Global sourcing brings lots of benefits including low costs and higher production capacity. Unfortunately, like most things, global sourcing poses challenges at every step of the way. Those challenges include supplier-related issues like non-adherence to international standards, no accountability, and compliance problems. It also includes other challenges like working across multiple time zones, delays in supply, language and cultural barriers, and business risks.
Here’s a look at how to overcome challenges and minimize risks of global sourcing at the same time ensuring profitability and the procurement of high-quality goods.
Four best practices to manage suppliers in global sourcing
1. Be clear about who you are working with
The suppliers that you work with can make or break your business. It takes a certain level of dedication and willingness to hunt down, qualify, and then negotiate with global suppliers. That is not a quick or easy process – and you will require patience. Then, once you select a few suppliers you think you might be able to work with, the next step is to test and qualify the quality of their goods. For all this, you require a successful sourcing strategy.
Conduct background research on various suppliers, you need to assess their market conditions and the ability of suppliers to deliver high quality products under those conditions.
Create a supplier evaluation scoreboard. Establish score criteria and then assign scores for each supplier based on their:
- Management capability
- Financial health
- Manufacturing capacity
- Technological capacity
- Social responsibility
- Business risk
- Quality status
- Lead time of delivery
- Regulatory compliance.
The above information will give you a clear understanding of how disciplined, organized, and reliable a supplier is compared with the others. That includes physically inspecting the factory, conducting social auditing, and meeting with decision-makers and the factory managers.
2. Establish quality standards right from the beginning
Quality is a critical aspect of the success of your business. You want to ensure that your suppliers provide you with nothing but the highest quality products. It all begins with establishing acceptable quality standards right from the beginning. That will:
- Ensure the safety and reliability of your products/services.
- Comply with regulations.
- Meet environmental objectives.
- Control internal processes.
When quality standards are not set out right at the very beginning, there is a risk of low-quality products leaking into your business. Here are four steps to ensure you set quality standards right from the word “go:"
- Audit potential and existing suppliers. That will ensure they will provide you with high-quality products, support continuous improvement, and operate efficiently. Look out for standards like the ISO 9001, social accountability, sustainability, and standards relevant to specific industries (AS 9100 for the aeronautic sector, TS 16949 for the automotive industry, etc).
- Develop comprehensive and detailed product specifications. Product specifications must include acceptable quality levels, expectations for each supplier, defect details, and classifications. To be able to do all this, you must first have thorough knowledge about your product.
- Test products to determine standards are met and to troubleshoot. Use applicable industry-related standards to measure the product’s properties and evaluate its performance.
- Inspect throughout production, before shipment, and after delivery. Once production begins, you will have to ensure end-to-end quality inspections. That includes incoming quality check, manufacturing control, pre-shipment inspection, container loading check, and onsite tests conducted by a professional QC team.
3. Have a solid manufacturing contract
Ensure the manufacturing contract covers the end-to-end process and outlines all the terms you and the supplier will work on together. The manufacturing contract must include:
- Product design: All the required specifications. It can also include a prototype, mold, or pattern.
- Intellectual property: If you want to protect your IP, include specific restrictions on the supplier’s license on top of the confidentiality clauses.
- Quality control: Include clauses that require the supplier to complete certain obligations related to the quality of the product. That could also include running regular tests and periodic quality control inspections.
- Ownership and indemnity: This specifies at which point ownership passes from the supplier to your company. That helps avoid any confusion if there are damages to the products during shipping, etc.
- Practical considerations: For example, whether the supplier will have the ability to store your products on your behalf and assist with packaging the goods so that they are ready to be sold.
- Ordering, pricing, and payment: Have a detailed account of the procedure followed for placing an order and if there will be a minimum order to be met. Include details of when payments will be made. If there will be instances when payments will be withheld (for example, a delay in product delivery), mention that too.
4. Build business relationships
The products supplied by your suppliers can improve your business and increase your efficiency and bottom line. So, how you deal with them must be a part of your strategy of global sourcing from China. If you treat your suppliers right, you can be sure that they will respect and stick to the rules you lay down in terms of:
- Quality
- Timelines
- Competitiveness
- Innovation.
First impressions are crucial, so you must always start on a good note. Here’s what you can easily do to improve your relationship with your global suppliers:
- Always pay your suppliers on time to earn their goodwill. Pay them on time, and you can benefit from various types of perks they might offer you.
- Keep in mind your supplier’s production methods and needs. Give your suppliers a reasonable lead time on your orders.
- Personalize your relationship with each supplier. Visit their offices and invite them to your office.
- Keep your suppliers abreast of what’s happening in your company. For example, keep them informed about new products, promotions, new people on the management team, etc. Suppliers might be able to use this information to find you potential customers.
