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 several 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. Let's look at some of the guiding principles for procurement in China to get started.
1: Using cloud-based procurement software
When it comes to preparing procurement for the future, going digital is essential. One of the e-procument advantages is to free up procurement team members to concentrate on their strategic responsibilities.
Procurement operations will likely undergo a complete digital transition as technology becomes more and more integrated into our daily lives. The most successful companies are using digital procurement techniques.
Provides an easy-to-use platform for onboarding, maintaining, and managing suppliers.
Authorization for the payment of an invoice
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.
Orders of Purchase:
Purchase orders and orders may be generated automatically from authorized POs.
Your purchasing data should yield actionable, data-driven insights.
Link your procurement cloud to other critical financial software platforms.
2: 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. In just five easy steps, we've shown how to get there.
The procurement process may be made more transparent by following these steps:
Set up procurement procedures that work.
Every stage of the acquisition process should be closely monitored and documented.
Identify and maintain a list of pre-approved vendor listings.
Construct foolproof purchasing agreements
Regularly check your systems for flaws.
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: Engagement with suppliers is the third step
Essential items, specialized services, routine maintenance, and one-time urgent repairs all fall within the purview of many vendors. Although phoning a particular vendor to acquire items or repair a piece of damaged equipment may seem easy, the effort of vetting and maintaining a supplier is everything but.
Finding suppliers in China, enrolling the vendor, getting an invoice, and paying them might be daunting. Even submitting a single vendor invoice might take many hours if done by hand. Unique characteristics of supplier management software enhance the supplier process and increase supplier engagement.
Sophisticated vendor monitors, pre-made agreement templates, digitized procurement procedures, and significant connections with financial management systems are all available via eProcurement technologies. Increasing supplier involvement may be done by:
Generating trust and win-win scenarios
the practice of seeing vendors as strategic allies
assessing the performance of vendors based on predetermined KPIs
facilitating the exchange of information and ideas between buyers and seller
4: Optimized stocking
Organizations continuously seek methods to manage their spending and enhance the bottom line as profit margins drop in some sectors. As a result, procurement departments must keep a close eye on their inventory to ensure it operates at peak efficiency. Here are a few things to keep in mind regarding merchandise.
Organizations should ask themselves these questions to see whether their inventories are optimized:
There is a far higher actual cost of maintaining inventory than the cost of purchasing the things
Approximately 20 and 30 percent is a good rule of thumb for the cost of holding.
Everything from consumer gadgets to clothes has the potential to go bad over time, not just food.
Poor forecasting is the primary cause of out-of-balance inventories.
Procurement officials slowly recognize the value of more significant data-driven insights throughout the globe. Most of those who took part in the 2018 Global CPO poll said they were using cutting-edge insights to reduce inventory costs and increase profit margins.
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 or services?
There are several variables to consider when it comes to purchasing frequency.
How well-synchronized are purchase orders and requisitions concerning stock levels?
5: Management of 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.
According to a recent survey of contract management, many companies don't employ any Contract Lifecycle Management (CLM) software. As a consequence, they have to deal with a variety of issues, such as a lack of consistency in contracts (53%), lengthy processing (45%), and problems with supply chain continuity (36%).
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 (riders, amendments, etc.) 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/policies to improve effectiveness.
Purchase clerks cannot influence the purchasing process and make no decisions independently.
The Pros: A minimal effort by the buyer's company.
The Cons: One-time purchases may lead to enormous inventories, quality problems can be found years later, and there is no planning, leading to recurrent shortages.
Suppliers are compelled to lower their prices by the threat of competition. This is the most common method of purchasing from China for most businesses.
The Pros: The vast majority of professional buyers are already familiar with this method, resulting in price savings of up to 20% with little effort.
The Cons: Relationships with suppliers are hostile; the purchase price is considered, not the entire cost of ownership; The possibility of a significant supplier going out of business is always present.
The third kind of cost-cutting tactic buyers uses (is the consolidation of the supplier base).
The Pros: Purchasers consider quality expenses, shipping costs, etc., while consolidating purchasing power in each category (across nations). Development activities make sense since working with fewer suppliers makes it simpler to keep track of them.
The Cons: When margins are narrow, suppliers are instructed to "make their profit on volume," yet this is very risky since any error may have a devastating impact (for example, GM pushed Delphi into bankruptcy with this approach)
Type 4 companies work more closely with their leading suppliers regarding long-term planning and choices.
The Pros:Total costs may be reduced by collaborating with suppliers and integrating the supply chain (creating common standards, co-developing goods, etc.).
The Cons: Buyers often need to be engineers with industrial expertise; many purchasers have difficulty shifting their thinking and working cooperatively with suppliers; each side of the table has different KPIs.
One of the most common types of collaboration is between a firm and its most important suppliers. We're talking about the most excellent procurement techniques here.
The Pros: Joint investments in novel materials, technologies, and products are possible with a long-term partnership; the objective is to increase customer value while lowering overall costs.
The Cons: For the plan to succeed, the buyers need to have a lot of industry knowledge and the backing of senior management.
A plethora of opportunities and challenges
Over the last decade, 60percent 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.
A large percentage of the parts used in Ford and GM automobiles are sourced from China. According to both companies, procurement of Chinese-made components is expected to keep rising. And over $10 billion a year might be saved by sourcing 50% of essential elements (such as carpeting, molds, electronics, tires, and wiring) from China for both manufacturers.
The procurement in China curve is also accelerating in other industries. In 2003, Wal-Mart imported items from China valued at $10 to $15 billion, and the company expects that sum to almost treble by 2007.
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. Companies that buy items from China may face many significant challenges at the start, according to our experience.
Blockage from middle management
Middle management at home might be a significant stumbling block to implementing a Chinese sourcing program. For example, suppose a company's success is judged by how quickly its inventory turns over. In that case, managers may be concerned that insecure supply lines may force them to keep more excellent stocks, increasing expenses and decreasing inventory rotations. Managers of logistical supply chains caution against utilizing suppliers located in remote locations because of the potential for increased costs. Product designers, manufacturing executives, and plant managers all have concerns about procurement managers' purchasing commodities.
They're both correct in their unique ways. But for multinational companies, a lower-cost buying strategy has nearly always outweighed any additional operational costs or risks . Even after considering these factors, a company still saved more than 20% on its sourcing costs.
When purchasing or operational managers attempt to execute a program without the explicit backing of top executives, it is sure to fail. It is possible to persuade people to accept change by providing a solid argument. To see whether the advantages of sourcing in China exceed the increased logistical costs, lower inventory turnovers, and risks to quality, several companies have attempted to construct total-cost-of-ownership models.
There were a lot of sales managers flying to China from Germany, Latin America, and Japan five years ago in search of new markets for their goods. Those planes now have as many procurement managers on board as marketing executives. If you want to sell your products in local market or developed countries, you can't go wrong with sourcing Chinese components and goods.
These people are drawn to the nation because of its fast growth as a low-cost manufacturing center. For 25% – 50% less than the cost of equivalent items manufactured in developed countries, many market leading companies are purchasing an ever-expanding variety of goods from China.