By The Pro QC Quality Assurance Team

Part 1 – Supplier Identification, Quality Systems Audits & Supplier Relationship Management

You’ve already defined your targets in support of your business strategy. You have designed and defined the product specifications that are necessary to fulfill your customer’s needs. Now you just need to find and collaborate with a reliable supplier to produce a product that meets your specifications. A reliable supplier or factory delivers excellent product quality, ensures on-time delivery at a competitive cost and most importantly within an ethically responsible environment.

However, finding the right supplier or vendor is only half the battle – maintaining the supplier relationship and performance throughout is key to achieving long term success. We’ve put together a go-to guide for this and other topics related to supplier development that you’ll need to bear in mind as you embark on your production and quality journey.

Choosing a Supplier

The hardest part about getting started is finding the right supplier. You do need to dedicate time to this – when you begin your supplier identification investigation, it is always a good practice to dedicate resources to formally review and approve your list of suppliers. Whether it is being done internally by your own team or outsourced to a reputable agent, an approved vendor list is a crucial first step to achieving quality assurance.

A supplier with the right technical capability is obviously important, but one should never overlook production capacity and quality consistency. A small manufacturer may not be able to keep up with your demand whereas a big manufacturer may have too many orders to cater to your needs, which often leads to late delivery.

Another important consideration is the legal side – contracts, tax audits and so forth – this is part of a different service usually, but one that is imperative to ensure is included in your forward-planning as you embark on your supplier investigation.

When Pro QC gets started finding our clients the right supplier, we assess their potential options on-site – doing a deeper check into a shortlist of factories, visiting them to verify documentation and environmental and working conditions.

One challenge when you don’t already have a relationship with a supplier can be getting valid references and ensuring the accuracy of information. Stringent background checks are imperative.

We then provide detailed reports on their general operations, quality systems, qualifications, and capabilities. We are also able to locate and manage the supplier base for you, as your sourcing agent.

Through our initial supplier audit, we evaluate the supplier’s current practices – e.g. operational excellence & working conditions – to ensure they are right for you.

Alongside this is ensuring the legal registrations are valid for suppliers, and that they have passed all relevant certification checks.

Once you’ve narrowed down a supplier that works for you, always have at least one back-up in mind in case you quickly realize the first relationship may not be quite the right fit.

Production Quality and Audit

To make sure your suppliers are manufacturing your product to expected levels of quality, Supplier Audits, or what we call Quality System and Compliance Audits here at Pro QC, are the next imperative consideration in the supplier development process.

This type of audit makes an initial assessment of whether the quality system of the factory has the right leadership, management team, infrastructure, resources, processes and procedures in place to deliver a satisfactory end-product according to your specifications. Other audit types include the social compliance audits (e.g. SA8000) which evaluate that working and environmental conditions in the factories meet all safety regulation standards. If you are interested in more than a snapshot-in-time-audit, an auditing program can be established which provides an ongoing check of the compliance level of the supplier to ensure they consistently maintain standards and focus on continuous improvement.

At Pro QC we engage an independent review, conducted by a certified auditor, which ensures full neutrality of the supplier audit or factory audit. The auditors assess the supplier through a very structured checklist that is recognized by a global certification body (e.g. ISO, IATF, SMETA, BSCI), and client-specific requirements can also be incorporated.

A thorough review of production line processes can also be carried out in order to make any necessary recommendations to improve the quality, performance or delivery time of your product.

Supplier Relationship Management

After you have found the right suppliers following an initial or more detailed supplier audit, it is imperative to approach the Supplier Relationship Management (SRM) process systematically. In short, this entails cultivating a relationship with the supplier to ensure your needs are being communicated efficiently and effectively.

Important to remember here is that there are often cultural differences to be mindful of when working with suppliers from different regions, so setting the tone for the relationship and ensuring everyone is on the same page is the first step. This process can be challenging and time-consuming if you are going in with the little experience of working where your suppliers are located, which is why it is important to enlist a company that has experience working with suppliers in the market you are looking at.

Pro QC considers facetime to be imperative to cultivating a working relationship with suppliers. Not only do we take the time to conduct regular supplier visits to put a human face to the various product and quality requirements, but we also ensure contact is maintained through monthly calls and consistent communication.

We support our clients through tailor-made programs which include the handling of purchase orders and invoices, ensuring regular communications during first production and other key dates. This keeps everyone on the same page and informed of any changes as they happen. This level of communication is central to maintaining and managing an effective supplier relationship.

A good supplier relationship can help make or break a business, as suppliers can also be helpful sources of information and advice. If supplier engagement is high, there is a greater likelihood of stronger supplier performance and a more successful end product for the client.

