8 tips for a successful supplier development program in China

For the last 5 years the labor cost has kept increasing in China at a huge pace as the manufacturing labor cost has more than doubled from 1.15 EUR/hour in 2009 to 2.6 EUR/hour in 2014. Moreover, the exchange rate dropped from 9.59 to 8.18 CNY/EUR for the same period and today reaching 7.30, that is to say an increase of 24% for “made in China” products. Most of the cost driving factors have the same trends leading to the overall impact of decreasing gradually China’s cost advantage.

Most of the local but also foreign suppliers have no other choice than to increase pressure on their production and supply chain organizations to maintain a competitive cost and retain customers. However, shortcoming savings of Chinese suppliers equals frequently to a proportional increase of the risk of business discontinuity. As an example, it affects manpower retention, competencies, or even worst it leads to strikes. The number of strikes has doubled in China in 2014 according to the China Labor Bulletin NGO.

Many manufacturers tend to solve those issues by investing in expensive equipment and robots, whereas the capital invested can be largely saved with a proper and structured approach. Another well-known problem in China is to sustain quality and delivery in a very fast growth period; we see that the traditional way is to install more equipment to increase capacity instead of working on productivity and developing continuous improvement. This is rarely framed into a long term industrial plan.

Why a supplier development program?

A supplier development program is a collaborative project involving both client and supplier aiming to developing supplier performance in terms of quality, cost, delivery, time-to-market, management and environment, as well as innovation and financial performance.

The establishment of a durable cooperation with suppliers is crucial in China as we observe a change of mindset. The development of Lean initiatives is expanding in China, even for small companies, as the increase of productivity moves from 40% to 60% in average in the 5 past years. But the lack of know-how and old believes, such as that supplier development is costly and time consuming, remain the main hurdles to switch from a firefighting mode to a win-win sustainable development.

On another hand, the companies willing to develop their suppliers often think that the improvement will benefit to their competitors too and that the impact will be therefore diluted. The involvement of the team to understand their suppliers and to build up deep relationships, as described by Jeffrey Liker and Thomas Y. Choi in the Harvard Business Review, shows how essential this tactic for a long term business development and building the foundations of innovation is.

Based on our experience, the implementation of a supplier development strategy can achieve significant performance improvement. We generally observe:

  • -5% to -50% of product defect
  • +6 to +90% of on-time delivery
  • +30 to +50% of order fulfillment cycle time
  • +5 to +10% of labor productivity
  • 4 to 8% of cost reduction

These figures are based on our own observations but can vary widely depending on the industry and the maturity of the supplier and the product types.

Our 8 tips to succeed in supplier development

During the past 8 years of our presence in China, we have identified 8 key factors to lead successfully supplier development programs. They are not all specific to China but cultural specificities have to be addressed for a smooth and successful deployment.

1) Define internally clear “development” initiatives which will support business strategy

2) Dedicate time to select the right suppliers

3) Inform suppliers in general and selected suppliers in particular

4) Lead the project with the Supplier Quality Team

5) Run on-field diagnosis to assess savings opportunities and confirm selection

6) Put in place and suggest financial incentives at supplier’s

7) Sign development contract with selected supplier

8) Organize REX and strengthen communication

 Conclusion

A supplier development program is a long journey for both client and supplier teams to reach a common goal. It must be carefully prepared and planned to fit in supplier’s culture and maturity, and meet business expectations.