McKinsey Study: Challenges of Chinese Procurement

Monday, October 16, 2006 5:57
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McKinsey has recently released the results of a study entitled The Challenges of Chinese Procurement that offers some interesting insights into what problems are currently plaguing companies sourcing in China, and how over time the resolution of those issues will impact their sourcing strategies.Representative more of the large multinational company rather than for SMEs, the study reports that only about 30% of goods are currently being sourced in China.Points to take from the study regardless of company size are:

  • Over the next 3 years many see increasing volume from 30% to 40%
  • Issues related to language, training, and culture have a large impact on the success of operations
  • A significant increase (from 14% of 50%) of goods will be designed in China

As part of this study, McKinsey looked heavily into the time required from submission of initial sample, and they found that some companies (an apparel manufacturer was used an example) require 3-6 months. Some of the activities that the authors believe could be the key to mitigating the time required are: design location, prototype approval process, and the intra communication process that results in time lost. following this, McKinsey shows that on average firms will take steps to improve this by placing many of these responsibilities on China based teams.

With only 39 companies that span 14 industries, a couple things I would hope to learn are:

Do figures only represent goods directly sourced, or does it include goods purchased through externally managed trading firms?

  • One U.S. retailer we work with sources 75% of their goods via trading companies in China and/ or U.S who source from China, and some of the remaining 25% is directly sourced – So what of this would be counted?

If companies are experiencing such high turnover and cultural differences, how will companies ensure adding design, protyping, and other pre-production responsibilities can be completed, and products protected?

  • As pointed out on China Law Blog, IP Dragon, Diligence China, and in previous posts on All Roads, employee turnover and IP protection are positively correlated, and thus companies could find it difficult to move these processes unless HR issues are resolved

What impact, if any, will the development of domestic markets have on the size of local sourcing operations, and thus the percentage of goods exported for other markets

  • With many multinationals now successfully selling into the China market, larger sourcing teams can not only be justified, but also be used to setup operations that are for domestic and export markets.
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