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
Supplier quality programs are successful when there is a strong connection between development actions and business expectations. For instance, depending on client’s contexts, some business will expect improvement on quality, cost or cash, while others might focus on service level or business continuity.
Various types of actions can then lead to significant progress for the following initiatives:
- “Problem resolution” will ensure supplier has the appropriate KPIs, tools and methodologies to solve problems, and drive continuous improvement with a strong impact on service level, and quality
- “Lean” will analyze the end to end value stream to eradicate non-value-added steps (at supplier’s or client’s), and define the action plan with a strong impact on cost, cash, service level, and quality
Example of an analysis of the value chain (VSM)
- “VAVE” will identify through functional and value analysis, savings opportunities achievable by product / equipment re-design involving raw & equipment suppliers as well as client with a strong impact on cost, cash, and quality
Building this catalog of initiatives associated with strong methodologies is a powerful tool to gain internal support, build credibility with supplier, and prepare the future roll out by identifying and training required internal or external resources.
2) Dedicate time to select the right suppliers
Not all suppliers are good candidates for supplier development programs: big suppliers may not be “affordable” whereas small ones may be at stakes. Therefore, the analytical phase consisting in selecting the most relevant suppliers among key categories is crucial. We recommend to run an assessment of the supplier portfolio based on criteria that is three-fold:
- Supplier maturity (ability to progress): process efficiency, pre-existing Lean approach, top management involvement and buy-in, openness to change, etc.
- Supplier relationship (interest of developing): mutual dependency (customer’s share in supplier sales and supplier’s share in purchasing spend), transparency, etc.
- Supplier added value in order to secure project’s ROI (savings opportunity)
This method is a model which has to be adapted to fulfill client’s expectations towards supplier development programs: reach quality standards, secure lead times, reduce costs, build long term relationships, etc.
3) Inform suppliers in general and selected suppliers in particular
“Supplier development program” is a real breakthrough in supplier relationship management, and can make the difference where purchasing competition is exacerbated (i.e. country or/and category where supplier can choose its client!).
We recommend clients to set up a dedicated communication enhancing:
- Client’s commitment to support strategic suppliers in their operational development
- Supplier’s selection in supplier development program
- Roadmap to development
4) Lead the project with the Supplier Quality Team
Our experience tells us that the purchasing department is not the one that should lead a supplier development program on the client’s side: in numerous cases purchasing is associated with cost reduction, and not development. The purchasing department remains of course a key contributor for supplier selection, savings assessment, final negotiation, etc. Yet, more neutral and operational departments such as the Supplier Quality Team are much more appropriate to establish a credible new era of supplier relationship. It can also be envisaged to rely on a third party to run the program, should internal resources not be ready nor be available.
5) Run on-field diagnosis to assess savings opportunities and confirm selection
We strongly recommend to run a short diagnosis prior to carrying out any actions, to identify savings potential associated with a supplier development program. This savings objective will be also mentioned in the development contract. We also recommend to clearly determine with the supplier the way savings will be calculated and shared. The more the rules are set in a written agreement, the more fruitful the output will be.
6) Put in place and suggest financial incentives at supplier’s
A major difficulty in China (and not limited to) is to engage supplier’s management and teams. Suppliers usually think that savings will be fully withdrawn from their next quote. We strongly recommend to share savings. The portion of savings to be recovered by the client depends on multiple factors, for instance client’s internal ROI objectives or possibility for the supplier to leverage optimization axes with other clients.
Moreover, we have experienced several projects where middle management or operators block the implementation of the project as they are not considered as key enablers. A good practice is to cascade down the benefit. We strongly advise to address this topic with supplier’s top management prior to project start.
7) Sign development contract with selected supplier
Supplier development programs must show return on investment (i.e. savings) on the top of operational deliverables that may have been set as priority targets. This is true for the client which involves internal resources, experts or a third party such as KEPLER. This is also true for the supplier for the same reasons. Consequently, project objectives, resources involvement and project governance need to be clearly stated in a so-called “development contract” signed prior to engage.
8) Organize REX and strengthen communication
Once actions have been carried out successfully, we strongly recommend 4 activities that are often missing:
- Keep on monitoring the action plan at the supplier to ensure actions sustainability
- Write business cases to market supplier initiatives achievements and ROI internally
- Have suppliers testify, for instance in a “supplier day” event
- Update development initiative methodologies to make client organization more agile
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.