Exploring How To Improve Supplier Performance [Podcast]In This Episode…

Here at Sofeast our customers regularly ask us: “How do I get my suppliers to improve?”

A large 70% of importers said that their greatest challenge when working with suppliers in China is improving performance. So, our CEO Renaud Anjoran is going to guide you through the important points you need to consider when working on improving suppliers, with a focus on product quality, delivery times, price, and more.


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🎧 How To Improve Supplier Performance? 🎧

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Episode transcript

Hey everybody, welcome to this week’s episode of the podcast ‘China manufacturing decoded’ I am Renaud Anjoran from Sofeast, I’m your host and today I’m doing this recording myself and I wanted to just cover an important topic that is usually on everybody’s mind. Pretty often, at least once a week, is ‘how do I get my suppliers to improve?’ and I gave a training in the European chamber of in China both in Shenzhen and Guangzhou a few years ago on that topic and then I found my notes again and I thought ‘hey this this would be an interesting podcast episode’ so there we go.

On the topic of supplier improvement, I found a survey again that was at that time a few years ago but 70 per cent of people interviewed say that hey my biggest challenge is actually working with suppliers to improve performance okay. So if they can find ways to get their suppliers to improve that’s a huge advantage for their companies. Now how to do that?

First I usually start by saying there are some cases where it’s just really difficult or impossible, such as maybe your purchasers when they deal with suppliers treat them like enemies, for example, we’ve worked with a company I remember their purchasing team was systematically demanding five per cent, at least five per cent, reduction in price every year. So do that with some Chinese suppliers, for example, which are used to actually raising the price every year and it leads pretty fast to a very conflictual relationship. In that case, everything you say or they say would be in the context of ‘hey their purchasers are trying to mess up with us and trying to cut our margins further and get us to lose money actually on their orders, this is not a nice customer!’ So they’re not going to bend over backwards just to to to please you.
Another difficult case is when maybe the top management is positive ‘okay yeah let’s try to do something,’ but the the the people under them the local managers the local leaders on the shop floor and so on, they are always busy with problems, they’re always putting out fires and so the question really is why is it? Because their processes are very unstable. Okay so that’s a clear path, but then maybe it’s something else and maybe they just have no clue how to actually solve problems so they don’t come back. So maybe there needs to be some training and coaching first, but until you address that, basically nothing really can be done. Another issue is a really tough one, is when really there’s no way to find some good suppliers. So, for example, you buy some metal parts and these parts have to be sent out for surface treatment, for example, for plating, but the supplier says ‘but all the plating suppliers that we work with, they’re all just bad and they don’t care about us either. We work with really big ones that are good, but they don’t want our business, and the small ones there are fewer and fewer of them because they’re getting closed (they’re getting shut down for non-compliance with anti-pollution laws), and so we don’t really have a choice!’ Okay, so that is a tough one. There are cases like this where really there’s no good solution, unfortunately.

Now, as you plan for how to get your suppliers to improve you need to think okay let’s say you have 10 different suppliers you’re not going to start working on that with all 10 suppliers, you need to think about which of them are more important to your company versus those just selling some ancillary products that don’t really matter much in your portfolio and getting them to improve will not really move the needle for your business. Well, focus on those that really have an impact on your business. Also, when you look at these companies, how mature are their systems and processes? Is it a pretty unstructured type of factory where it’s the boss and his wife maybe running the show and they don’t have any management to speak of? Well the way to deal with them would be pretty different than dealing with a 2000 worker very highly structured manufacturer, very very different. If it’s a smaller company they have different needs, maybe their performance is not up to the standard that you want because they don’t have proper management and because they have no clue how to control their processes and have no clue how to really address the problems and things like that, and when you work with a bigger manufacturer, well, then you need to think okay where does it come from and how to address that? And how maybe to work together with them and can we be seen as more as a good customer so that they put their good engineers to work on that problem. Maybe you don’t need to be that hands-on in the approach okay? So, of course, you need to think also of their performance, maybe it’s good to help them to get even better, but if some suppliers are really putting your business in a difficult position, sometimes maybe they deliver weeks late and sometimes this very inconsistent quality and you have to reject a batch and things like that, that’s probably number one on your priority list so you need to work with these troublesome suppliers first.
Okay, you need to be clear about what you want also. Not just go to them and say ‘hey we’re not really happy, this is not good blah blah, you need to get better…’ It’s very vague and one good tip here is to be very specific. Be as specific as you can: Do you want better quality? Do you want fewer delays? Do you want them to increase the prices more slowly? Do you feel that communication is not good?
You need maybe better communication, a healthier relationship what exactly is it that you’re not happy about?

