How To Validate Your Supplier’s Factory’s Production Capacity (From Abroad)?

2021-01-08

In This Episode... Adrian and Renaud kick-off 2021 with Renaud's thoughts on how the coronavirus pandemic will continue to affect manufacturing this year and how things might change once vaccine use becomes more widespread, and then get into the main topic: How to validate a supplier's production capacity, especially if you're a buyer abroad who isn't able to travel to China (or elsewhere in Asia) to do this on-site yourself. Given that a supplier over-promising on their capacity could land you in hot water when it comes to ...

In This Episode...

Adrian and Renaud kick-off 2021 with Renaud's thoughts on how the coronavirus pandemic will continue to affect manufacturing this year and how things might change once vaccine use becomes more widespread, and then get into the main topic: How to validate a supplier's production capacity, especially if you're a buyer abroad who isn't able to travel to China (or elsewhere in Asia) to do this on-site yourself.

Given that a supplier over-promising on their capacity could land you in hot water when it comes to delivery delays, quality problems, and increased costs, understanding if they truly do have the capacity to handle your order quantities before placing orders is a must, and since there are still tight restrictions for travelling to different Asian countries, not least China, being able to do so from abroad is very relevant for many buyers right now.

Show Notes

00:00 - Introduction

01:44 - Renaud talks about how the coronavirus pandemic may continue to affect buyers from China/Asia in 2021. How the vaccine rollout could improve things, certainly by 2022, and how in China the manufacturing industry continues to operate strongly for most verticals. Will the West start to perform better by Q2 of 2021?

07:54 - Why do we need to be able to validate a supplier's factory's production capacity before we start placing orders? When buying from a supplier you will fit into one of these 3 categories regarding your order quantity and their capacity:

Your order quantity is in the supplier's sweet spot - there shouldn't be an issue with them making this without hitch and being attentive to your needs. This is where everyone wants to be.
Your order quantity is very low and the supplier is quite large - they're unlikely to be flexible, offer special terms, and pay attention to your needs as much as you may like.
Your order quantity is too large for the supplier - this is the danger zone. Some suppliers may accept an order even if they know they don't have the capacity, and this could lead to dangers such as unauthorised subcontracting, rushing to implement new machinery and onboard new staff, and other issues that can lead to delays and quality problems for you.

14:24 - Why in East-Asian cultures, 'yes' doesn't always mean 'yes.' Suppliers agreeing to orders they know they can't handle easily has a cultural factor. Yes, may not mean yes directly, rather it may mean, "I hear you and I'm thinking about it." Also, Chinese salespeople, for example, don't want to disappoint foreign customers so are likely to overpromise rather than say no in some cases.

16:22 - If buyers are unable to visit Asian suppliers right now, how can we assess them from afar? Renaud shares a number of tips, such as using factory auditors, and about how to question them and the kinds of questions to ask (if possible over the phone and with someone at a managerial level), including:

Getting an understanding of the supplier's number of employees.
Questions about what they buy from outside, such as components and if these are custom-made (more supply chain risk) or not, capacity per day, % of good pieces, etc.
Questions about what they actually do in their facility, such as their processes, daily capacity per process, defect rate, etc.
What their peak and slow seasons are - for instance, around CNY is a risky time to place orders.

24:35 - If it's possible to get truthful answers to the above questions that is good, but will many buyers get a better result by working with companies who are already on the ground in Asia and can perform due diligence and audits for them? Yes. If your main contact has no idea and their colleagues don't help answer them you may not have success with speaking on the phone, but it's easy to find companies like Sofeast who can go on-site perform due diligence on potential suppliers and validate a supplier's capacity.

26:14 - What actually impacts a supplier's capacity? It is a lot more than just the number of employees and machines that they have. Renaud suggests the following things have an effect on overall production capacity:

Staff numbers alone don't mean a lot with the exception of garment factories.
The equipment can lead to a lot of output if it's fast and well-maintained, but if there are bottlenecks around it then the output will be slowed down a lot, and the same can be said for equipment downtime.
The supply chain will affect capacity - so how efficient are sub-suppliers in the production and delivery of materials/components?
Quality has a large impact on capacity because reworking bad batches, for example, takes time away from making the product, thereby reducing capacity.
Material and production planning - if things are well-planned to make the operation flexible and optimised with little idle time, capacity also will be optimised. Many suppliers in China won't be this well-organised.
Staff training also has an impact, as mistakes lead to rework and operators will work faster, too.
Good process engineering makes everything run faster and improves quality.
Small tooling and fixtures and automation which is well-integrated can also help speed things up a lot.
The warehouse even has an effect, as if operators are waiting for deliveries of new materials/components to be delivered to the assembly line, for instance, this leads to idle time.
Engineering change notifications can have an impact, as can making prototypes and samples using the tooling which takes capacity away from production.
The mix of products being made at any one time, especially if it's high mix low volume.

35:13 - Is the best way to get a handle on all of this conducting factory audits? A technical process audit is ideal in this situation, as it will look into the real processes being used on-site and the auditor, who is accustomed to the processes being used and familiar with the product type, will be able to assess the supplier's capacity, key risks, ability to reach your quality standard, and much, much more.

36:27 - Wrapping up. Tell us how you've coped with assessing suppliers' capacities from abroad throughout the pandemic.