3 Main Traps to Avoid for China Industrial Sourcing
China industrial sourcing has many challenges. Most of them are a result of the Chinese business environment and the fast pace of the country.
But some problems are self-inflicted by buyers and are not related to suppliers. The three main traps I have seen buyers fall into are:
Buyer improvises a project and launches ill-prepared sourcing missions because they cannot secure the right expertise;
Buyer gets the first steps right but then hesitates for a long time because of the complexity of the project or because of internal conflicts;
Buyer has been waiting for a long time and suddenly gets impatient and makes hurried decisions.
This is how these three sourcing traps play out. I am sure you will be able to relate at least to one of them, even if the cases below are a little of a caricature.
Someone decides that it is time to source goods from China. The company has no experience but management wants to get the ball rolling and get things done. "We need to improve our margins. Our competitors produce in China. We are late in the game and we need to catch up. This is a question of survival."
A few people are put together and assigned to a special sourcing team. The new China sourcing initiative is launched.
Sooner or later, trouble starts:
The team cannot identify a suitable supplier;
First samples are substandard and cannot be accepted;
Or worse, quality problems arise after a few initial deliveries.
No one in his right mind will proceed with these suppliers. It seems that the sourcing initiative has stalled and that all is to be done again from scratch.
Three years ago, a company launched a China sourcing project for sub-assemblies to be assembled into its main product. For the initial steps, the project team has done pretty well. They have brought in all the relevant expertise from within and have also sought assistance where they needed.
Within 12 months, they identified seven suppliers that displayed the right capabilities, offered interesting pricing and were willing to move forward. The company COO visited all suppliers during an intensive tour and was impressed both by what he saw on the shop floor and by the attitude of the suppliers' management.
Then things started to slow down. Every time the China sourcing topics comes on a company management meeting's agenda, participants raise many questions such as:
Are the suppliers really as good as we think?
Will our customers push down our prices if they know we are making these parts in China?
We are far from China, how do we manage these suppliers from this far?
The projects cannot proceed as no one takes the decision for the next step.
None of these questions is a new issue. They were there already at the outset of the project. But now that the prospect of sourcing from China is real, they come up in the discussion all the time without being resolved.
It seems that the sourcing initiative has stalled and that it will take either serious strategic thinking or strong push by the top management to start again.
The company has considered China sourcing for several years. A couple of people from purchasing have even visited factories they had discovered at various industrial trade shows. But business is so hard these days with the economic crises and no one really got the time to seriously go through the sourcing process.
The wakeup call came one month ago at a tender post-mortem meeting. "We lost mainly because the winner was able to go down in price" says the sales manager. He continues: "They could do this because they buy all their peripheral equipment in China and also source some motors and control systems assemblies there."
"We gotta move now! "says the GM. "We started exploring China suppliers at least 3 years ago. How come I still have not seen a single order from them. I need this... now."
Pressure is high. Purchasing department goes back to the files built throughout the last few years. They reactivate the suppliers they had met then. They send RFQ and request samples. The technical department makes a first analysis. It does not look bad.
Before the engineers can make deeper tests and confirm how the product really performs when put in the full system, the company is invited to a large tender in Turkey. Normally a very competitive market. It is decided to use some of the Chinese suppliers to reduce the total cost and protect margins.
The tender is won. Everyone is very excited about it... until project implementation:
Supplier had misunderstood some key requirement in the RFQ and quoted a substandard product;
Supplier can meet the requirement but it will be more expensive;
Delivery is delayed three weeks because of the rework;
Export is trouble too: supplier sells CIF and has selected a cheap forwarder and custom agent with poor service.
The company managed to keep the final customer immune of all this and no damage is done to the reputation. But the total cost of the project proves to be higher than what it would have been with traditional suppliers. And no one is keen about working with China.
It seems that the sourcing initiative has stalled and that it will take lots of work and convincing to restart it.
None of the difficulties faced by buyers of industrial goods in China are simple.
The cheapest suppliers may be good marketers with poor quality.
A good prospect supplier may expect much more business than the buyer is able to generate.
This supplier met 2 years ago was only average, but it may have tremendously improved since then.
Successful China industrial sourcing is both about expertise and about process. When so many things can go wrong, success lies to a large extent in how these aspects are evaluated and addressed. And this takes knowledge, a rigorous approach and time.
Some of the keys to success in China industrial sourcing are:
Get well prepared;
Go through each step thoroughly;
Make clear go/no go decisions, avoid half measures.