China has emerged as a low-cost manufacturing center. It attracts organizations and small businesses to buy an extensive range of goods ranging from clothing and crockery to appliances and tools for 25% to 50% less than if manufactured in developed countries. The leveraging cost has empowered many businesses in the technologically advanced world to stay ahead in the competition.
The opportunity is tempting but many things associated with the procurement process are hard in China to get right. The geographical distance between foreign companies and Chinese manufacturers is a vast hurdle. Besides, finding a reliable manufacturer and contract negotiation is also an issue. There are other dilemmas like logistics sorting, cultural differences, language barriers, and securing reliable Wi-Fi, which company’s rarely experience in their home country. Hiring global sourcing management can be an advantage to get things right!
Opportunities & Obstacles
Over the last decade, exports accounted for 60% growth in GDP for China. MNCs set operations in China and local factories manufacture goods to export. Products and services are sold to MNCs doing business within the country. For example, two giant automakers General Motors and Ford Motor source some car components from China and save significantly. Walmart, Best Buy, Tesco, and many popular retailers source products from China.
The opportunities are impressive, but there are challenges ranging from poor communication and intellectual-property breach to custom delays. This can be overcome by hiring a reliable global sourcing management firm. The time-consuming task of evaluating suppliers as well as establishing a supply chain network is made easy. The three issues that foreign companies sourcing products from China need to address right from the beginning are given below.
Sluggishness at headquarters
The resistance from the middle managers at the headquarters can have limited perspective. Their performance is calculated on inventory turns. They are concerned that due to distance and unclear supply chains they need to hold large inventories. Thus the costs increase and turns are reduced.
In the same way, logistic managers’ performance is assessed on their ability to scrimp and save. They warn that partnering with distant suppliers can push the cost. The product designers, procurement managers, plant managers, and manufacturing chiefs have their own objections.
From their position the opinion is right. The sourcing operation costs will increase, so there is a need to handle these new risks of Chinese supplier management. The senior executives must support the programs implemented by the operational managers or the procurement department. Executives can encourage the procurement team by developing a suitable model like the TCO [total cost of ownership] model. It shows how outsourcing from China can outweigh the extra logistic costs as well as lessen the inventory turns and quality risks.
Directly sourcing from China is successful, when the company’s internal talent learns the basic skills of –
- Ensuring quality & control
- Testing samples or prototypes
- Assessing packing processes
- Satisfying custom regulations
- Shipping arrangements
Foreign companies can teach their internal talents the skills but it is wise to partner with a reliable global sourcing management firm. They do the heavy lifting saving the company’s time to vet suppliers, negotiate deals, and establish an infrastructure to manage the supply chain.
There are good reasons to tap the specialized services because some are skilled at handling complex product categories or have exclusive rights for specific factories in China. They can even offer useful information about market-led innovation or changes in the supplier base.
Direct sourcing from China seems cost-effective but they need to concentrate on building a strong leadership team. Create a cross-functional professional team from sourcing, operating, financing, and other stakeholders involved directly with the product under development. Fill the important posts –
- Office heads
- Procurement & trading
- Quality control
Choose an ideal candidate for every role with company knowledge and China’s business culture [fluent in Mandarin]. However, it is hard to find such a candidate….so partnering with a sourcing agent in China is the right solution!
Attention to details
Executives are aware that many detailed decisions associated with direct sourcing ranging from choosing manufacturers to the management of quality, timeline, and logistics can stumble as the business expands. Companies have to pay more attention to details than expected….Monitoring the manufacturing processes from scheduled delivery dates to checking if raw materials are received n time and subsequent milestone is fulfilled until products are packed and shipped. If supervision and instant action are unavailable milestones are missed and the shipping is delayed.
China’s geographic distance makes it hard to pay this level of detailed attention. Besides, the time zones differ. There are a lot of verbal fights and it becomes hard to upgrade the sourcing from China.
Set the stage
Resolving the leadership puzzle at the headquarters and establishing successful sourcing skills in China is challenging. If you get it right then you gain a competitive cost advantage over your competition.
Developing extra capabilities in China is to cut cycle times. Move activities like sample and prototypes approval closer to manufacturing operations thus decreasing the dependence on headquarters. Thus, the back & froth process is trimmed by 1/3rd of the time taken to create the new product. Bringing new products quickly to the market can dramatically impact the economics of the company by increasing forecast accuracy, understanding customers, and reducing markdowns & stock-outs.
It is advantageous to hire a global sourcing management firm to handle your export needs. The global sourcing firm has a strong network of suppliers and manufacturers capable to offer better quality. Even if the cost is low there are no concerns about quality compromise. The four qualities a good supplier has include capabilities, responsiveness, transparency, and quality standard.
Companies with a healthy relationship with Chinese manufacturers can work together and adopt best practices for cutting operating costs, improving lead times, and introducing advanced procurement tools.
The success of a company relies on a solid sourcing strategy and a proper sourcing process. Measure the manufacturer’s performance and line up their competencies with your needs. Your company is all set to surpass and flourish with a good supplier relationship!