things can be counted and checked. If you help them to remove 20 operators from production lines that are dedicated to your products, calculating savings is easy. This is the easiest way to calculate the immediate and direct benefits of supplier development.
How to structure the deal? If you reap 100% of the benefits, what’s in it for the supplier? Will they be motivated to do the hard work? Probably not. Based on our experience, the following approach usually works best:
- Agree on the planning of improvement initiatives,
- Calculate final savings after improvements, if possible based on information that cannot be hidden or refuted,
- Share the savings – for example 50% in the form or lower pricing, and 50% to be enjoyed.
What are your thoughts on supplier development in these ways?
What about you? Have you had success with supplier development? Or are you afraid that some of your competitors, who might be buying from the same factories, will benefit from your efforts?
Have you worked out an arrangement for cooperation with suppliers whereby they share some of the savings? How has it worked out?