In this series of posts we will first explore the background and latest developments of the ongoing US-China trade war and then provide an overview of some other counties that companies are considering as a new sourcing alternative.

Written by: Pro QC Quality Assurance Team

Considered one of the biggest threats to the global economy this year, the ongoing US-China Trade War has caused what can only be described as a mad dash for companies to move their production out of China. But what exactly is going on, and what does it mean for your supply chain solutions?

A very brief review of the politics

Although there is some contention about tensions mounting between the US and China as early as 2016, things ramped up in early 2018 when the US announced a list of 1300+ categories of Chinese imports listed for tariffs. In March 2018, the US government levied import tariffs of 25% on steel and 10% on aluminium. China responded by placing tariffs on imported US goods and agricultural products, with 25% on a list of 106 products, including soybeans, automobiles, and chemicals.

By May 2018, the US asked China to reduce the trade gap between the two nations by US$200 billion in two years. A brief truce ensued, followed by the US Trade Commission recommending a 25% tariff on approximately US$200 billion worth of goods, including textiles, metal products and machinery in early August of that year. The second round of tariffs was released a few days later on the following list of US$16 billion worth of goods.

In early August 2019, the US government announced it will tax all Chinese goods entering America at 10% tariffs, potentially set to increase in stages to 25% – encompassing items from apparel to smartphones. This will be on top of US tariffs on a total of US$250 billion worth of incoming Chinese goods, while China tariffs have applied to a total of US$110 billion US goods.

With tensions mounting, the recent escalation saw China devaluing their currency in what they stated was part of trade protectionism measures. The currency passed the unofficial peg of seven Chinese Yuan to one US dollar, making China more competitive for those who wish to purchase Chinese goods with international currencies.

So how does this impact your supply chain solutions?

While tariffs may have increased for goods either going to or from the US or China, global trade markets continue to be active despite the uncertainty of future conditions.

For example, China’s automotive import industry continues to boom, and automotive product inspection is still a large business.

But several industries – including large numbers of those in the apparel sector – have been looking to shift their manufacturing from China to other locations in Asia as a precaution to any economic fallout. While those considerations vary for individual businesses, the decision to move production doesn’t necessarily mean things will be easy in a new country: supplier maturity, quality, and logistics are all factors to be taken into account when determining the best spot to be in.

Protecting your brand becomes even more important when you realign your supply chain – so how do you do that?

When looking at ex-China production countries such as Vietnam, India, Thailand, Indonesia, and even Myanmar, it is imperative to have ‘quality boots on the ground’ or enlist a reliable quality control or inspection company in Asia, who understands the region. To ensure quality from the commencement of supplier identification through to postproduction monitoring you may require services such as an initial supplier audit, quality inspection, factory audits or supplier management or development. You also may see quality control companies use terms such as source inspections and third-party inspection services for standard postproduction quality control services.

As we continue to monitor the trade situation, we’ll be highlighting alternative supply countries for those seeking alternatives to China. Follow us for more on the pros and cons of each, and why you shouldn’t eliminate China from your supply chain.

So what are your alternatives to China

Choosing a new manufacturing location is never easy, especially if you’re used to working with a particular production unit. However, with the US-China Trade War in full swing, many are being forced to look at other options in order to decrease the loss on margins. It doesn’t have to be all negative though; we’re weighing out the pros and cons of two alternative countries, Vietnam and Taiwan.

Before you start though, we think this tip is helpful: remember to assess whether the new location you’re looking at has known expertise in manufacturing your product. And secondly, conducting a factory audit on a potential new supplier can help make sure you’re taking the right step.

Vietnam

Second quarter 2019 figures from the Vietnamese government have indicated the country’s manufacturing figures rose 9.14%, pushing GDP up to 6.71% year on year, as Vietnam indicates it’s been benefitting from the current US-China Trade War climate.

According to the IMF, in 2018 Vietnam’s strong economic growth was led by industrial activity. One of the reasons for this has been the government’s strong support of the private sector, which has helped strengthen the regulatory quality and boost the ease of doing business in the country.

Revamped anti-corruption laws in 2018 have also improved transparency – with a commitment to link databases on taxation, anti-money laundering, customs, and land transaction, on target for the end of 2019.

If you’re producing apparel, shoes, home-textiles or anything furniture-related, Vietnam’s a good bet.

But beyond this, one of the key advantages of Vietnam is its logistics chain – with solid infrastructure: roads, airports, and multiple ports of shipping, getting your goods on their way is much easier than ever before.

But this is also one of the challenges to consider – logistics is still more costly and less integrated in Vietnam than in China.