There are some smart consultants from McKinsey that came out with a framework with five levels, but basically, you need also to think of where you are with these suppliers. Are you just sending a PO and making sure you get it and not doing anything else, just like you buy stationery for your office? Let’s say that’s level one: they might not even really know you, you might never have visited them. In this case, well, there might be a lot to gain simply by going a little bit deeper with them, sending someone to actually visit them to create more of a face-to-face relationship and looking at the competition.
Maybe you need to sort some other suppliers a little bit of cost analysis to understand if cost is the problem, negotiating a little bit you can do a lot without really pushing for improvement.
Now, if you’re already at that stage, have you tried to maybe consolidate all the volume on them and make them more of a key supplier and make sure that they know about that and give you some concessions, some maybe better treatment, in exchange? Maybe you can do that and maybe you can also work with them to fix the sources of their issues, to uncover first the sources of their issues because often they don’t know and then do you actually even develop new products with them? Standardize certain things together with them there’s a lot of things you can do, but if you have a very hands-off sort of relationship, or you don’t really know them, and you haven’t really worked on making sure that you’re paying the market price and looking at the competition and everything this might be the first step.

Now, as I said, you need to be clear about what you want and then you need to translate that into KPIs (key performance indicators). Not 20 KPIs, maybe two or three KPIs that you follow up on and you put in the face of their managers maybe once a month or once a quarter. And then they know that you’re going to get back to them about that then you will have their attention.
Again, be specific as much as possible, so some common KPIs for quality would be: the percentage of defectives or part per million defective the improvement in that in that number, the number of returns that you get from the market, maybe the number of corrective action requests that you opened, and how fast they were closed, and whether they were closed, these are the kind of things that are typical, maybe the cost of quality (we will get to that also in a few minutes).
If the main problem is on-time delivery or should I say late deliveries well you can count the percentage of on-time deliveries and late deliveries and be very very clear on how you actually keep track of that is it based on the ETD date that you wrote on your PO, or is it that the one that they confirm is it up to actual ETD? Make sure that the formula is very clear here. If there’s a lot of items, well, what is the percentage that is not shipped on time? Because maybe some of them are on time, some of them are not in time, what was their service level, and their lead time? Now, that that is that is an interesting one because maybe they tell you it’s 50 days. Okay, well it should be possible for you to get down to 35 days in six months and maybe you need to show them how to do that, and then you just keep track of it because if they improve on that point, well this is the most important for you actually.
Okay, cost: do they keep raising the cost? How fast do they? Maybe they even give you reductions on pricing? Wow, that that would be great! Keep track of that. There’s a lot of things you can do to keep track of costs, maybe for some of the products they give you visibility on the prices they pay to their key suppliers for the key components. That would be great because it gives you better visibility, that’s something that you should always try to fight for with your key suppliers at least.
Maybe it’s service or responsiveness: so when you need an engineering change request to be done fast do they say ‘okay yeah we’re going to work on that, but for the next batch we don’t have enough time.’ When you have an emergency order, do they try to accommodate it or not? There’s a lot of things like this communication, development of new products, whatever is most important to you, and then pick two or three that are really important and just be maniacal about following up with the suppliers and giving it to them and saying ‘hey guys this is what really matters to us, okay?’
It can get very complicated. If you google Chrysler American Keiretsu on hbr.org (Harvard business review) you can find an interesting article on what Chrysler did in the 90s. They had pretty nice and sophisticated system to actually get suppliers to suggest savings sources of savings and based on that they could be more expensive and still get the business based on points and it was quite sophisticated.

Okay, now, something that very often comes up is the cost of quality. If you want them to improve you’ve got to make sure that they understand that they will actually save money. They need to understand the sources of the costs because factory owners and managers don’t care that much usually about that here. ‘Yeah this buyer is really happy about us he loves us,’ but they want to make sure they make money in the short term, that’s the sad truth of many of them. So if you can show them ‘hey you’re doing this wrong and it’s costing you a lot of money’ they would be more likely to make changes and be motivated much more likely in our experience, and I’m covering the cost of quality here because obviously, it motivates them to improve quality but also it shows them how to cut costs so that’s very often a discussion that buyers have with their suppliers.
So they know that they’re scrapping some material and doing some rework, but they might not keep track of it. If you ask ‘okay so last month how many hours of rework did you do on the assembly lines?’ They might have no clue because they’re not tracking it, so they’re not putting in a number of RMBs on it and guess what? That means they don’t know, so it’s not very clear in their mind that it’s costing them a lot of money. Sometimes you go to the factory and you say ‘so what is all this line doing here with 10 people?’ ‘Oh the yeah, nothing, they’re reworking something that failed.’ But they’re not translating that necessarily into RMB. What they certainly see are your penalties and your chargebacks, there are no worries on that, so that’s good, but that’s quite conflictual. So you’re pushing the cost of quality back to them which is usually a very good thing, but it leads to to a conflictual relationship often so you can do it in a way that they don’t see as fair because often that just gets them mad, and just gets them focused on the wrong thing, not on improvement, but on negotiation, and that’s what you don’t want.
Also, let’s say you operate a manufacturing company in Shenzhen and you’re thinking ‘how can I improve the performance of my suppliers?’ Well, when you get a batch and your incoming QC inspectors just reject it that’s painful to the supplier. They get it back, they have to fix it with a lot of pressure, so instead, maybe you request that they send five of their guys to do rework in your place and they see that it’s a little bit more visible and it’s immediate feedback on poor quality which is a very good thing.

