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Strategic Sourcing with Supplier Consolidation in China

2024-03-08
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In today's global economy, companies are increasingly looking towards China for sourcing products, components, and materials. The advantages of sourcing from China are numerous, such as:

- Lower cost

- A large and diverse supplier base

- Access to advanced technologies.

With growing competition, companies are staring at thin profit margins. On the procurement front, many Asian countries are offering products at a cheaper rate than domestic markets. Low cost of labor and government support are enabling countries like China to manufacture products at competitive rates. Moreover, globally recognized quality standards followed by Chinese manufacturers help in maintaining high product quality. Now, most global product companies are procuring their product from China.

In global sourcing activity, supplier of the product is a key stakeholder. The quality of your product and its timely delivery depends on the supplier. For bulk production requirements, you may need to engage with multiple suppliers at the same time. But coordination with different suppliers can lead to a lot of complexity. Varying delivery slots and variations in quality standards is a challenge for your business. Similarly, this can lead to cost escalations due to multiple shipping consignments. 

However, with the rise of the internet and the ease of international trade, the number of suppliers in China has grown exponentially, making it difficult for companies to identify and select the right partners.

This is where strategic sourcing comes in - the process of identifying, evaluating, and selecting suppliers to achieve long-term goals. Supplier consolidation is a crucial step while we consider a consolidation strategy.

What is supplier consolidation? 

Procurement strategies assume a significant position in business growth. Quality and price are the two major factors that often guide the procurement process. However, while sourcing from China, you need to engage with numerous vendors for fulfilling your bulk requirement. The process of managing different vendors across multiple manufacturing clusters can be cumbersome. At this juncture, your company can adopt supplier consolidation. Supplier consolidation is a smart supply chain management strategy for minimizing complexity in the procurement process. In supplier consolidation, a company reduces the number of vendors that they depend on. During this consolidation process, they choose and select only the best vendors that add value to their business. 

While working with fewer vendors, a company can focus more on its product strategy. Supplier consolidation is important from the perspective of quality also. Sourcing products from multiple vendors can affect quality standards. Eventually, this can lead to product rejections. By deploying consolidated sourcing options, you can get a hassle-free procurement experience.  

What are the benefits of supplier consolidation? 

As a supply chain strategy, supplier consolidation is highly beneficial for your company. In a way, it is the best option for optimizing all your resources such as manpower, costs, and logistics. The various benefits of adopting a consolidated sourcing option are: 

1. Economies of scale 

Procurement is a game of volumes. You can arrive at competitive purchase cost only when you order in bulk quantities. The same applies to global sourcing also. Supplier consolidation helps shortlist fewer suppliers that suit your requirement. By doing so, you are not spreading your bulk product requirement across multiple vendors. Through this, an individual factory gets a high-volume order. With a large order, the factory can use their machine and human resources optimally. This process optimization results in avoiding wastage and leads to considerable cost savings. Similarly, you have better control over the entire sourcing process while dealing with a small set of suppliers.

2. Better adherence to specifications and quality

While procuring from a foreign country, companies often worry about the quality standards. Even with the advent of global quality standards, complete adherence to these systems is still pending in China. Additionally, huge variations in product quality are observed when moving from urban clusters to rural manufacturing clusters. So, it is always better to work with a small set of reliable suppliers. In doing so, your team can effectively collaborate with these vendors to chart out exact specifications and quality requirements. By focusing on a few vendors, you can speed up the process of sample production. With this, your team has better control over quality monitoring activities. 

3. Cost reduction in shipping

Logistics and shipping occupy a major portion of the final product cost. Minimizing the shipping charges becomes a priority area for a company. Any minor fluctuation in freight charges makes a drastic change in the final product price. When you deal with multiple vendors, each of them needs to arrange separate shipping arrangements. For small product quantities, this translates into high shipping costs. By supplier consolidation, you can provide these fewer vendors with bulk product quantities.

With these consolidated sourcing strategies, you can also reduce shipping costs. If your vendors are in close vicinity, it is possible to club their product consignments together for shipping. There are domestic package consolidation agents that help you with this activity.

4. Stronger company-supplier relationship

Product sourcing from China requires a great deal of teamwork. The sourcing activity becomes a success only when your team can effectively collaborate with the personnel from the supplier team. With a huge difference in cultural factors, this is a challenging task. So, it is always advisable to keep the number of vendors at a minimum level. When you limit the number of vendors, you can maintain a better relationship with them. Proper vendor management is very useful in obtaining the best quality products as per your requirement. In a long run, a strong company-supplier relationship is beneficial for your company in many aspects.

5. Better collaboration & communication

Lack of proper communication is the most common reason for product failures in the case of global sourcing. At every stage of sourcing, effective communication is inevitable. You need to make sure that the designers, engineers, and production executives all interact constantly throughout the process. This is crucial during initial design, sample procurement, and final production.

Dealing with numerous vendors can be a daunting task for your team members. Without proper focus, this can lead to total product failure. Instead, adopting a supplier consolidation strategy in China helps your team in bringing out the best results. Over a period, it becomes easy for communicating your requirements when you deal with a small set of trustworthy suppliers.

What are the key factors to consider before supplier consolidation?

The process of supplier consolidation is not an easy task. In supplier consolidation, you should evaluate your existing vendors based on multiple parameters. For existing suppliers, the evaluation can be based on past performance. 

You can also consider new suppliers as a part of your consolidated sourcing options. It is advisable to select vendors that specifically suit your production requirements and timelines. However, the preparation of a robust evaluation system is very crucial in this. It requires a lot of experience and domain expertise. Apart from this, a thorough understanding of the local production ecosystem is crucial. Check out the factors that you should consider before supplier consolidation.

