Vendor Management

Those of you who have done business in China for any length of time know that the marketplace is fluid, to say the least. Companies rise and fall, reinvent themselves, destroy themselves, and exchange key staff at a dizzying rate. If you're dealing with a tier one automotive supplier, you will probably disagree with my observation, but if your volumes are smaller, like mine, then you've dealt with these small, rapidly morphing companies.

Most of my experience has been in and around Ningbo. In such a rapidly developing area, company changes are accelerated. There are many great companies in Ningbo, but a technique is needed that will help make sure the company you're doing business with today is the same one you started doing business with yesterday.

Most of you are familiar with vendor management programs. Larger companies have formal vendor management systems that rank all vendors on such things as delivery accuracy, on-time delivery, number of identified defects, number of outstanding non-conformances, etc. For smaller companies, it's still important to have a program. In fact, it's so important, that you should take the time to develop a procedure, just to remind yourself on occasion to spend a few minutes thinking about your vendors. For the purpose of this discussion, let's assume that you have already performed an initial audit and vendor qualification.

Here are some ideas to get started, and to use as the basis for a procedure:

1. For every shipment from a vendor, it's likely you perform some sort of source or receiving inspection. Put a copy of the results in a vendor file. Make note of any non-conformances.

2. In the vendor file, maintain a copy of any non-conformances. Be sure to pay special attention to any non-conformaces for which the vendor hasn't completed corrective action.

3. For every shipment from the vendor, make a note about requested delivery dates and quantities.

4. Make sure you capture any price changes throughout the year.

5. Dust off your initial audit form. Take the time to do a quick survey of the company, paying special attention to any findings made during the initial audit.

6. Set an appointment on your calendar to take a quick look through your vendor files at least annually. Take corrective action on any areas of concern you uncover.

7. If you haven't personally visited that vendor in several months, take the time to swing by. Now is a great time to bring along your audit form and do a quick survey. Have lunch with the owner, and remind him how much you value his company.

In a market changing as quickly as China, especially in second and third-tier cities, it pays to have a vendor management program. Do you have one? What else do you measure?

As a quick aside, when I audit companies, I always see what kind of vendor management program they have in place for their suppliers. This helps reduce sourcing risk, by making sure your vendor is dealing with the best possible suppliers.

Iraq Oil to China

From the China Economic Review, take a look at this piece on Iraq's first major oil contract with a foreign firm since the fall of Saddam Hussein, with China National Petroleum Corp (CNPC)!

There are those who predict a conflict between China and the US over energy, and this isn't going to do anything to assuage their fears.

Feeding China

I just saw an interesting report from Reuters titled "China Became Net Food Importer in First Half." That in turn got me thinking about a book I had once called Who Will Feed China? by Lester R. Brown.

As I watched the amazing economic growth in China, I thought less and less about the poorest in China. Even though I travel often to rural areas, and was aware of the demographics, I was so caught up in the economic movement forward that I stopped thinking about issues of basic survival. Amazingly, as I was faced with soaring metals prices (and even watched the soy bean crops near my house mature) I thought very little about food prices and availability. I even tossed out Who Will Feed China in one of my recent moves.

I suppose that rising commodity prices are hastening the end of subsistence farmers in the developing world. Good or bad (and my knowledge of agricultural economics is far too limited to know), the day is soon coming when a water buffalo is a rare sight in rural China, replaced by heavy equipment owned by some massive ag company.

The Best Cost Might Be Right Next Door

China Success Stories just published this piece by Terri Morgan of Wudang Research Association -- http://www.chinasuccessstories.com/2008/08/14/china-sourcing-quantity-price/

I certainly agree with the point of the story -- when the total costs are considered, China may not be your best option. In fact, you may find the best price locally.

In my business, I consider myself something of a teacher whenever a new client calls. (I need to think of a way to get paid for this! Oh well, when the time is right, they will call me again) I certainly don't want to make promises I can't deliver on, or find myself losing money on parts I source!

I once worked with a company that had moved some brass machined components to China. The volumes were VERY high, so it seemed a good idea; however, there were some fairly complex features that resulted in high scrap rates, even at good Chinese machine shops. It turns out that their US operation had developed some very specialized machine tools over the course of 30+ years, and these machines had evolved to the point that very little operator interation was required. The short story -- moved the production back to the US. (The other option would have been to move the machine tools to China. Of course, that could mean that suddenly your competitors now have access to the same source of product as you!)

