Global sourcing is defined as a centralized procurement strategy for multinational companies, wherein a central buying organization seeks economies of scale through corporate-wide standardization and benchmarking.
Global sourcing in China could be still a cost-effective option for a business, if done correctly, sourcing in China can save valuable time for foreign companies (e.g. prototyping time less than 7 days) and resources (e.g. 15-40% TCO saving of metal components). Some Chinese suppliers can offer reasonably priced and quality products with on-time delivery.
However, on the other hand, most international buyers are struggling during souring activities in China and feeling that it is a difficult task to find the proper supplier and to maintain a stable supply activities with Chinese supplier is even more difficult.
Quality and cost controls are the top challenges. The importance of sustainability has increased significantly from year 2018. Other challenges, such as languages and culture, also play a role and are counted as difficult points to manage. Here we try to list top 8 challenges and find the root causes.
Challenge 1: Quality related
- Production batches vary from shift to shift when there have no onsite constant quality monitoring
- Reworking faulty products and discarding rejects
- Raw material volatility(esp. steel)
- No report when key production element changes.
- Supplier’s Sub-Contracting
Challenge 2: Cost control
Sourcing (Coordination) costs:
- Procurement market research
- Evaluation of suppliers – difficult and costly
- Communication expenditures-supplier selection – language and cultural barrier, no personnel on site or lack qualified personnel on site
- Travel expenses for supplier selection – costly
- Negotiation and supplier relationship building – negotiation tactics and cultural barrier, no personnel on site or lack qualified personnel on site
- Design adjustment with supplier – supplier lacks of proper knowledge, experience, and on-the-ground capabilities.
- Returns, exchanges and replacement – lack of experience
- Cost to have your own representatives – costly and corruption risk (that’s why international company, like SIEMENS , shift their sourcing manager every 3-4 years)
- Keeping up with the supplier relationship -- language and cultural barrier, no personnel on site
- Packaging issues: shortage, loss or damage
- No standard documentation
- Insufficient supplier reliability
Challenge 3: Communication (i.e.: culture and language)
- Communication with authorities
- Commission for intermediaries
- Some manufacturers have no proper knowledge, experience, and on-the-ground capabilities.
- Quotation price is attractive but order price might be increased due to many reasons.
- A convincing website could be created easily and phone conversations always sounds sincere, but certain trading companies mask themselves as the actual manufacturers.
Challenge 4: Sustainability
- some manufactures lack willingness to improve or even begin to implement best in practice manufacturing methods.
- Audits of working conditions at suppliers – no personnel onsite to manage
- Information costs-regulatory changes
- Management of social aspects
- Evaluation of environmental standards
- Political/legal support(compliance)
Challenge 5: Risks control
- Currency risks
- Government policy
- Risk of loss of expertise and know-how – IP concerns
- Re-negotiations, supplier change risk.
- Performance measurement-supplier relationship
- Risk of loss of reputation
- Risk of delivery shortfalls – low transparency of order processing and low commitment of supplier
- Risk management – no people onsite to manage, costly
Challenge 6: Demand
- Difficult to find right supplier for high mix low volume order
- Slow action with market demand fluctuations
- Single source supplier risk
- Most manufacturers focus on big demand
Challenge 7: Delivery issues
- Poor delivery rate
- Sudden notice just before delivery
- delivery shortfalls – low transparency of order processing and low commitment of supplier
Challenge 8: Buyer’s global sourcing strategy
- Unprepared to deal with cultural differences, time zone difference, as well as the sheer geographical distance…
- Lack of a Well-Defined Strategy includes no Well-Defined Standards for Suppliers
- Inadequate Due Diligence Performed on Suppliers
- No Mandarin Speaker on the Team
Why there are so many challenges in finding suppliers in China, and what is the root cause?
Based on years of experience, we believe that the most fundamental reason is that China is still a developing country and it’s manufacturing industry is just developing step by step since 20 years ago. After China's entry into the WTO, China's manufacturing industry has gradually become in line with world manufacturing. Some foreign enterprises come to China, build their factory, have played the role of coach, gradually training and instructing Chinese suppliers on how to produce, manage and communicate with the world.
Today, 20 years later, if we rank all suppliers into level 1 to 9, then Chinese manufacturers have formed a full echelon from 1 to 9. The best suppliers are belong to level 8 and level 9 (the proportion may only account for 5- 10%). Their ability could already get close to their counterparts in the United States and Europe regardless of technology, quality management and service, while their cost is also close. But China also has suppliers with different echelons level 1-7( level 1-4, accounts for 70% to 80%, may not suit international business). According to different needs, there is still a high probability that buyers can find the appropriate suppliers, meeting their requirements of cost, quality and delivery. But it needs time to find suitable suppliers to ensure continuous and stable order execution.
Foreign companies should make arrangements in advance and work hard on pre-certification and management, this will avoid most critical issues before they transform into costly, time-consuming issues.
To source effectively in China, we suggest:
1) Do not assume China supplier as one homogenous
a) Supplier in different regions within China varies in terms of salaries, regional support, educational level and economic development.
b) Supplier in different developing stage appears different result;
2) Let the Chinese deal with the Chinese. It is good to have a trusted partner be present locally which makes the purchasing process more effective. To invest time and effort in building strong trusting relationships with your partner.
3) Before having trusted partners in China, taking onsite audit, making sure suppliers meet your quality standards and production and working conditions are concerned.4) Be aware that purchasing start from RFQ, but quotation price does not mean everything.
We will discuss separately with these challenges and give our solution one by one in following blogs.