When President Donald Trump tweeted an order to “our great American companies” to leave China, he was no more than voicing a conclusion many boardrooms had already reached. The tightening tariff war is making companies sourcing in China reconsider their options to maintain competitiveness in the face of increasing US import costs.
The presidential edict came at the end of August, three months after the Trump administration had widened the range, and increased to as much as 25%, the tariffs on many goods. It perhaps marked the point at which all but the most optimistic US companies realized this war is unlikely to be over by Christmas.
As the dispute between the US and China continues, more than 50 multinational companies have either shifted some of their production elsewhere, or plan to do so. But the range of options is limited and the risks of relocating or choosing alternative sources of supply are substantial.
Among President Trump’s exhortations was for businesses to reconsider the US market. To date, that does not appear to have been a popular suggestion. Figures from the Federal Reserve indicate no change in the downward trend for US manufacturing output, which contracted by 0.9% last month, compared to a 2% rise a year ago.
Uncertainty over the length and depth of the conflict may be a factor, but it seems unlikely that tariffs alone will be sufficient to persuade companies to look to the relatively expensive US market when there are other far cheaper sources not so far from China.
The big winners in the trade war seem to be Asia’s emerging economies. According to the Financial Times, while China’s exports to the US fell 12% year-on-year in the first half of 2019, Vietnam’s leaped 33%.
Elsewhere in the region, Bangladesh reported a 13% rise in exports to the US, alongside positive figures for Malaysia, Thailand, and the Philippines.
Many US brands have already begun, in some cases enthusiastically, to move their production to alternative Asian economies. In July, the Wall Street Journal reported that such big names as GoPro, Crocs, and iRobot Corp are all producing outside of China to escape the tariffs. Multinationals including Apple, Dell, Nintendo and HP are also believed to be looking beyond China, with fitness tracker manufacturer Fitbit announcing likewise in October.
The risks of changing suppliers
But making the move is not so straightforward as it might seem. While low labor costs make it attractive to relocate production to China’s neighbours, a broader picture needs to be considered if a fair comparison of the costs and risks is to be made.
Part of the difficulty concerns the relative economic immaturity of such countries as Vietnam. Although, like China, Vietnam’s communist government opened its economy to outside investment, it has grown at a slower pace. That growth affects not only its manufacturing base and the supply of skilled workers, but also wider aspects such as infrastructure. The LA Times’ correspondent, writing from Ho Chi Minh City last summer, observed that the effects of trying to accommodate the ‘exodus’ of US production from China can be seen not only in factory managers turning down orders, but in deliveries delayed by a patchy transport network, and in ports unable to cope with container ship traffic.
Such worries contribute to an increased risk to quality, taken at its broadest. Brands eager to contain the disruption and costs to their business, while continuing to deliver to the satisfaction of their customers, must be conscious of the costs of poor quality whether in production, service, or delivery.
In a report for India’s business daily, Business Standard, one US company owner explained that it had taken 20 years to establish a reliable supply chain in China; how should he replicate that any quicker in a totally different country?
While the situation could not be described as a panic, the speed with which many companies have reacted suggests at least a lack of diligence. That only adds to the risks, needlessly, as the tools to mitigate them are available.
Effective supplier selection
There is much that can be done to limit the potential damage caused by poor supplier choice, vetting and selection. With a quality-focussed approach, businesses can ensure that the standards they have built up over years are maintained.
Just as relevant as investigating your own internal operations, taking a hard look at suppliers can reduce risk and earn improvements and efficiencies that maintain quality and reduce costs.
While it is common for companies to have a some kind of supplier management process, it might not be as robust as it could be, leaving the business facing unnecessary risks.
Part of the problem is that supplier management, and therefore supplier quality, has been buried in the procurement function, with a greater emphasis on cost versus quality. Selecting suppliers based on cost will always remain in procurement’s hands. However, supplier selection based on quality will enable the whole organization to improve because when a supplier fails to meet our needs, many other functions pay for it. Sales will have to get involved to minimize impact on customers, operations has to find alternatives, quality needs to understand what happened, and finance may need to pay fines, and so on and so forth.
A reliable model for supplier management has several interrelated aspects, including selection, auditing, onboarding, performance monitoring, development and ongoing management. But the most important is its first: initial selection—for which well defined criteria are necessary.
A dangerous shift towards subjectivity?
It almost goes without saying that the selection should be objective, yet the rush out of China suggests objectivity is being ignored right from the off. The risk to quality, to say nothing of the loss of local markets, may turn out to be greater than the cost of tariffs. It is far from a given that relocation is necessary, so it is important that alternative suppliers in China are considered alongside those of other countries—as well as the possibility of negotiating better terms with existing suppliers.
Making the right choice is fundamentally about satisfying customer needs. That means assembling a team to evaluate potential suppliers, taking into account a range of interests from across the business. We refer to this as a Supplier Performance Council. This council oversees the selection, risk and deselection of important suppliers.
The ideal selection council membership should comprise influential leaders from purchasing, quality, design, engineering, value stream, and production. Without their different perspectives on the criteria for, say, raw materials or components, the selection is at risk of bias in favor of one or another function, or worst case, cost only.
The council can do much to ensure that selection is objective, taking into account such criteria as quality (defect rates, capabilities, PPM rejects, improvements, quality system), delivery (cycle times, complete order), engagement (corrective action reporting, response times), and cost (not least).
Armed with such a model, your selection process can begin to evaluate performance using a supplier scorecard. Through site visits you can fill out the card, and with its data assess the relative risk of different potential suppliers.
A risk matrix, comparing risk to value, can help you segment suppliers, establishing which among them might be, or might with development have the potential to be strategic, critical suppliers. A monthly scorecard, annual audit and on-going improvement projects will keep your suppliers moving in the same direction as your organization, thereby reducing the need to always look for new suppliers.
It’s only by taking such a thorough, clear-headed approach to considering options for suppliers that quality and ultimately brand value can be safeguarded.
The current uncertainty surrounding trade terms with China is certainly putting companies at risk. The urgency to maintain profits throughout the upheaval can lead to rapid and frequently ill-considered reactions—the opposite of good quality-centred business decision-making.
But relatively simple models—if applied consistently and with confidence—can deliver effective and reliable results.
To read more about our supplier quality and development systems, and how to choose, engage, manage and develop suppliers to achieve your business aims, make sure to follow Joseph A. DeFeo and Peter Robustelli, Juran’s advisors on LinkedIn. Alternatively, please contact Juran for specific advice, guidance or direct consultation.