Further cons in Vietnam are a need to improve the enforcement of contracts and legal interpretation as well as facilitate resolution and bankruptcy proceedings.

Taiwan

The Economist has long hailed Taiwan as being the most technologically advanced computer microchip maker in the world, and with the world’s seventh-largest economy, there’s no need to look at the region’s GDP figures.

A tech-savvy hotspot, Taiwan has built up its reputation as a key player in manufacturing IT goods over the last 20 years. One of the advantages here is a highly skilled labour-force and top-notch R&D centres, which also offer design expertise that is often found lacking in other markets. All these pros inevitably make Taiwan a great option for higher quality – and largely tech – manufacturing needs.

Solid infrastructure and well-established shipping ports and logistics chains back Taiwan’s claims to fame here, but strong IP laws, backed by stable governmental regulation are also important factors in why it is such a hotspot.

This though leads into Taiwan’s biggest challenge: cost. All the stability Taiwan provides also means that you’ll be paying up to 30% more for manufacturing there versus in mainland China.

Remember that supplier identification research or an initial supplier audit can help determine if a location is right for your production needs.

Cambodia

A relatively recent entrant into the outsourced manufacturer game, the Cambodian government has been making a real push for the country to build a name for itself as an apparel manufacturer over the past 7 years or so.

With one of the fastest growing economies in southeast Asia, there’s no doubt that they’ve been successful in garnering business – Cambodia now accounts for approximately 31% of all apparel manufacturing in the region. A number of major multinational brands manufacture here, contributing to the 16% GDP and 80% of the country’s export earnings.

Taking advantage of a competitive labour force, it is undoubtedly Cambodia’s strategic location which really counts – functional rail infrastructure surrounds the international port city of Pnomh Penh, where the majority of factories are located. The country is also strategically placed in another sense – as a member of the ASEAN Free Trade Area, which offers less costly sourcing of materials between the 10 member countries.

However, while it is substantially less costly to do business in Cambodia, one of the real issues the nation has faced is a relative lack of regulation when it comes to wages and working conditions for labour in the industry. Regular conduction of factory audits and supplier audits are crucial here.

India

With a relatively well-established manufacturing industry, India is one of Asia’s manufacturing juggernauts, following China. Through the government’s continued push through the ‘Make In India’ campaign, India has seen an uptick in tax benefits with reform in foreign direct investment regulations, along with an uptick in modern, high-quality factories as well as ongoing improvements in the logistics space.

While 31% of India’s manufacturing exports come from the textile industry, the country is known as a haven for sourcing a large plethora of products – everything from apparel to wooden products and hard goods to sporting goods to jewellery and high-quality medical supplies are being manufactured here. Quality inspection is a well-oiled mechanism in India, with consistency as one of the higher-quality producers among its peers in the region.

Although production here is a lot less costly than in China, India compares in the fact that Intellectual Property protection and enforcement is weak. The government is overhauling some of the regulations here, but it could be a little longer before any sort of clarity on what exactly will change.

Another current disadvantage of India is a somewhat tenuous infrastructural system – the water and electricity supply can be patchy – and the domestic logistics chain is not so stable, with shipments from the north often taking a couple of weeks to reach the south of the country due to poor roads.

Bangladesh

Better known for its apparel manufacturing, Bangladesh has also in recent years billed itself as a hardware destination. Proximity to China has been one of the biggest advantages for the tiny nation, which receives its raw materials from there.

Although a largely rural nation, with the agricultural sector providing employment for at least 41% of Bangladesh’s population, according to the IMF. Further figures indicate the industrial and manufacturing sector employs roughly 20.8% of the population, with the services sector (including technology outsourcing), employing around 38% of the population. This puts Bangladesh squarely in an advantageous spot for a variety of outsourcing needs.

While the world’s lowest cost labour in Bangladesh forms the backbone of a manufacturing industry that is able to churn out the largest number of goods at acceptable quality at the lowest possible cost, this is one of the downsides of diving into the country without a bit of extra research.

Post the Rana-Plaza incident, which in 2013 saw the collapse of an eight-storey commercial garment manufacturing building, housing several apparel manufacturers, the spotlight certainly turned toward exporters conducting better supplier inspection.

With ongoing scrutiny, regular factory audit and supplier audit services are imperative when looking at Bangladesh as an alternative sourcing destination to China.

Indonesia

KPMG’s ASEAN Business Guide 2018 country focus reports Indonesia as a nation with not only consistent economic performance (5.3% in 2018, and similar figures estimated for 2019), but also as having strong governance and transparency to support future growth.