I believe in doing the work up front, to improve the odds of a successful sourcing project later. Part of that work must involve a business case. Is the project justified? Take a look at the total cost of the product from China, including shipping, insurance, and verification by a third party. Consider the non-recurring costs associated with the project such as tooling, engineering support, factory audits, etc. Is the NPV still positive? Sourcing projects involve risk. When the opportunity is right, the returns can be impressive, but all too often, companies run headlong to China hoping for huge savings, only to be disappointed and frustrated. Do your work up front, and look at sourcing projects as you would any other investment in your business.

Outsourcing Quality Body of Knowledge Part I

I just finished reading a very nice article in the August edition of Quality Progress called "In the Know." Govindarajan Ramu nicely lays out a Body of Knowledge (BoK) for managing outsourcing projects. I plan to research this further, as I have been developing my own sourcing BoK which I plan to publish at some point in the future. Look for more about this article future posts-- lot's of good stuff here.

One point I'd like to talk about now is the use of the subject matter expert (sme). I've seen countless examples of a well-meaning company sending a SME to a local manufacturer, only to have the quality fall apart soon after he leaves. Having a subject matter expert participate in knowledge transfer is necessary, but won't guarantee a quality product unless their knowledge is properly documented. Manufacturing and quality managers must take the knowledge from the SME, and convert it to useable processes and procedures. Most importantly, the local managers must be able to train new staff in the transferred knowledge.

We've all heard the term "tribal knowledge" when describing local processes that are known to work well, but are not documented. "Tribal knowledge" can be trained, but is impossible to maintain when the manufacturer is on the other side of the planet from the subject matter experts.

Go Kunming

One of my favorite places in China is Yunnan Province. My family and I took a short vacation there in 2006 and traveled to Lijiang and Kunming. Yunnan borders Tibet in the northwest, and Burma, Laos, and Vietnam in the south. What a wonderful place, full of natural scenic beauty, interesting and friendly people, and fascinating history. That history includes the famous WWII Flying Tigers.

Today, I found a nice English-language blog about Kunming. Right now, it's all stories of the Olympics, but it looks interesting. Check it out!

http://www.gokunming.com/en/

Audit Tips -- Feed the Auditor!

In the July edition of Quality Progress, Joe Kausek wrote a very informative piece called "10 Auditing Rules." Here they are:

1. Make auditees feel like members of the audit team.

2. Start the evaluation by asking general, open-ended questions, then use clarifying questions to fill in the gaps.

3. Be an active listener.

4. Never let the auditee pick the samples.

5. Always try to identify any real effects of your findings, using dollar values when available.

6. Always confirm your findings with the auditee.

7. Don't go looking for nits (administrative finding that has no real impact on the performance of the management system).

8. Provide sufficient background information in your write-ups to allow the auditee to understand both waht was found and what the requirement is.

9. When citing areas of strength, be specific.

10. Feed the auditor.

This is a great list! Let me expand on #10 just a bit. Joe is reminding us not to forget to plan lunch. If the audit is offsite, will you have a working lunch? Will the auditee take you out? Do you have time? Seems simple, I know, but often forgotten. Strangely, this point is more important than ever in China!!

Often, when auditing a Chinese company, the auditee will plan for an elaborate and lengthy lunch. I won't comment on the motivation -- hospitality, stalling the auditor, getting the auditor drunk? During my time in China as Director of Engineering, I was often supervising audits, not on the actual audit team (though I have done plenty of work on audit teams as well). I would often play the role of decoy -- or designated drinker. I would convince the company owner that he and I (and maybe some other members of the management team) should go to lunch, but that we should leave the audit team in the capable hands of his quality manager, or engineering manager. This would often satisfy two requirements -- satisfying the owners desire (requirement) to demonstrate his hospitality, while allowing the audit team to maintain the audit schedule. Let me add a subrule:

10b. When auditing in China, consider the use of a designated drinker to have lunch with the factory owner!

Memory Eternal

I waited, wondering whether or not to post about the recent falling asleep of Aleksandr Solzhenitsyn. I think it's appropriate, even in a blog theoretically aimed at China sourcing. Solzhenitsyn is a shining example of how one man can change the world. May his memory be eternal! http://www.nationalpost.com/news/world/story.html?id=707120

Proudly Made in China?

Just came across this in the China Sourcing Blog: http://www.chinasourcingblog.org/2008/07/chinas-no-longer-cheap-from-lo.html

This article covers what we all have been facing, rising costs in China, and makes particular reference to Foxconn's recent announcement to move factories from ShenZhen to northern China in search of lower costs. I know we're all looking elsewhere, and the jury is out as to where the next hot, low-cost manufacturing country will be -- in Eastern Europe, Vietnam, Phillipines? Will the supporting infrastructure in these countries develop quickly enough to really challenge China's manufacturing sector?

