This post is by Gary Huang, an expert in sourcing products from China and creator of 80/20 Sourcing.
When sourcing from suppliers abroad, oftentimes we are so bogged down in the day-to-day communications, fixing problems, placing orders, and handling all other parts of our business, we rarely take a chance to evaluate how the supplier is performing. One of the best ways is to do this is with an annual review.
Just like a performance review at work, when your boss picks apart all the good and bad you’ve done all year, this can be an uncomfortable process.
But despite the awkward conversations, the same annual review strategy can be applied to your business relationships with your suppliers. By recognizing weaknesses, you can identify ways to work together to improve upon them.
The annual supplier review – what is it?
An annual supplier review generally consists of three parts: past, present, and future. In other words where we were, where we are, and where we want to go.
Part one is essentially a scorecard or a review of a supplier’s business performance over the past year. In the scorecard, performance criteria can include quality levels, on-time delivery, pricing, service, and other factors particular to your product.
Once the scorecard is reviewed then you want to identify key problems, and work with the supplier to identify ways to improve.
Moreover, when discussing problems it’s important not only to identify the problem but also to create a corrective action plan (CAP). This way, first the root cause of the problem is found. Only when this is discovered can corrective actions be implemented. In other words you have to know the root of the problem before you can fix it. Also it’s important to get the supplier to identify and solve the problem. This way you get them more engaged. At the same time you are testing how cooperative they are.
The second part of the annual review will highlight the present. How much in volume have you purchased in the past year? You’d be surprised that sometimes the factory boss doesn’t even know how much you’ve purchased. If your order sizes are growing and volume is large, then now is a good time to highlight it. We will get into why later.
Also, which are your key products? What are the main problems you are facing right now? Remember the 80/20 rule – 20% of your products result in 80% of sales. Highlight these bestsellers and make a note to double-down on them. Plan to fix any problems with these essential products especially.
Part three is a forecast for the following year. This can include your estimated purchase plan, new product developments, changes to existing products or packaging, a review and negotiation of pricing and payment terms, and other terms such as exclusivity.
But why should I give an annual review?
You might be thinking “I’m busy enough as it is running my one-man show. Why should I spend more time on this when I could be fixing other problems, or working on ways to grow my business?”
Peter Drucker said:
If you can’t measure it, you can’t improve it.
By tracking your past, examining the present, and forecasting your future, you are literally drawing a roadmap to your success.
Applied to sourcing, I’ve seen many people who let problems with product quality persist, delivery delays continue, and suffer through a slippery slope. Eventually this jeopardizes the whole business, when the problem could have been measured and caught early. In fact in most cases those problems can be fixed or even improved.
On the other hand 20% of your defects may cause up to 80% of your returns or losses. So focus on these essential problems to save the most headaches later.
Quick case study: With a fashion accessory product that we have been sourcing, we found that one of the suppliers had a major problem with on-time deliveries. Several shipments missed delivery deadlines, and caused two- to four-week delays. As a result one of our bestsellers was out of stock during the holiday shopping season and we lost out on tens of thousands of dollars of revenue. The root cause was with their component supplier who handled the fabric dyeing. There was a backlog there which caused a bottleneck in the production line.
This one problem (or 20%) caused disproportionately more returns and customer complaints than all other problems combined. If we can work with the supplier to fix these problems then we would sell more products and the supplier would get larger orders and faster repeat orders. It’s win-win.
In essence the annual review is a chance to step back and take a 10,000 foot view of the big picture by measuring performance, looking for ways to grow your business with the supplier, fixing essential problems, and deciding how to plan the next year to grow the business and take advantage of economies of scale.
Let’s take a closer look at monitoring performance.
How do I monitor vendor performance?
You need to present the evidence. This may include:
- Delivery times
- Quality or non-compliance
Rather than just tell the supplier the quality problems I’m facing, I find it’s more effective to show them. This means to keep records of negative feedback and pictures from your customers.
If you are an Amazon seller, take screenshots of your one-star reviews, get photos of any defective products, and present them to your supplier. This is more powerful than merely telling them “this is bad”. A picture is worth a thousand words, especially if it’s from an actual user of the product.
When working with suppliers I like to take the long view. Rather than hopping from supplier A to supplier B, it makes more sense to pre-screen suppliers and develop long-term trust and guanxi, in order to build better business relationships.
How do I do that? The main idea is to constantly monitor not only their quality, delivery, and pricing but also their actions. Are they responsive or are they late? When problems arise are they cooperative or do they shift blame to someone else? Do they value you as a customer or are you neglected? Remember it may not be all their fault. Which brings us to the next point…
Relationships are a two-way street
Just like in a marriage, it’s easy to point fingers and play the blame game. But before you push them to the edge of a divorce, let’s look at how we, the buyer, are performing.
Legendary American bluesman Bo Diddley once said:
Before you accuse me, take a look at yourself.