Now, there are also a lot of hidden costs and these are the ones that they usually don’t even pay attention to. They don’t really associate that to poor quality, so, for example, there are issues and they have to put some of their engineers on a problem. Do they keep track of the cost of these engineers? No, very often they don’t. You give them a corrective action request and an AD, whatever you call it, to fill out, to explain. Well, that’s administrative work, maybe by their quality manager or one of their quality engineers and that costs money. In the end, there are issues they’re wondering what to do, how do you respond to the customer, and how do we fix that? Management time is also a lot of money. Sometimes they have a lot of confusion, maybe a line is down because they notice they’re making something wrong. Okay so they don’t want to keep going, but all of these operators are idle, now that’s much better than keeping them working processing products that in the end will have to be rejected, of course, it’s much better, but still, there is a cost here. If they have uncertainty, for example, uncertainty about the quality of what they will get from their suppliers, they might always keep some inventory. Well, that’s an extra cost that usually they don’t also factor in. When they do rework obviously they cannot do some other production, so it decreases their capacity. And then the biggest of all is the lost orders, lost customers, lost reputation. This usually they don’t put a value on, but it’s actually the most expensive of all.

And then you also want to look at the cost of quality for your organization. So when you talk to your supplier it’s not just about the cost that poor quality creates in their company, but also they need to sort of understand that poor quality coming from them has an impact on your company’s costs and you can put pressure on them and can make them understand that you cannot accept a higher price because all together buying from them is quite expensive for you.
You might also simply send them some chargebacks for this cost incurred in your company so when you look into it, what are these? Well, when you receive poor quality products, what kind of disruption does it cause in your company? First, you need to have inspectors just because you cannot trust this supplier, then what happens when your suppliers find some issues – they spend a bit more time to check a little bit more in-depth maybe, then a purchaser or a quality person has to communicate with the supplier what happened, there are some administrative costs and following up and maybe charging back some of the costs and things like that. You might open a corrective action request and then you have to follow up on it, this also is administrative cost maybe from your quality manager at this time. What happens if you actually send some poor quality products to your own customers? They have to understand that it’s very expensive in that case. Now with the typical Chinese supplier, I know when they hear that they’ll be like ‘wait no, no, you cannot charge me for all these extra damages and things like that!’ Sorry, but if you have some key suppliers you can probably talk to them from the beginning and make them understand the problem and if it’s not enough maybe charge some of it back to them, okay?
Also, quality issues cause late deliveries cause expedited shipments and things like that, so all of these are sources of cost for you the buyer. Do you actually communicate that to your suppliers? Do you keep track of it? Some companies have a point system where so many issues okay it’s so many points per supplier and then they keep track and then you can tell the supplier ‘you are the worst because this this this and you have to improve.’ But I see a lot of buyers don’t communicate that so it’s a little bit of a wasted opportunity.

Now, how to actually drive improvement?
As I mentioned earlier, in many cases the key problem is that their local managers and their engineers are just always busy with number one the day-to-day business to run and number two dealing with the problems that keep coming up, and that means they’re spending no time at all on projects to actually drive improvement in the long term. In many cases that’s the problem, so what you do here is you actually need to have someone force them to work on the biggest problems sort of one by one, and then keep following up over time and that’s actually not easy to do, because you need to keep working, as I said, on these problems maybe for six months or a year, because if you don’t do follow-up well then the countermeasures you’ve put in place actually don’t stick and you’re back to having the same problem come back again. So you often need to give them some guidance to do proper root cause analysis, and you need to push them to pick the countermeasures that actually address the root causes. All of that is an entire different podcast episode if I go into that, but it’s not that easy. You usually cannot do that just by emailing and a few calls.