Of course, there has also been much talk about China's attempts to move up the technology ladder by rejecting lower cost, less value added product, in favor of more advanced, high technology manufacturing. Those of us sourcing in China have seen the VAT rebate changes that favor more value-added manufacturing.

To me, it seems that the biggest challenge for China is not manufacturing, but breaking the negative emotions associated with "Made in China." I guess I'm not old enough to remember when made in Japan was a bad thing. I think the Japanese make some of the world's greatest products (certainly cars), and don't remember ever thinking any differently. How long did it take for Japan to change the stigma?

China and Renewable Energy

In today's daily brief from the China Economic Review, http://www.chinaeconomicreview.com/dailybriefing/2008_08_04/China_leads_world_in_installed_renewable_energy.html

China leads world in installed renewable
energy
Energy
4 August 2008
China now leads the world in installed renewable energy, the Christian Science Monitor reported, citing a report by the London-based nonprofit organization the Climate Group. China has now reached 152 gigawatts (GW) of renewable energy capacity. This compares to around 101GW of capacity in the US in 2006, according to data from the US Department of Energy. China also plans to double its renewable energy output to 15% by 2020. The country has the world's
largest hydroelectric capacity and the fifth-largest wind-power capacity. China is also a major exporter of renewable-energy technologies. Output of solar-voltaic
technology has doubled for each of the past four years and China will be
the world’s largest exporter of wind turbines by 2009.

I'll confess now to a conservative view on things. In fact, I was so pleased with President George W. Bush's acceptance speech at the 2000 Republican Convention that I hung a copy on my office wall. I especially remember the line,

"This administration had its moment. They had their chance. They have not led. We will."

I don't want to enter into a general debate on the accomplishments and failures of Presidential administrations, but I think it's pretty clear to all that on the issue of energy -- foreign energy reliance, renewable energy, energy research -- that the US has failed to lead.

China's leadership has acted with foresight and commitment to build a renewable energy infrastructure. The progress is nothing short of amazing, and the world should take note.

Of course, it also helps when you don't have to listen so much to local opinion. (Try building the Glen Canyon Dam today. The majority of Chinese renewable energy is hydro.) There is a considerable amount of "not in my backyard" syndrome going on in the US. I have to agree with much of it --not sure I want a nuclear reactor in my backyard, and I'm an engineer, for the most part capable of understanding the technology and its impressive safety record. A great example is the attempt to put a wind farm on Cape Cod, and the strong resistance by so-called environmentalist Robert Kennedy Jr.

I served for three years on a local Zoning Board of Adjustment. I can say from experience that any new project involving change in land use, "character of the area," or scenic vista is met with strong opposition. Certainly energy projects (and the ever problematic cell-phone towers) cause changes in all three.

I don't know what the answer is. Certainly, the Federal Government needs to take a strong role in promoting alternative fuels. I think the most effective way is through basic science research, in a way that allows the developing companies/agencies to commercialize the technology and realize the economic benefit. It's also important that local governments (strategic planning groups and zoning boards) recognize the importance of renewable energy and work with various other community groups to develop local policy that encourages the development of renewable energy.

Have any of you worked with local governments on zoning policy or other that encourages renewable energy development? Where?

Convergence

I had a fantastic evening! My wife and I spent the evening at a private club near Lake Ontario. The weather was perfect -- sunshine and a light breeze. The beer was cold, and the company friendly. I spent a few minutes talking to the owner of a machine tool manufacturer. Of course, the topic turned to China. He explained that his business is growing, and that he is selling more and more machine tools into China. With the abundance of very cheap (and worth every penny) machine tools in China, why would any Chinese company spend the money to import an American machine?

In The World is Flat , Thomas Friedman explains the triple convergence. Convergence two is the evolution of flanking technologies and business processes needed to make the most of new technology.

Friedman is spot on, and it couldn't be more obvious than in the machine shops of China. I'd often remarked that I could produce massive improvements in Chinese machining productivity and accuracy by opening a school for operations managers and CNC programmers and setup people. (This isn't universally true -- of course, there are some fantastic machine shops in China. They are rare.) I often joked that most shops ran CNC equipment like they were running old manual engine lathes. In short, they were spending the money, but not seeing the gains in accuracy and productivity simply because they were running the new technology the same way they ran the old technology.

Things are changing. A more competitive market has forced Chinese machine shops to get the most out of their equipment. They have invested in training, and the convergence of skill and technology is increasingly apparent. This was confirmed by my conversation this evening. The Chinese are seeking training, and his distributors are providing it, making his machine tools a real value in the Chinese market.