Two-thirds of Indonesia’s GDP come from manufacturing, construction, wholesale and retail trade, information and communication, financial and insurance activity, agriculture, forestry and fisheries, according to the KPMG report.

The advantages here are of a country that offers several tax incentives and benefits to those looking at Indonesia as a sourcing and manufacturing destination. Free-trade zones and free port areas contribute to zero import duties or other taxes on the import of raw materials and other goods. 

However, despite the positives, two factors offset challenges for Indonesia in general: labour productivity and highly developed manufacturing infrastructure. Ongoing site inspection is a necessity to ensure that your chosen supplier is the right one for you in meeting your production needs and times.

Malaysia

A well-developed infrastructure and productive workforce characterize Malaysia as a sourcing and supply alternative to China. Seven international ports are key to the country’s ability to price down in shipping to the world.

Tax-wise, although domestically manufactured products and imported goods are both taxed at a rate between 5% and 10%, there are no import duties on raw materials, machinery and parts in Malaysia.

Another large benefit here is Malaysia’s reputation for its natural resources – it is one of the world’s largest producers of tin, rubber, and palm oil, while petroleum is also one of its biggest exports. The benefits here are clear in terms of lower electricity rates as well as heralding its role as an electronics manufacturing destination.

The challenges here are heavy bureaucracy – foreign involvement in the sector is restricted and requires expert on-ground assistance in navigating the paperwork required. Halal certification is also required across a range of products necessary for various industries, as well as services, and is something that must be monitored and ensure careful following when looking to source supplies from the country.

Offset by high quality technology and a strong knowledge-based, Malaysia is a destination to consider for production of medical and health products, as the stringent regulatory atmosphere offers the opportunity for superior end products.

Myanmar

Formerly known as Burma, Myanmar began to open up to the world – after decades of isolationist measures – around 2015. Quickly garnering a reputation as a fast-fashion producer, Myanmar’s top exports are petroleum gas, dried legumes, apparel, rice and refined copper.

The country is also well known for its wood products and jade and gem processing. More recently, electronic good and vehicle assembly units have been set up in Myanmar as well.

Corporate tax exemptions and special economic zones have made manufacturing in Myanmar much easier than ever before, along with its status as an ASEAN Free-Trade Agreement signatory.

However, here it is imperative to maintain regular scrutiny of factory production units – often the same factory will be producing disparate goods (everything from wooden products to men’s apparel to women’s lingerie) at the same time.

Another challenge faced here is the lack of regular maintenance and updating of manufacturing equipment. 

Without third party inspection services to keep a close eye on units, Myanmar is one of the more difficult countries to enter as a sourcing destination.

Philippines

Manufacturing is anticipated by Deloitte to be one of the key industries that will drive growth of the nation over the next 20 years – based on the nation’s continued strong economic growth pattern.

With governmental policies increasingly opening up foreign direct investment channels, capital injections have driven up investments in the manufacturing sector – yielding higher quality factory facilities and better trained labour.

The Philippines is a diverse manufacturing location with expertise in everything from electronic components and semiconductors to processed food, furniture, homewares and fashion. Another plus is that 70% of the population is English-speaking, opening up the channels of communication. 

However, one important challenge to consider with the Philippines is a high-level of bureaucracy. A current lack of transparency does not protect investors – the nation scores low here on the World Bank and IFC indices, ranking 128 in the world.

Additionally, despite being relatively inexpensive to move products across borders, the country remains slow in processing and transport. This may be accounted for by a large calendar of public holidays (approximately 18 days annually) as well as a number of days which see shutdowns due to tropical cyclones each year.

Thailand

With a thriving domestic market and a stable economy, Thailand is worth over 437.81 billion USD economically.

It’s the place to go if you’re looking to manufacture computer components, autos and auto parts, and for food processing. The country has been working on transforming their manufacturing base to high-tech production, already bringing in Chinese investors to help enact this plan.

With excellent infrastructure and ease of doing business, Thailand is well placed after China as a sourcing and manufacturing location. An additional advantage is an educated workforce.  

It is however important to bear in mind that as far as foreign direct investment goes, the government does favour Thai nationals. Along with this is the need to keep a finger on the pulse of the country’s politics – there have been several shifts in political power over the last decade, which has yielded disruptions to the supply chain.

Talk to us about how to best serve your full-spectrum supply chain needs.

Learn more about Pro QC’s quality assurance, engineering and consulting services at https://proqc.com.

Despite recent threats of tariffs related to current immigration issues in the U.S., Mexico remains a solid contender for global organizations looking to mitigate tariffs in China, or simply diversify their supply chain.

