Why Auditing your Suppliers’ Factories Will Cut Your Costs

In times of budget cuts, many hard-nosed executives request cuts in every line of every cost center. However, in some cases, spending more on preventive activities, and cutting drastically in some other budget lines, is a smarter approach.

First, let’s look at your costs of poor quality

Do you estimate them every year? Here are the main buckets:
  • Market opportunities lost because of poor past quality — a lost customer can be a very heavy loss, dwarfing all the costs showing on your P&L statement
  • Cost of dealing with problems — sometimes the cost of throwing away an entire production batch, and paying penalties/chargebacks from customers
  • Keeping an army of inspectors to constantly monitor quality… because production comes out of inconsistent systems & processes

Now, how does a supplier auditing program help reduce these costs?

By pushing management to set up proper systems in place.
What you are probably doing is placing end-of-line inspectors to catch problems. Are you, and your suppliers, really working on fixing the sources of those problems?
I have been in many manufacturing facilities where management is constantly busy in ‘fire fighting’. It is exhilarating, and sometimes addictive. When a manager puts out a fire, he is the hero of the day. And tomorrow, other problems will come up, because that’s the nature of the business, isn’t it?
Well… no, it isn’t.
Or, I should write, it should not be the nature of the business. Let me take a few examples.
  • Equipment keeps breaking down? No, becoming better at repairing is not going to help much. You need preventive, and maybe also predictive, maintenance.
  • There are constant production stoppages because of supplier quality issues? No, tightening incoming QC is not the long-term solution. You need to work with better component suppliers.
  • Production operators keep ‘forgetting’ something important? No, firing them won’t help. You need to set up a training program, clear work instructions, visual aids, etc.
So, how does this cut costs?
In simple terms: from better processes will come better products. You will need fewer inspectors. You will suffer fewer quality issues. You will lose fewer customers.

Does auditing really help drive factories in the right direction?

If done well, yes, definitely.
First, let’s cover what you DON’T want to do:
  • You don’t want to invoke “this is for compliance”, review evidence that might well be fake, and threaten to stop the entire business relationship on the basis of one assessment. That’s typical of social compliance audits, and I have zero empathy for those.
  • You don’t want to send a junior auditor who sits in a conference room and simply “ticks boxes”. ‘Do you have XYZ, yes or no?’ Is a joke. Suppliers will prepare some paperwork, and will do nothing to improve their operations.

So, what does good factory auditing look like?

Here are a few characteristics that you should follow, if you want to drive improvement in your factories.

Look at processes from a ‘system thinking’ perspective

An assessment is necessarily based on sampling, or it would take weeks or months. Pick what what you study carefully, so that you look at what really matters. Some processes, if poorly run or skipped, can have a disastrous impact — focus on them.

Follow a logical approach

Most often, it means following the flow of materials, from arrival & incoming QC to shipments & outgoing QC, as well as the management of customer complaints. Otherwise, you might get distracted and pulled in the wrong direction. Having a checklist helps a lot.

Challenge manufacturing managers, process engineers, purchasing managers, etc.

When you review their procedures and practices, ask why do they do their work in such a way. Ask about their past issues and how they have reacted. Ask about risks and how to they address them. Don’t stop inquiring when they say “from my experience” or “that’s how I saw good factories do”, as these are usually attempts at closing a conversation.

Do not tell them what they should do

Challenge them, note the holes or inappropriate practices you see, but let them come up with a response to those issues. You don’t want them to raise prices and say “your auditor has forced us to do XYZ and it is an extra cost”. And you don’t want them to justify a quality issue by saying “but your auditor told us how to do our QC setup”.
(Some companies have a different opinion on this. Helping a manufacturer that was never exposed to a good quality system can make sense, too. And the only way for you to do that might be through your auditor.)

Look at past issues and follow up

This is how you will drive improvement! Come back regularly and make it clear that you will look at their past issues. If they promised to do something about it but it wasn’t fixed, that’s a major problem.

Don’t get bogged down in a lot of paperwork

Have you noticed that third-party auditors (i.e. for certification) often find no nonconformities? That’s because nearly half their work consists in amassing references and preparing paperwork. You don’t want to be in that situation. That’s where specialized software like ours can help a lot.

What’s the next step?

If you’re ready to begin auditing a supplier’s factory (or perhaps your own), you should now read: 7 Tips To Start a Quality Auditing Program to Cuts Your Risks – in this post we’ll explore a proven auditing process that is made to reduce quality risks now and in the future.

Tell me more about factory auditing and the role it plays in your business – do you have any questions or experiences to share? Share them in the comments, please.


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