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Best Practices in China Procurement for Western Importers

2024-04-19
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Over the last decade, 60 percent of total of China's GDP growth was driven by manufacturing. As a result of establishing multinational operations and the growth of local enterprises, exports of goods and services to multinationals operating in the country increased. Let’s take a view of multinational corporations’ procurement in China.

When purchasing goods from China, most corporations employ the same purchasing strategy: They aim to get the lowest possible price by placing many vendors in competition. And that worked well up until 2009, at least.

On the other hand, extracting cheaper costs has become very difficult over years. The buying department should be organized into broad categories or projects, and suppliers should be brought into the value-creation process to work together to reduce overall expenses rather than just lowering the purchase price.

Companies that buy items from China may face many significant challenges at the start, according to our experience. The challenges ahead are intellectual property violations, customs delays, and poor communication between corporate headquarters and suppliers. According to reports, Ford failed to get $1 billion worth of Chinese components last year because the task of vetting vendors and connecting the supply chain was more complex than the business anticipated. Even if they seem impossible, these roadblocks can be surmounted.

Getting procurement right

Procurement is the process of finding and acquiring goods from an external party. The goal is to receive goods at the best possible price, taking aspects such as quality, quantity, time and location into consideration.

The procurement manager’s responsibilities include approving orders, finding reliable suppliers to provide goods at a reasonable price, negotiating price and contract, reviewing technical specifications and full details, forecasting upcoming demand and so on.

As a western importer, managing all aspects of the function can be overwhelming, and more so when you intend to work with suppliers in China. How do you get procurement right without burning out? Let's look at some of the guiding principles for procurement in China to get started.

1. Use cloud-based procurement software

When it comes to preparing procurement for the future, going digital is essential. One of the e-procumbent advantages is to free up procurement team members to concentrate on their strategic responsibilities.

Manage suppliers - It provides an easy-to-use platform for onboarding, maintaining, and managing suppliers. It also authorizes for the payment of an invoice, so you may approve and do three-way matching on the go.

Requests for purchase - Purchase requests may be captured, approved, and tracked using fluid forms. Purchase orders may be generated automatically.

Analyze spending - Your purchasing data should yield actionable, data-driven insights, incorporate and link your procurement cloud to other critical financial software platforms.

2. Keep transparency in spending

Unlocking savings and moving closer to operational excellence begin with making procurement in China activities more transparent. The procurement process must be evident to ensure accountability and reduce the risk of fraud. Bringing your spending under control is a terrific strategy to save money. The procurement process may be made more transparent by following these steps:

- Set up procurement procedures that work.

- Monitor and document every stage of the acquisition process.

- Identify and maintain a list of pre-approved vendor listings.

- Construct foolproof purchasing agreements.

- Check your systems for flaws regularly.

Dark buying and maverick spending can be eliminated by utilizing data analytics and automation. The procure-to-pay cycle may now be seen more clearly thanks to advances in procurement technologies.

3. Engage with suppliers

Finding suppliers in China, enrolling the vendor, getting invoices, and paying them might be daunting. Unique characteristics of supplier management software enhance the supplier process and increase supplier engagement. Increasing supplier involvement may be done by:

- Generating trust and win-win scenarios.
- Assessing the performance of vendors based on predetermined KPIs
.
- Facilitating the exchange of information and ideas between buyers and seller.

4. Optimize stocking

Organizations continuously seek methods to manage their spending and enhance the bottom line as profit margins drop in some sectors. As a result, you must keep a close eye on their inventory to ensure it operates at peak efficiency. Organizations should ask themselves these questions to see whether their inventories are optimized:

- Approximately 20 and 30 percent is a good rule of thumb for the cost of holding.

- Everything from consumer gadgets to hardgoods has the potential to go bad over time, not just food.

- Poor forecasting is the primary cause of out-of-balance inventories.

Organizations should ask themselves these questions to see whether their inventory is optimized:

- What is the operational inventory ratio for safety, replenishment, and surplus stock?

- Is the procurement team over-buying or under-buying any items?

- Are there variables to consider when it comes to purchasing frequency?

- How well-synchronized are purchase orders concerning stock levels?

5. Manage contracts

Procurement teams strive to negotiate prices in the procurement stage, but the value is never fully unlocked. Disorganized contract management is the most typical issue, although there are many more other kinds. They must deal with a variety of issues, such as a lack of consistency in contracts, lengthy processing, and problems with supply chain continuity.

By transferring their contract administration process to the cloud, organizations may avoid these procurement traps. Firms can maximize their spending, decrease expenses, and prevent risk when contracts are recorded and managed in a centralized data repository. Automated contract administration will benefit enterprises in the following ways:

- All papers should be stored in a cloud database that can be accessed from any location.

- A massively scalable and adaptable interface can be adapted to meet specific business needs.

- Agreement milestones, revisions, and opportunities for renegotiation may be flagged via automated notifications.

- Monitor delivery date, product reliability, price variations, and compliance with purchase terms to improve effectiveness.

