Do You Know Where Your Manufacturer Is?

Wednesday, April 25, 2007 22:59

Following my post on venture capitalist realizing that they NEEDED to BE HERE, I have decided to follow up with a post dedicated to those buyers who still have 3-4 layers of trading companies in between themselves and their factories.

For years, using trading firms was a common. For many, it was necessary as these firms were willing to go out to all corners of China to find factories that would produce everything from plushy toys to power tools.

With a desire to save costs, and a lack of market knowledge (and language), many firms would look to firms in HK, Taiwan, LA, and other cities outside of the mainland to provide what were viewed as services critical : supplier identification, QC, inventory management, and consolidation. For firms that did could not order in full container lots, these firms were even more important as they would fulfill LCL shipments

But.. over the years, while the situation on the ground has change, some things have remained the same for many companies from an organizational standpoint….. and money is being lost.

With one of my largest clients being a wholesaler of construction tools, we are often looking at various factories up and down the coast, and during one trip we were giving a glimpse of just how some companies have yet to understand just how much money can be saved if companies would only invest in their China presence… or at the very least, take an additional step and identify trusted partners in China.

The story really is a simple one in that we were visiting a factory that made products in the hand tool category, and one of our existing suppliers thought it would be good for us to visit his “friends” factory to see if there were other products we might be interested in.

Of course we jumped at the chance as what started with one product 2 years ago has grown over time, and it is always good to know where existing factories are as: (1) initial orders can be filled through them until production levels rise and the cost equation makes sense, (2) this trip gives insights into our own planning process, and (3) we can see who else is manufacturing in China (labels are always visible).

putty knife ChinaIn the case of this factory though, we hit the jackpot. first, this factory was supplying 3-4 retail chains with everything from putty knives to trowels to floats… wood, plastic, metals.. you name it. this factory was pumping the stuff out (sample putting knife pic).

At that point, we weren’t really excited nor interested, but it through conversations with the factory manager we can to learn we had come upon something interesting, and possibly an opportunity, as NONE of the buyer for the 4 retailers were buying directly from the manufacturer.
NONE OF THEM

All 4 were buying through either Taiwan or HK trading firms, and for at least 2 of them, there was another firm (Chicago and LA) in between the TW firm and the end buyer…

Given this factory was managing at least 50-75 products (all in full containers), it doesn’t take long to see that the potential savings for these retails was HUGE…in the millions.. possibly tens of millions (there is a LOT of money in tools).

The next day, I met the global head of one of the groups at a Thunderbird alumni events and my first comment to him was that I had just visted one of his factories (his logo was on the putty knives pictured above).

His reply was shocking…. he was managing a team of 4 buyers in China and had no idea about that supplier. He even admitted that the category of item we saw followed much the same patch, but that since the category was not up for review little could be done.

In the end, nothing happened, I our supplier is still working through HK/ Taiwan suppliers for now (They will eventually reach out to buyers before buyers find them).. and money is still be left on the table.

For a any high volume product group (like construction tools), working through multiple layers just is not needed anymore than a VC partnering with someone in their home country to source deals in China.
Getting as close to suppliers should be the goal, and to do that one must be on the ground in China either through one’s own presence, or through a strong partnership that will provide trading copmany + services… i.e logistics support, financial support, etc.
For those that are not yet big enough for that, identifying a group that can do this for you is perfectly acceptable, but the move away from overseas sourcing offices needs to begin if firms are going to remain cost competitive (one client of our actually was able to reduce costs before anyone, kept prices at same level, and was able to take a more aggressive stance to gain share…)

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