Finding the Right Suppliers – Part 1

Monday, July 9, 2007 0:17

Following my pattern of posts related to the importance of supplier management in China, I found the below Youtube series entitled Sourcing Strategies China — Find the Right Suppliers Part 1, and the series is a must watch for anyone who has been able to see the forest from the trees and is still interested in China based sourcing options.

[youtube width=”425″ height=”335″]http://youtube.com/watch?v=tjIQ8dDeT5A[/youtube]

Part 1 starts off with a standard intro and then a few tangents about how not knowing the culture (and making a few face losing mistakes) will not kill a deal before addressing the question:

How do you find a supplier in China under the constraints of pricing, quality,and lead time?

The speaker rightly recognizes that while one can find a 100 suppliers for a product, it can be difficult to narrow those down to the 2~3 bet candidates. He uses ball bearings as his example, and for products like this there are literally hundred s of factories (just go to Alibaba.com for proof), however as one gets more specialized or looks for a supplier of assembled products there will be fewer candidates.

Areas that he says hampers this process are: transparency issues from legacy system of trading company (agree) and regionaliztion (agree).

Probably the most interesting point he makes is that China has a lot of “areas of competency” where a township has specialized in a product, and that in those towns one must be very careful with designs. Not only a very valid point, but knowing this fact is why I never conduct any business at a trade show and why I always take brochures of companies home with me. After all, why negotiate when there is a line behind you when you can visit their factory as part of a township tour.. a simple way to gain the upper hand.

Part 2

In Part 2, the speaker gets into the meat of his presentation by opening up with the question:

How do you qualify a vendor on a limited budget

In his experience, online platforms and trade shows are an excellent source for locating potential suppliers, but buyer needs to beware of traders.. They are selling at higher costs, when things go wrong middlemen make the process worse, etc… and the best way to avoid the middlemen is to “walk the line”. All of these statements are true, and in my experience I would add the following:

  • the biggest give away of a trader is their portfolio and geographic diversity. If you are looking at their catalogues and asking yourself how it is possible for them to manufacturer so much… well, they may not be manufacturing it all in house.
  • Middlemen/ traders are not always a bad thing: If you have small volumes or if you need to source a lot of different things, they are quite useful. But the key is to make sure that if your volumes are going to ramp up that you can get to the manufacturer once the scale of ordering reaches the point that you can invest in your own system
  • unless you are in the final stages of a negotiation, or you are in their town, there is no need to walk the line of 10-12 factories. The key focus at this point should be pricing and samples.

[youtube width=”425″ height=”335″]http://youtube.com/watch?v=TPqyrcNC8kU[/youtube]
The speaker has a pretty negative view of trading firms, and while I do understand where he is coming from, it is a bit ironic as he himself acts as a trading company.

Dealing with trading companies can be a pain sometimes, especially when you need to make minor changes to a product….they don’t understand why the change needs to be made, then it takes time for them to communicate to the factory owner what is needed, and with any luck the change gets made.

Personally, if the product is highly customized or at high volumes, a trading company makes no economic sense anyway, and all the risks are there. However, if a buyer is buying a commodity item at small volumes, then there is little choice but to work with a trading firm.

One example of this is that we are currently working with a trading firm for a product that we are buying about 10,000 of per quarter. Were we buying 100,000 a quarter I could walk into the factory, ask for better pricing, and get it. But at this level we are only left with a trading arrangement, and at this level we are happy to have this trader who is willing to buy 100,000 on spec and sell 10,000 to us.

The speaker does a very good job of addressing the issue that you need to be able to compare apples to apples when evaluating proposals, and the key to this is to break out everything. Break out tooling costs, material costs, transportation costs, VAT, etc as best you can before sitting down in front of Excel. One additional point is that for items that are items that have a large percentage of a single raw material, take their material costs and try to break out the actual cost of the PP, steel, or other material.. then work back to get their labor cost as that is what your negotiations will need to focus on

Now you narrowed it down.. it’s time to negotiate, and his two pieces of advice is to speak to the decision maker, not his english lackey, and avoid the baijiu.. In addition, I would add

  1. Always treat the other party with respect. A lot of jokes are cracked about the fact that factory managers wear white socks, lack personal hygiene, etc.. but remember that these are the people who invested in the factory, have built their factory to the point that you are now sitting across the table from them, and are going to be responsible for your goods. Show them that you respect everything they have accomplished, and you will get farther than playing hardball.
  2. Make sure you are armed with data. Break out all the costs, and be specific on where you look to save costs. Understand that some costs cannot be reduce (you cannot negotiate their electric bills), but that there are always to save costs.
  3. Don’t get caught up in the extras early on. Talk only about the fundamental materials, not the extra product features like imprinting, packaging, and transportation. You don’t negotiate the floor mats first when buying a car do you?

Overall, what I find most interesting at this point is that there are a number of different ways of successfully souring in China, and while I have one way.. there are others.

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One Response to “Finding the Right Suppliers – Part 1”

  1. University Update - YouTube - Finding the Right Suppliers - Part 1 says:

    July 9th, 2007 at 1:51 am

    […] Link to Article youtube Finding the Right Suppliers – Part 1 » Posted at All Roads Lead to […]