8 Tips for Sustaining the Development of Your Suppliers in China
Insight 24 Apr. 2017

8 Tips for Sustaining the Development of Your Suppliers in China

In 5 years, the cost of labor continued to increase rapidly in China, leading to a doubling of the cost of labor in the manufacturing sector, which went from 1.15 EUR / hour in 2009 to 2.6 EUR / hour in 2014. At the same time the exchange rate dropped drastically from 9.59 to 8.18 CNY / EUR and today reaching 7.30. This corresponds to a mechanical increase of 24% for “Made in China” products. The majority of cost factors follow the same trend, gradually degrading the competitiveness of companies established in China.

Most local and foreign suppliers have no choice but to increase the pressure on their production and supply chain in order to keep costs competitive and retain customers. In this situation, a short-term view of suppliers to reduce their costs, often corresponds to a proportional increase in the risk of supplier failure. This phenomenon will result, for example, in a decrease in employee retention, and therefore skills, or even in strikes. In 2014, the number of strikes doubled in China, according to the NGO China Labor Bulletin.

Under these conditions, many suppliers decide to invest in an expensive automation of their production tool, while the invested capital can be greatly reduced with a structured approach. The same has been observed for many years in the context of long and sustained growth, the traditional approach consists mainly of stacking production capacities, without worrying about productivity and a continuous improvement approach. What is more, this is rarely integrated into the industrial plan.

Why Implement a Development Program?

A supplier development program is a collaborative project involving both the customer and the supplier, with the objective of developing the supplier’s performance in terms of quality, cost, time, time-to-market, management and environment, as well as innovation and financial performance.

Establishing lasting cooperation with the supplier is crucial in order to support him in this change of mind. The development of Lean initiatives is booming in China, for both large and small companies, as shown by the 40% to 60% productivity increase observed over the past five years. However, lack of perspective and old beliefs, such as a costly and time-consuming supplier development program, remain the main obstacles in moving from a rush operation to a sustainable win-win development operation.

In addition, companies wanting to develop their suppliers often think that the improvements will also benefit their competitors and that the result will not provide a competitive advantage. Beyond improving industrial performance, involving teams in understanding their suppliers and building strong relationships, as described by Jeffrey Liker and Thomas Y. Choi in the Harvard Business Review, demonstrates just how important this tactic is. is essential in order to develop long-term collaboration and the necessary foundations for innovation.

Our experiences in implementing a supplier development strategy show that it is possible to achieve significant performance improvements. We generally observe:

  • – 5 to -50% rejects
  • + 6 to + 90% on-time delivery
  • +5 to + 10% labor productivity
  • -4 to -8% cost reduction

These numbers are based on our own observations and can vary widely depending on industry, supplier maturity and product type.

Our 8 Best Practices for Sustaining Supplier Development

Our 8 years of presence in China have enabled us to identify 8 good practices for carrying out a supplier development program. They are not all necessarily specific to China, but cultural specificities must be taken into account for a sustainable and successful deployment.

1 / Define Internally the Development Initiatives That Will Support the Operational Strategy

Supplier development programs are successful when there is a strong connection between development actions and business expectations. For example, depending on the customer’s context, the priority will be to improve quality, costs or cash flow, while others will focus on service level or operational continuity.

Several types of actions can be taken in this direction:

  • “Problem solving” initiative, aiming to ensure that the supplier is equipped with the appropriate KPIs, tools and methodologies in order to solve the problems and lead a continuous improvement process with a strong impact on the level of service and the quality.
  • “Lean” initiative, consisting of a complete analysis of the value chain in order to eradicate the steps without added value (both on the customer and supplier side) and to define an action plan impacting costs, cash flow, the level of service and quality.
  • “VAVE” initiative, aiming to identify, through a functional analysis and an analysis of the value, the opportunities of gains attainable by a re-design of the product / equipment, this by involving the suppliers and the customers in order to have a strong impact on costs, cash flow and quality.

The construction of this catalog of initiatives, accompanied by proven methodologies, is a powerful tool to gain the support of internal teams, to strengthen credibility with the supplier, and to prepare for future deployment by identifying and training internal or external resources required.

