China is getting expensive. Very few companies sourcing from China will have failed to notice the changes over the past few years. In the last decade, factory labour costs have more than tripled and the Chinese exchange rate has risen by around 50% against major western currencies. Salaries have increased even more. Other costs such as electricity, land and government charges have also increased and better regulation means that some of the nasty short cuts that might have been taken a few years ago are no longer accepted. So Chinese factories are looking for price increases and buyers are under pressure.
Western buyers are now looking for other ways to stay competitive. And they don’t need to look far. The inefficiencies in many Chinese factories are staggering. Managers used to Western factories and the efficiencies demanded by high western labour costs, can easily see opportunities to dramatically reduce costs. However achieving this improvement is not always straight forward. TXM has worked across a range of industries to help companies sourcing from China to improve their competitiveness. Here are our best tips to help you succeed in changing your supplier.
1. Remember that your Supplier Owns His Business
Often when your supplier is highly dependent on you as a source of business, it is tempting to start thinking that you “own” the supplier’s business. You don’t. Even if your supplier is 100% dependent on you for his business, it is his business and he will make the ultimate decisions about how it is run. As a separate business it will have its own culture and own ways of doing things and its objectives will not necessarily align with your objectives. This means that you do not “tell” your supplier what to do, you ask. It also means that you listen to what your supplier is telling you and try to learn what the supplier’s objectives are and try to find common ground on how you can both improve the supply chain. I know this is “Negotiating 101”, but I am amazed how many companies think that they can walk in to a supplier and just “tell them what to do”.
2. Respect Chinese Culture.
China has an ancient history and culture that is quite distinct from Western culture. To work successfully with your suppliers you need to gain a rudimentary understanding of this. The basics are well known. You need to focus on developing a personal relationship with your supplier. This does not necessarily mean heavy drinking and Karaoke bars! More important is to spend time in the supplier’s factory and demonstrate your commitment to him and his success as a supplier to your business. You cannot manage Chinese suppliers by Skype. You or your team need to be personally present. Secondly you need to respect your supplier’s “face”. This means finding good things to say about his factory, and couching your suggestions as ways to make it better rather than just criticising what you see as wrong. If you take the latter tack, you may find that your supplier will stonewall and deny the problems rather than admit that he runs a “bad factory”. NEVER criticise a Chinese manager in front of his or her subordinates. This is a serious loss of face and will mean that you will loose all respect in your supplier. Also recognise that just because your supplier doesn’t loudly disagree with what you say, does not mean that they agree. Chinese people are very polite and will often disagree silently!
3. Encourage your Supplier to Implement Lean
Many companies are now providing Lean Consulting assistance to their suppliers to try the accelerate the improvement. The aim is to make the supplier a Lean China supplier. This kind of supplier development has long existed in the automotive industry and is now entering other industries. When heading down this path it is important to agree with your supplier up front how this will work. Key questions that need to be answered are:
- Who gets the benefit of the improvement? DO NOT assume that cost savings from improvement will be passed on to you unless you have agreed this up front. Suppliers will most likely initially be very reluctant to pass on price reductions, so focusing first on non-financial gains such as lead time reductions can be a good way to build trust initially.
- Who pays for the consulting help? There is a spectrum here from the buyer pays everything to the supplier pays everything. There are problems at both ends of the spectrum. If the supplier is paying, then he should receive all the benefit. However if the buyer pays 100% then you may find that the supplier does not take the exercise seriously. One approach we have used is for the buyer to pay for the initial evaluation and lean action plan and the supplier to then pay for support to implement that plan.
- How to manage confidentiality? You may think it is very reasonable to collect data during the Lean program and then use this data to help your next round of price negotiations. Your supplier will have a different view and the outcome is likely to be the end of your Lean program at that supplier. There needs to be some clear rules and boundaries over how data can be used and shared.
- Change in China needs “Chinese Characteristics”. Many companies believe that by sending their internal Lean specialists or Lean Consultants from the US or Europe to their suppliers in China will ensure “consistency” of their lean implementation. In reality, foreign lean consultants can have a short term impact, but will not create sustainable change (and may even alienate your supplier). Without Chinese language and an understanding of mainland Chinese culture the foreign expert will neither understand nor address the underlying cultural barriers to change. As a result the TXM lean consulting team in China are all experienced local Chinese lean experts.
4. Look in the Mirror First
In most cases the easiest wins in reducing cost in your supply chain don’t involve changing the supplier’s factory at all. They involve understanding in detail how your supply chain is operating and how this is driving cost back in to the supplier’s process. Therefore mapping the extended value stream from your customer back to your supplier and (ideally) to his suppliers is likely to reveal significant opportunities to streamline the supply chain and reduce cost. These may involve simple changes to ordering patterns, rationalising the product range, simplifying material specifications and reducing expediting. These changes are often easy to implement and deliver real benefits to both you and the supplier. Improving the extended supply chain first will build confidence and trust with the supplier by showing that you are prepared to change as well to improve overall performance. Therefore it can be worthwhile focusing on creating a Lean China supply chain before you try to create a lean china supplier.