- Be aware of and mindful of cultural nuances. Ensure proper communication to always ensure transparency from both sides.
Tips about managing Chinese suppliers in global sourcing
1. Don't be too cheap or you'll lose out
Quality is directly proportional to cost. You get what you pay for. The chances are that the lower the cost, the quality of the goods will also be lower. When you try and negotiate too low a price, you can expect two outcomes. First, the supplier may prioritize delivering more “profitable” orders, resulting in delayed shipment. Second, to increase their margin on your low price, the supplier may swap out materials and components for cheaper alternatives. In both cases, you may end up paying a higher price than what you expect to save.
If you want nothing short of the best price for the products that you are sourcing, you will need to negotiate in a smart and determined manner. Consider these tips:
- Rather than a specific bulk quantity, ask for prices based on quantity tiers. For example, quotes for 200 (MOQ), 500 and 1000. It sends the message that you may place a bigger order if you’re able to get a discounted price.
- Compare a number of suppliers to determine which one works best for you. As you will have done your research, you can use the data to gain an upper hand during negotiations. For example, after expressing interest in ordering a certain quantity, you could state the lower quote from another supplier. As the supplier you’re talking to doesn’t want to lose your business, they may consider the possibility of offering you a better price while still assure the quality.
- Also understand that you are not your supplier's sole client. Your supplier will only prioritize your order by the degree of your significance to them. That means if you don't order larger quantities as declared during your initial communications, then the supplier won’t waste time haggling with you. They won’t be receptive to your requests or pay adequate attention to meeting your quality standards or delivery deadlines.
Chinese factories operate on small margins. By putting more pressure on their profits, you will neither create a good impression nor get an acceptable product quality. There is no winning here. Rather, focus on negotiation prices and terms that work well for you and the supplier. A realistic price that allows you to source at a reasonable rate while ensuring that the factory doesn’t lose out will go a long way in fostering a healthy relationship. There is always room for discounts as your relationship grows.
2. Incentivize your supplier
In a long-term buyer-seller relationship, there are opportunities for each party to incentivize the other to continue supporting each other’s business. If your supplier has consistently met your expectations, you could work out payment terms that help the factory’s cash flow or any other 'reward' that the supplier can appreciate.
At the very least, you can avoid establishing terms and conditions in the manufacturing agreement that penalizes the supplier if the production deadlines or quality standards are not met. These targets may seem realistic to you, but from a supplier standpoint, they may not be so. Despite them being unrealistic targets, your supplier may just agree with them only to get your order. In fact, when a supplier does not resist unrealistic prices or terms, that’s a red flag that they're using you as a 'fill-in' until they get more clients. At the time of sourcing China suppliers, keep in mind that any show of weakness or very high hopes (indicating a lack of awareness) will strengthen the supplier's position.
Determine realistic timeframes and an acceptable level of quality. If you want a highly customized product, choose a manufacturer that has the machinery, tools and expertise to meet your demands. You can also consider offering them an incentive for meeting strict quality requirements early on. When there is scope for improvements, think about the different ways in which you can motivate your supplier to bring out a product that boosts your competitive advantage.
3. Treat your supplier as your business partner
Your supplier is not just another business but an extension of your company (however small or big), helping you make money and grow. The relationship with your supplier is not just based on financial transactions but mutual trust and loyalty.
Keep communication channels open so you can get across everything the supplier should know. This includes any special requirements regarding the product, quality management and product testing. Be sure to share constructive feedback: Chinese factory workers may not be familiar with ‘western quality’, what is fine for them may be sub-standard for you. Also, fill the supplier in about market trends so they get an idea of how you’re looking to respond and adapt.
Making your suppliers feel like a part of your business can go a long way in building a healthy relationship with them. You may keep them informed about the release of new products or promotions to make them feel more involved in your business. Also, it is crucial that you listen to their concerns and address them appropriately.
While the point of managing global sourcing in China to gain a cost advantage, it is important to put the relationship in perspective. Where else can you go for prices that are just as good without compromises to quality and deadlines? This is not to say that Chinese manufacturers have leverage and buyers must always oblige. But as it stands, China remains the world’s factory and in order to benefit from a China sourcing strategy, relationship-building is necessary.
4. Know the right people
In most cases, the supplier representative who takes your emails and calls isn’t calling the shots at the factory. This person’s job may simply be to pass on your message, and there’s no telling whether all your requirements have been understood.
This is why you should insist on being introduced to the factory manager or the decision-maker who interacts with workers.
Global sourcing in China is less challenging when you have a sourcing agent to assist you. Unless you've done business in China before or have significant importing experience and cross-cultural perspectives, it is best to use a reputed third-party to manage supplier relationships successfully.
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