Example of value chain analysis (VSM)

2 / Spend Time Choosing the Right Suppliers

Not all vendors are good candidates for vendor development programs: large vendors can be difficult to approach while small vendors can generate interest. Thus, a multi-criteria analysis phase consisting in the selection of the most relevant suppliers is crucial. We recommend starting with an assessment of the supplier panel on three levels:

  • Supplier maturity (ability to progress): process performance, existing Lean approach, involvement of top management and membership, openness to change, etc .;
  • Supplier relationship (development interest): mutual dependence (customer share in supplier sales and supplier share in bulk purchase), openness to change, etc .;
  • Added value of the supplier in order to secure the ROI of the project (profit opportunities).

This method is a model that must be adapted in order to meet the specific expectations of each customer for a supplier development program: achieving quality standards, securing delivery times, reducing costs, building a long-term relationship, etc.

3 / Inform the Entire Supplier Panel and More Particularly the Chosen Suppliers

Un programme de développement fournisseurs est une vraie percée dans la gestion de la relation fournisseurs et il peut faire la différence quand la concurrence, dans un contexte achat, est exacerbée (par exemple, quand le fournisseur peut choisir son client pour un pays et/ou une catégorie donné).

Nous recommandons donc à nos clients de mettre en place une communication spécifique mettant en avant :

  • L’engagement du client à supporter les fournisseurs stratégiques dans leur développement opérationnel
  • La sélection des fournisseurs au programme de développement
  • Le plan de déploiement

4 / Carry Out the Project With the Supplier’s Quality Team

Our experience allows us to say that the customer’s purchasing department is not the one that should lead the supplier development program: in most cases, the purchasing department is associated with cost reduction rather than development. The purchasing department nevertheless remains the key contributor to the selection of suppliers, the evaluation of gains, final negotiations, etc. However, a management by an operational department is more suitable to establish a new era in the supplier relationship. Consideration may be given to relying on external assistance to run the program if internal resources are not ready or available.

5 / Carry Out a Field Diagnosis to Assess the Profit Opportunities and Confirm the Selection of the Supplier

We recommend carrying out a short field diagnostic before launching any action, in order to identify the potential for gains associated with the supplier development program. This profit target will also be transferred to the development contract. We also recommend that it be clear with the supplier how to calculate and share the gains, including the application levels. The more detailed the rules are in a written agreement, the more important the outcome will be.

Examples of analyzes carried out as part of a field diagnostic

6 / Implement and Recommend Financial Incentives for Suppliers

The main difficulty in China (but not only) is to involve the management and the teams of the supplier. Suppliers often think that the winnings will be deducted from their next proposal. We therefore strongly recommend to split the winnings. The share of gains that the customer can capture will depend on several factors, for example their internal ROI objective or the possibility for the supplier to develop areas of optimization with other customers.

In addition, we have had the experience, during several projects, of a blockage on the part of middle management or operators in the implementation of the project when they are not considered to be key success factors. A good practice is to cascade part of the earnings to middle management and operators. We strongly recommend that this point be taken into account with the top management of the supplier before launching the project.

7 / Sign a Development Contract With the Supplier

A supplier development program must produce a return on investment in addition to the operational deliverables which have been defined as priority objectives. This is true for the client who engages internal resources, experts or third parties such as KEPLER. This is also true for the supplier for the same reasons. Consequently, the objectives of the project, the resources involved and the governance of the project must be clearly defined in a “development contract” signed before the launch of the project.

8 / Organize Feedback and Strengthen Communication

Once the actions have been successfully implemented, we recommend 4 types of actions that are often overlooked:

  • Continue to follow the action plan at the supplier to perpetuate the actions
  • Write a business case to internally communicate the results and ROI of initiatives
  • Obtain testimonials from suppliers, for example during a “supplier day”
  • Update the methodologies of development initiatives to make the customer’s organization more agile

Conclusion

A supplier development program is a long journey, for both customer and supplier, towards a common goal. It must be prepared and planned meticulously to fit the culture and maturity of the supplier, and to meet the expectations of both parties.

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