According to Inbound Logistics, “Mexico is becoming an increasingly popular option for any and all manufacturing industries that want to mitigate costs without compromising quality.”

As a result, U.S. imports of Mexican goods rose 5.4% in the quarter from the year-earlier period, while imports of Chinese goods were down nearly 15%, according to U.S. Census Bureau data.

Traditionally known for automotive, aerospace and electronics, more recently, manufacturing and assembly of office furniture, stamping and metal mechanics, and textiles (industrial applications) has emerged.

Examples of market movement include:

Companies like China’s Hisense, one of the world’s largest television manufacturers, is bringing more suppliers to Mexico as it aims to switch production of all U.S.-bound flat screen TVs to its largest plant outside of China.

GoPro wants all of its U.S.-bound cameras to be in production in Guadalajara, Mexico, in the second half of the year as it seeks to insulate the firm against possible tariffs.

Cosmetic Colors, a thriving Mexican producer of eyeliners and other cosmetic products, recently got a €7 million ($7.8 million) order from a European cosmetic giant for items that were previously made in China and faced a 25% tariff. The company’s high-end plant in the city of Toluca exports 85% of its products to the U.S. for the world’s top cosmetic brands.

(Source)

The advantages of considering Mexico vs. China include:

• Mexico follows similar Intellectual Protection laws as the U.S. and Canada
• Logistics advantages
• More compatible time zones for U.S. and Canada
• Lower travel costs
• Skilled workforce
• Reasonable labor costs
• Mexico’s exports on average contain about 35% or more U.S. parts, whereas Chinese exports contain far less, at about 4%. (WSJ 6/2/19)

So, why wouldn’t organizations want to manufacture in Mexico?

• Identifying new suppliers can be a slow process. Organizations wanting to quickly hedge tariff implications will likely encounter slower response times in communications.
• In many cases, the costs remain higher than if sourced in China or SE Asia.
• Government regulations, including labor requirements, can be challenging to work through.

Pro QC assists organizations in identifying new suppliers in markets around the world. Within Mexico, Pro QC has an ISO certified testing laboratory in Monterrey and a network of sourcing and quality professionals throughout the country. Contact us for additional information.

Additional Resource:

Why Manufacturing Industries are Nearshoring to Mexico

https://www.manufacturingglobal.com/leadership/why-more-manufacturing-industries-are-nearshoring-mexico

Quality control inspections started out as a relatively primitive process, as a way of catching variance in newly developed production systems. The demand likely evolved as it does with many of Pro QC’s new clients. Someone got product from a supplier that didn’t meet their expectations. And, that meant increased costs, delays, impact on branding, etc. It’s a timeless tale.

Using Statistical Quality Control (SQC) starting in the 30s, the QC inspection introduced a reliable way of evaluating a randomly selected production lot. Inspections were conducted at different stages throughout the production process, with the most common being the pre-shipment inspection.

Historically, inspections were conducted and the result would be a go/no-go on the shipment. Sorting and rework were often the default way of handling issues, and the buyer felt assured of the quality and could rest easy knowing that the risk and cost were reduced for that particular order.

But, quality control has evolved into something bigger, more impactful than a singular check of product at a moment in time. For many companies, it has developed into a program of supplier development.

When Pro QC started, fax machines were the primary way of communicating inspection results and other details. There weren’t any online reports, videos, or digital photos. Imagine that.

Fast forward a few decades, and we now leverage our own supply chain management system that offers an in-depth look at the performance of suppliers using the data we capture while on-site.

What data do our clients find useful?

A product defectives analysis can include various details:

* Appearance attributes
* Functional attributes
* Labels and artwork
* Packaging and labeling
* Manufacturing
* Location
* Suppliers
* Product categories
* 80/20 – Top defects

In addition, product conformance analytics can be evaluated in a number of ways:

* Suppliers
* Location
* Product categories
* Quantity check
* Master packing
* Specifications
* Tests & measurements
* Workmanship
* 80/20 – Top non-conformance issues

As Deming reminds us, “In God we Trust, all others bring data.”

So, what’s the big picture?

Many clients meet regularly (often quarterly) with Pro QC and their suppliers to review performance. It’s an ideal time to discuss improvements, opportunities for cost reduction, etc.

A few actions resulting from this type of data analysis includes:

* Ability to identify when an issue is persistent and requires root cause investigation and corrective actions

* Data to indicate a new supplier or additional suppliers needs to be identified

* Additional support to use during negotiations with suppliers

Contact us for additional information, or to see a demonstration of our system that’s changing the way quality is integrated into business.

(This article originally appeared in the Pro QC International quarterly newsletter, March 2019)