Are you clear in your communications? Do you put together a detailed Purchase Order (PO) or do you merely tell them I want to buy 500pcs of “that”. When the delivery comes and the color is off or if the quality doesn’t meet expectations, do you have this to refer to somewhere in writing? If you do then you can work on resolving this problem and getting the supplier to help cover any losses. If not, then you will need to play the blame game – “he said, she said”. Not likely to be productive in your business relationship.
Just as in personal relationships, clear communications are key to avoiding misunderstandings later. While putting together a PO will not solve all quality problems, simply taking the time to spec out all the details will help your supplier to understand your requirements, and often this will reduce the likelihood of many problems later.
Moreover, are you responsive to their emails? It’s only fair that they judge you according to the same standard that you judge them.
Finally and perhaps most important – do you pay on time? At the end of the day, suppliers are most worried about their cash flow and accounts receivable. They have to pay their component suppliers, energy bills, worker salaries, bonuses, and deal with rising material, labor and environmental costs.
Many factory bosses tell me that they like working with me not only because I am transparent and fair, but also because I pay on time. So when it’s time to pay and they’ve delivered their part, be fair and do what’s necessary to build trust.
Now let’s look at how to put together a forecast.
Why offer a forecast of your purchase plan?
First of all this helps your supplier plan ahead to keep their costs down and make things more efficient. As mentioned above, material, labor, energy, and environmental costs all continue to rise in China. This means that if the factory owner can take advantage of economies of scale when you share a purchase plan, this helps them save money. It also helps in their purchasing of components and planning ahead how many workers to hire.
After Chinese New Year, many employees do not return to work. Staff turnover rates of 30% are not uncommon. So if you can share your purchase plan at least for the next quarter this will help the supplier plan their HR process. In other words they will not hire more than necessary.
Secondly, from the supplier’s perspective, because most other buyers do not share a forecast of their purchase plan, this will make you look more professional. Factory boss “Zhu” will see that you have been detailed in your purchase orders, your orders are growing, and you have a plan in the next year with 60% expected growth. He will think “this guy has potential”, and may offer you better terms and pricing because he can plan ahead to take advantage of economies of scale and to keep his costs down.
What if things are going well?
Here are some signs that your supplier relationship is healthy.
- Deliveries have been on time.
- Quality has been acceptable overall.
- They’re willing to make the changes to the product that you’ve requested.
- They’re willing to meet your price range.
If this is true then your business is growing. You may be considering making improvements to your product. Or bundling it with something else. Or adding additional products to your brand.
In this case it makes sense to reward your supplier with larger orders to keep up with your business growth. But quid pro quo – with bigger orders, this a great opportunity to negotiate better pricing and payment terms as well. You certainly don’t want to leave money on the table!
What if things are NOT going well?
Your relationship is on the rocks if the factors below sound like you:
- There are repeated quality problems and defects. You’ve warned them but they can’t seem to get things right.
- Orders are consistently late. You’ve instituted a fine for the late deliveries but it doesn’t seem to fix the problem.
- They are unresponsive to your emails.
- Trust is an issue. They claim to be a factory but you suspect they are a middleman, for example.
In this case, it’s time to take a closer look at the problem and whether they are motivated to improve. The key thing is to issue warnings in order to get them to “buy in” to fix the problem for the sake of your business together. Then work with them to fix the problems. How do you do that?
A Corrective Action Plan (CAP) is often used by the big players in the industry. Not to bore you with too much jargon, but essentially this contains three things to help your supplier first understand the problem, then diagnose the cause, and finally implement a plan to prevent the problem from happening again. The goal is to improve performance (not beat up your supplier).
If after working with the supplier to implement a CAP, and the problem persists or they are not cooperative or responsive, and you’ve given them fair warning, then it’s time to consider your backup suppliers. You do have a backup don’t you?
Firing a supplier should not be taken lightly. But each supplier has its own unique strengths and weaknesses. For example some auto part suppliers may have more technical equipment and consistently produce high-precision parts. This is their strength. However their entire quality management system, equipment from Germany, and skilled labor-force commands a price premium.
Conversely other suppliers may be based in more remote regions of China, for example Anhui province, with lower labor costs. They may not have the sophisticated equipment, they may not have an ISO 9001 certification, but all-in-all they can get the job done and at a lower cost.
If quality is needed then you want to base production at supplier A. If price is the top priority (above quality) then consider shifting production to supplier B. Sounds obvious, but you’d be surprised at how many people think there’s a “perfect” supplier who can produce guaranteed best quality at the best price. Instead consider this rule of thumb: you get what you pay for.
When used correctly an annual review can help you quickly evaluate your supplier’s performance, help them address problems and understand your order forecasts, and help grow your relationship.
Savvy buyers even tie-in the order forecasts to negotiate lower prices, better payment terms, and expedite order deliveries by helping suppliers plan their raw material stock and labor hires.
This post was by Gary Huang, an expert in sourcing products from China and creator of 80/20 Sourcing. Gary teaches online sellers and small business importers how to save time and make more money when sourcing from suppliers in China.
Exclusive offer: Gary has prepared a free 5-minute supplier scorecard for Web Retailer readers to quickly evaluate suppliers’ performance.
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How to Carry Out an Annual Review of Your Chinese Suppliers