Global sourcing has become less a strategic advantage and more a competitive necessity. Fierce competition is driving many companies to source in low cost countries. The expectations of more return on investment combined with increased competition drive executives to seek reductions in expenditures, making an immediate and direct impact on the bottom line. At the same time, they are challenged to maintain service levels and prevent any loss of control.
Many Western companies are eager to source Chinese parts and products in order to achieve these goals. Retailing giants such as Carrefour are buying an expanding range of Chinese-made goods for up to 40% less than the cost of comparable goods made in developed countries. Driven by a continual margin squeeze, an increasing number of industrial players also found their way to source basic chemicals and commodities, small machining, molds, packaging and much more in China. Ford Motors, for example, has spent considerable effort to source more parts in China, but still those goods represent only a fraction of the components used in their vehicles. Aware of the savings opportunity of sourcing half of their basic parts in China, they plan to vastly increase their purchases of China-made components. Although the opportunity is certainly enticing, the current stage of development creates skepticism about the ability to get right the many pieces of a sourcing operation in China. Some companies reportedly did not meet their target volume of sourcing in China, largely because the job of evaluating suppliers and establishing and managing supply chain connections was more complex than the companies had understood.
The emergence of sourcing portals and specialized sourcing fairs has facilitated searching suppliers in China. Procurement managers will probably find numerous suppliers that comply with their requirements at first sight. With an attractive website or boot and a convincing sales proposition suppliers may convince companies of their professionalism. But finding high-quality suppliers and negotiating agreements with them are problems many companies face. Difficulties ranging from due diligence or intellectual property infringements and customs delays to poor communication make the sourcing opportunities less appealing. Moreover, the widespread use of trading companies does not offer the transparency companies need in order to monitor the process. Additionally, there are issues such as cultural and language differences that companies rarely face at home.
Many companies have fallen into traps because they only consider the cost factor instead of realizing that global sourcing is only effective when it involves the evaluation of all factors including the cost of materials, transportation, inventory carrying costs, taxes and tariffs, quality and operational risks.
In order for companies to benefit from China's unrivaled potential as a global sourcing center, they should first deal with a few important internal stumbling blocks that may slow down the whole setup. A prerequisite for success is for top management to understand this broader picture and sell it internally, making a persuasive case for their sourcing strategy in China. Middle management should be convinced that the benefits of lower-cost purchasing outweigh the increase in operational costs and risks. Moreover, incentives and performance measures should be adapted as inventory costs and logistics costs will rise. Organizational adjustments will be needed to deal with the new risks of managing suppliers in China. A step by step approach enabling managers to learn gradually about the new methods of selecting vendors, negotiations, and logistics will help minimize the pains of the transition phase.
The capabilities that need special attention when sourcing directly include quality assurance and control, logistics coordination, and satisfying customs regulations. Quality assurance and control start with an in-depth assessment of pre-selected suppliers against the company's specific criteria. During this assessment companies may want to gain more insight into the suppliers' production processes, quality procedures, R&D activities, current client base, financial stability, and due diligence. Quality management is a continuous process. Once a suitable supplier has been recruited and contracted, its performance needs to be measured consistently. This insight enables companies to optimize supplier interaction and performance, and thus improve product and service quality and delivery. The logistics activities include packing, managing inventory and consolidation, inspecting container loading, arranging shipments and satisfying customs regulations. Many activities have to be managed and many detailed decisions have to be made while sourcing in China. Small details, which are obvious in Europe, can go wrong. Hence, a hands-on approach is required to monitor the supply base and take quick action when corrective measures are necessary. Control is a vital element to successfully capitalize in China.
Taking these issues into account, companies can lay a foundation to enable the relocation of bigger and more crucial pieces of their supply chain operations.
Companies may find it appropriate to bring in consultancy services during the transition stage, assisting them in establishing effective sourcing capabilities. These parties help identify reliable suppliers, provide quality assurance and control, perform logistics activities and help recruiting personnel. This enables companies to set up sourcing offices in China, reduce reliance on traders and thus gain control and capture savings. Companies seeking to drive more value out of procurement are considering the outsourcing of selected product groups and procurement processes, and in this way leveraging third party knowledge and experience with sourcing in China. Unlike traders, these procurement managed service providers represent your company in China, giving the company the transparency, control and savings that should be expected.
Sourcing in China can certainly create a real competitive advantage, but this does not happen overnight. A company that wants to build value for the future should start to lay the foundations today. Of course, every structure is unique and needs more than foundations alone but these are the prerequisites for success. Considerable time and effort should be spent first to lay the foundation, but those who place their stones in a thoughtful way can create value and competitive advantage for the future.
Copyright 2007, CF China Sourcing
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