Tips for reducing procurement costs

There are different ways to maximize cost advantages from procurement. Consider these ideas for cutting unnecessary costs in the purchase process:

1. Review your purchasing needs

Look at your inventory to determine whether you’re using everything you have in stock or stocking more than you need. Based on this assessment, you can plan your order quantities and avoid purchasing in excess.

2. Assess order quality

Compromising on quality to reduce costs further almost always results in rework, which suppliers may not do for free. On the other hand, also think about whether you need only the highest quality or whether your customers are fine with an acceptable quality level at a low price.

3. Eliminate expensive purchases

Novice western importers that accept suppliers’ quotes without negotiating may find out only later than they could have received a better price. While driving the cost too low is not advised, you should also avoid paying more for a product that can be easily manufactured for less.

4. Review contracts

Most Chinese suppliers are willing to offer discounted prices on large order volumes or early payments. After you’ve been purchasing from your vendor for a couple of months, reevaluate terms and make the most of the discount offers and other perks to reduce procurement costs.

5. Improve risk management

Procurement risk management prevents you from losing money when unexpected events occur. Fluctuating markets and the large geographical distances between China and your home country make risk management even more crucial.

Advantages of e-procurement

Usually, your search for a Chinese supplier will begin with an internet search. After you make a long list of suppliers, you’ll send them an email. The sourcing process begins, and you’ll move from one step to another until you’re ready to draft a contract with the supplier and place your first order.

Between finding a supplier and receiving your shipment, there are many activities to manage. They can all be handled online so long as you have proper e-procurement practices in place. For example, how can you stay updated with your order and enjoy peace of mind knowing that everything is on schedule? Is there a way to know whether a major event in China or globally is affecting production times and consequently, delivery timelines? E-procurement solutions make various aspects of sourcing products from China more efficient and cost-effective.

1. Increase transaction speed

Identifying the right supplier for your needs is effort and time consuming. After you find the right supplier, you can set about placing your order and making payments. E-procurement simplifies the procurement process by maintaining buyer-supplier records in a database and eliminating any unnecessary activities from the time you contact the supplier till you place your order.

2. Lower costs

Online procurement saves you money in different ways. You can eliminate paperwork, and the costs of stamps to mail documents. Online order purchase records prevent duplicate spending. Through online communication, you can make your requirements known rapidly and convey your interest to buy in large volumes for price discounts. When you buy more, you can save more. One of the key advantages of e-procurement is how quickly you can move back and forth with suppliers to negotiate price and leverage opportunities for bulk buying in a timely manner.

3. Increase productivity

Organizations invest in e-procurement systems to save time for other strategic, profit-making activities. Transaction records stored electronically can be retrieved within seconds. Pre-made templates allow paperwork to be filled quickly.

E-procurement can boost your productivity in another way - by relieving you of the responsibility of maintaining records of transactions and agreements with suppliers. This saves you time to focus on other areas of your business and enhances your productivity in those key areas.

4. Better transparency

There are two ways in which e-procurement supports transparency and accountability in the procurement process. One, by facilitating access to many suppliers to submit their bids for your project. You can rest assured that the supplier is acting fairly rather than choosing an existing supplier in their network even though there are better manufacturers to make your product.

Second, e-procurement leaves an electronic trail that allows verifications and cross-checking to take place seamlessly and is especially helpful in the event of a misunderstanding or dispute. Transaction records help prevent duplicate spending. You don’t have to waste effort in figuring out whether you made a payment or if the balance from any excess payment has been credited to your account. Keeping a tab on transaction details can be difficult and overwhelming when you’re using paper records or basic tools like Excel.

5. Identify the right supplier

The success of your importing business depends on finding a supplier that has the capability and experience to make your product. Besides, the supplier should also not treat you lesser than other clients that place large orders. In this regard, one of the main advantages of e-procurement is the effectiveness with which it helps you find a quality supplier who can help you build and sustain your business. E-procurement widens the competitive field, bringing a number of suppliers before you, each vying for your business. If you visit a supplier directory, you can see the vast number of options to choose from. You come to know that you have leverage over suppliers and can negotiate prices with them.

6. Prevent fraud

Better transparency minimizes the risk of fraud or dishonesty by the supplier. Although selecting a trusted supplier means not having to worry about whether you’ll be duped, better safe than sorry. If the supplier challenges your claim that they haven’t received payment from you, then you should have proof other than your bank records. An email with the receipt of payment will help you get out of the sticky situation.

7. Easy supplier management

Effective supplier management requires time and effort. It is difficult to manage on your own when you have other important tasks such as marketing, business development, investor meetings and so on. In this regard, e-procurement is beneficial as it records information, interactions, relationships, and performance of suppliers.

Among the key procurement advantages is that it is a tactical activity that allows you to make the most of rising and falling rates. Unless you plan to stick with one supplier for your needs, you can switch suppliers based on the cost and quality advantage they offer. As e-procurement provides all the supplier information in one place, reviewing performance and costs is simpler, allowing you to move proactively to meet changing business requirements.

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