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How to Achieve Cost Savings by Partnering with Chinese Factories

May 11, 2017

 by David Collins

If you work in a purchasing department, you are certainly looking to get cost savings and quality improvements out of your suppliers.In most factories we assess, a significant amount of money and quality improvements are possible, even if a program only lasts for 6 months. And much more over the long term (often in the range of 40% of variable costs).

The issue though is that the companies do not trust their customer. The suppliers are suspicious that, if they participate in an improvement initiative, the buyer will know how much is saved and ask for it all.

For this type of approach to succeed, you must enlist the supplier companies as partners. Make them part of your company’s ‘extended enterprise.'

 

Partnering with Chinese suppliers

Partenering with Chinese suppliers.jpg

Cooperation and teamwork will develop superior results. Pushing at the suppliers without any help or end in sight will create animosity and distrust. So the key is to make your suppliers part of the “extended enterprise” and part of your company’s success.

This is not an easy task. Suppliers are used to being beaten down by purchasing organizations to reduce costs even while their own costs go up. This kills profit margin and the desire to innovate.

Purchasing departments are pushed to reduce costs. Since they are not part of engineering, design or manufacturing, their only method is to drive (negotiate) lower prices. Most of the time, lower prices do not turn into lower costs.

The supplier then has to turn to inferior materials, change delivery schedules, change country for lower manpower cost, and often eliminate its own R&D. Any of these items can hurt the buyer in the long term. Warranty costs can increase, new products from suppliers might not be developed, and frequently the supplier goes out of business.  Then the buyer has to find another supplier with its own learning curve and higher costs.

This is typical of “level 2” purchasing departments.

Examples of this have been in industry for years. But two very famous examples of breaking out of that mold have been Toyota and Chrysler. 

In both cases, Chrysler and Toyota partnered with their suppliers to create value for both. This incorporated the supplier improving itself with both Toyota and Chrysler, and the supplier adding value back to Chrysler and Toyota.

This has been well documented:

  • This article discusses several cases, including the Dodge Durango. (I was part of the launch of that product and saw firsthand how the system worked.)
  • This article describes the benefits of this whole approach to the Chrysler Corporation.
  • Even with the evidence of supplier cooperation helping to achieve superior results in the organization, many companies still do not embrace this idea. Instead, they take the more direct ‘fighting for price reduction’ model. This does not take into account the total cost of ownership of the materials and services used.

 

How to make it work?

First, your company must have a highly developed supplier selection system. It is a must to pick good partners. Small, medium, and large companies that can meet the quality and delivery performance you need. But equally important is to have suppliers whose ideas can bring new designs and products to you.

Getting your suppliers into your design and engineering process can pay huge dividends. Not only do they know their product well and can come up with ideas to improve cost and quality, but they can also design new parts for you that can have better functionality. Again, the more brains and ideas, the better for the company.

Second, you must have a reward program that benefits the companies that are working to help you succeed. This is much deeper than just buying products from a supplier.

It entails working with the supplier as a partner and trusted adviser to link cost savings and quality improvements to more business.

The hard part, though, is to have an open and honest relationship with the supplier and this will take time.

 

The first step: supplier selection

The first step; supplier selection-1-1

Supplier selection must include the most important aspects:

  1. Quality
  2. Cost
  3. Delivery
  4. Service
  5. Risk mitigation
  6. Safety and social responsibility.

These criteria are simple, and analysis is easily made.

To take the criteria to the next level, your company must also ensure the supplier has the following capabilities:

  1. Strong process control so that quality improvements and cost savings can be realized;
  2. R&D that not only understand the specific product they are making but also how that product integrates into your products;
  3. Open and honest cost and quality charts;
  4. Openness to change and to have people come to the supplier operation to help make improvements;
  5. Ability to make engineering, material, or design changes that can help quality and profitability (both internally and for their customer);
  6. Strong culture of change management;
  7. Willingness to use operators as well as engineers to make changes;
  8. Ability to help your company during the design phase.

 To conclude, your company needs to work more closely with key suppliers if you want them to truly improve and cut costs.

Have you tried this approach with some Chinese suppliers? How did it go? In what cases did it work or not work? Please write comments below and we will make sure to respond.

 How Your Procurement Policy Might Prevent You From Cutting Costs

 

Topics: Cost Reduction, Chinese Factories

David Collins

David Collins

25+ years manufacturing experience in computer, automotive, aerospace, furniture, and chemical industries.
Build and managed several automotive plants in North America.
Successfully turned around Foxconn’s Mexico plant.

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