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Improve Profitability in China: Scrutinize Material Costs

May 23, 2017

scrutinize material costs china

One of the most tried and true ways to improve profitability when contract manufacturing with China suppliers is to reduce material costs.  But it’s not about reducing them, per se. it’s about scrutinizing them, because reductions must also sustain goals for quality. Too often, material cost reductions give a short term benefit but put long-term quality at risk.  It’s all about balance. At CMD, here are three ways we scrutinize costs with China suppliers on behalf of our clients.



Never stop shopping. Globally. 

First, we benchmark current China suppliers against competitors to learn the market price for the materials and components.  This is necessary whether we’re planning on switching suppliers or not. It gives us a feel for where we stand. 

Also, we’re constantly looking at global supplier trends. We’re learning what’s not acceptable and not acceptable in payment terms, quality levels, and delivery performance. Our goal is to stay two steps ahead of what is trending.

The cycle for us never stops – learn, leverage, learn, etc.

Earn trust. Help a supplier improve their bottom line. 

Next, we ask suppliers to break down costs into the material, labour, and overhead.   This helps not only with benchmarking against other competitive suppliers but also helps us collaborate with a supplier to identify ways to reduce costs with continuous improvements.    Examples:

  • We’ve helped suppliers address overhead costs, in order to reduce allocations across all products in a factory, including ours.
  • We’ve helped suppliers with productivity improvements, to improve labour utilization and reduce labour burden on the product.

A strong relationship based trust with a China supplier is essential for lasting, sustainable improvements. We work side-by-side with everyone from the leadership suite to the guy sweeping the floor – to find things big and small that will help the supplier improve their overall bottom line.  Typically at first people are reluctant to work with us but when they see how little changes make their lives easier, over time our input is not only welcomed but encouraged.

The ink’s never dry.

Once a contract is signed in China, it doesn’t mean that those are the terms forever.  As changes in our clients’ business happen, whether it be increases in volume, new requirements for quality…communication is key.   We keep suppliers in the loop and ask how them what they can do for us on quality, costs, payment terms, and delivery terms.

The moral of the story is if you don’t ask…and keep asking…you don’t know what you can get.

 

Want to hear four more ways to pump up profitability in China?  Get the infographic…

5 ways to inc

Topics: Operations