1. Supplier’s experience in your industry

In China, there is intense competition in the product manufacturing segment. With the advent of manufacturing hubs, you can get numerous product suppliers across the length and breadth of the country. But only a few suppliers might fit your specific production requirements. It is important to assess the supplier’s domain expertise before you consider them for a partnership. In the absence of proper domain expertise, you may end up with faulty products and time delays. A due diligence activity can help you in determining the experience in a particular industry segment.

2. Supplier’s production capability

In global sourcing, a lot of your time and focus goes into the coordination of every activity with your supplier. When you carry out supplier consolidation, you are dependent on a few vendors. Even though it is beneficial, you should make sure that the existing vendors can fulfill your requirements. This is important in terms of both quantity and quality. Failure in gauging your supplier capabilities can severely limit your business growth.

Before shortlisting your vendors, make sure to carry out necessary background checks. You can rely on a mix of online and offline methods to evaluate this. In most cases, a direct factory visit can be helpful. A sourcing agent based in China can support you in this activity.

3. Terms of contract

Supplier consolidation is a strategic decision for streamlining your activities. All vendor-related activities follow a mutually agreed contract. As a buyer, you need to make sure that the contract terms are favorable to your company. By eliminating multiple vendors, you can have better control over these agreements. On the other hand, it is necessary to put strict clauses while having few vendors. Documenting your specific requirements in the contract can ensure better monitoring options. At times, before supplier consolidation, it is important to review existing contracts.

How to strategically consolidate your China suppliers? 

Being a major supply chain strategy, supplier consolidation can have a huge impact on your business profitability. As a result, a collaborative approach is necessary while executing this. It should balance your profitability as well as bulk product availability. You need to consider all factors before executing supplier consolidation. Any negligence in this regard can lead to constraints in bulk product availability in the future. A mix of due diligence and cost-benefit analysis can help in determining your consolidated sourcing strategies.

The following step-by-step process can help you in the successful execution of supplier consolidation.

1. Identify your bespoke goals for consolidation

A thorough understanding of your product requirements and larger business goals is the first step in supplier consolidation. Charting an expected growth trajectory will help in determining your product portfolio. Based on this, you can devise the quality standards also. The goal-setting acts as the base for supplier consolidation. Once you are clear about your goals, it becomes much easier to filter vendors based on their capabilities. It brings in a sharp focus on various vendor management activities such as contract preparation, price negotiations, and monitoring. 

2. Segment your suppliers to conduct a SWOT analysis

After setting your procurement goals, you need to select the best vendors that fit your requirement. There is no shortage of suppliers in China. However, shortlisting the best suppliers is always a challenge. You can use a mix of primary and secondary sources to create a primary list. Use a set of basic criteria to prepare this list.

Segment your suppliers based on their core strengths and expertise. Further, the use of tools such as SWOT analysis helps create the shortlist of preferred suppliers.

3. Do a cost-benefit or spend analysis for each supplier

Normally, most of the considerations in vendor selection boil down to cost competitiveness. In supplier consolidation, a detailed comparison of shortlisted vendors is essential. Along with vendor capabilities, cost comparisons are equally important. Spend analysis or a cost-benefit analysis can help in determining these comparative advantages. A review of the company’s purchase history can help in conducting a spend analysis. In this, you compare various costs associated while purchasing from multiple vendors. It also considers the time of purchase and quality expectations. Analysts rely on purchase orders, invoices, bills, and related data for carrying out spend analysis. Based on the results, you can choose the best suppliers for future orders.

4. Create a team of stakeholders to review this information 

As a key supply chain decision, any vendor analysis needs to go through a strict review process. It is advisable to form a team of stakeholders from different business verticals to review the analysis. The idea is to bring in maximum diversity in viewpoints. This is very helpful in understanding your business priorities clearly. You can also reach out to trustworthy consultants outside your organization. The team of key stakeholders can become the backbone of your consolidated sourcing strategies execution. Involvement of your internal team members in the early stages of supplier consolidation is helpful during actual execution. 

5. Cut down on suppliers who don’t meet your requirement

Supplier consolidation is not merely an analytical exercise. You should operationalize the strategies derived from vendor analysis. The first step is to cross-check the final results of your research. Beyond this, reach out to suppliers and understand their current offerings. Based on the analysis and vendor interactions, remove suppliers that seem to fall short of your expectations. Taking such a step is very crucial for your business while moving ahead. But ensure that you keep cordial relations with suppliers even in the absence of any business deals.

6. Start the transition towards supplier consolidation

Once your organization is sure about the details of 3-4 vendors, take steps to transition towards proper consolidation. Provide appropriate orientation and training to your team members for prioritizing your business objectives. Later, work closely with the suppliers to revise your contracts as per the new requirements. With the reduction in the number of suppliers, your team will be in a better position to deal with them. It is crucial to monitor the key parameters to assess any visible improvement in your process outcomes.

Conclusion

Strategic sourcing is essential for companies looking to source products from China. By partnering with a proven China sourcing company, importers can benefit from the many advantages of sourcing from China while mitigating the risks and challenges associated with international trade.

With the right sourcing strategy, companies can build long-term relationships with reliable suppliers, streamline their supply chain operations, and achieve their business goals.

Supplier consolidation is an excellent method to optimize your supply chain operations. However, a global sourcing activity involves a lot more complex step. Global companies face numerous challenges while sourcing products from China. A reliable sourcing agent can support your company in successful product sourcing as they also offer consolidated global sourcing solutions.

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