Now, the last topic I want to cover here is when working on the processes, actually manufacturing processes, I want to give you sort of a simple rule of thumb of what to work on based on the kind of issue.
So if you’re getting three per cent, five per cent, ten per cent of defectives due to a specific cause, such as I mentioned before poor plating or some other issue that has to do with a specific process, that’s a process capability issue. If you have a process capability issue just focus on that process. You start to collect data on the critical to quality points and you chart that and you sort of look at the amount of variation and if really it is confirmed that there’s way too much variation and it’s really impacting the final product quality then you need to keep tracking that and make changes to the process. If possible change one variable at a time so you actually see the cause and effect relationships and you and the team can learn from the process behavior.
In many cases, we would simply set up like a regular measurement cycle and tell them you keep measuring these points or these variables and you you chart them this way and you calculate the cpk index, it’s one of the types of capability in the indices, and then you make changes one variable at a time based on your best guesses and you see what actually changes and if your variation goes down and if you can make the values more centered on the target value, and then over time people usually find ways to to to improve the process capability. If it’s very complicated there are more advanced statistical tools like designs of experiments, especially if you cannot make a lot of experiments you need to maybe it’s very expensive then do a DOE, but this is not needed 95 per cent of the time or more.
Now, if the problem is that there are issues, but they’re not detected fast enough, maybe it’s because of a mix-up on the line, because they have too many pieces in front of them. Okay, then you work on the line setup, you try to re-engineer the lines you work on making the products or materials flow in a way that’s very logical if possible one by one and on having the testing and inspection points where needed and on having very quick feedback to the previous process step whenever there’s a problem. You need to have a very very fast feedback loop so as much as possible you need to make all of that is very interconnected rather than process A and then wait for a week and process B and so on.
If the main sources of issues are just human mistakes, suppliers often say ‘well it’s made by hand so there’s always going to be some problems, always one/two/three per cent, sorry I can’t do anything about it.’
In many cases that’s not true.
If they make metal parts, wooden furniture, so many electronics, so many kinds of products, mistake proofing helps a lot. So, if the operator can grab the part and maybe position it in the fixture in this way or maybe in that way which is the wrong way, but you put pins or sensors there are ways to actually make it impossible. That’s the best, so it actually doesn’t even fit or detect that he did something wrong and give him feedback very fast. In some cases, it’s very very simple and very very cost-effective and very fast and for this is a very common story I heard it two or three times at least of the problem of the empty carton. So it’s like a conveyor belt, and then there’s a way to pack the cartons that’s automated, but some of the cartons, maybe one in a hundred, come out empty, so you want the conveyor belt to check the weight like a weighing scale and then based on that it would be reoriented in a different way and we know that this cartoon is wrong. That’s sort of the high-tech approach, and then the low-tech approach is to put a fan there and then when the empty carton gets in front of the fan it would just be blown away! There’s many things like that like if the product comes out and it’s too high some people will put an optical sensor and whenever there’s something too high that passes it will beep, and some other people will say well just put a stick and it will catch the stuff that’s too high and push it on the side, so there’s usually more than one way to to do this, but it requires a certain mindset and if if you’ve seen a number of these mistake-proofing devices you will have many ideas, but if you’ve never seen it, like many people in the factories that we deal with, you might never have thought about that.
Maybe it might just mean color-coding things just like when you get a computer and you say okay this port is green and this cable is green so they go together. It guides people, it’s not really mistake-proofing, but it does prevent some mistakes in some cases, you just need to make some small redesigns to the parts.

I’ll conclude this topic on how do you actually drive improvement in the long run with your suppliers?
Some good approaches to that that we’ve seen are to make it specific. Pick one, two, three KPIs and give them to them regularly and then give them some formal feedback that involves their managers maybe every three months and if it’s bad you might summon them to come, especially if you are in the country, and actually explain the poor performance on the data that you collected. That kind of sends a signal that you really think this is very important and your general manager wants to see them in his office when performance is not good like that, that actually pushes some suppliers to make a lot of effort.
Since you draw some data you can actually show this data per supplier and also of their competitors (maybe you work with five suppliers for roughly the same kind of product) and maybe you have inspectors going to their factories and they collect data, it’s more and more common to have that in a digital way on a mobile app, and then it’s quite easy to pull out some of the data and you can actually show them A B C D, and say ‘you are B and look you’re not doing well so I’m gonna give some more orders to supplier A because they’re doing better than you.’ That sends a signal.
When you find issues or your team finds issues, escalate the problem very fast. Push them to do much more inspection of the source, and/or force them to pay an inspection company to do 100 per cent inspection. These kinds of things really catch their attention, and then, of course, there’s the whole approach of punishing them with chargebacks or penalties and threatening that we’re gonna reduce their business in half next year if they don’t get to that level or if there’s any more serious quality issues or whatnot. This also gets their attention, but, again, it is a bit conflictual so it might not be the first thing you want to try.
But really it always gets back to the same question: do you have good fit suppliers? You also need to re-evaluate that periodically and you might need to make some changes in your supplier pool to maybe consolidate your purchasing power. To have a few key suppliers rather than a bunch of different suppliers.
You might need to have a purchasing person a purchasing manager maybe who is very adept at having tough conversations, but at the same time motivating them rather than just getting everybody in a bad mood. Some people really have the skills to sell the idea and to motivate people to do things, so don’t underestimate that it’s not all about financial penalties.


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