Securing Your Supply Chain in China – Part 1

Tuesday, July 31, 2007 13:24
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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, 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.

Part 1 starts off with a basic intro of the speaker and his background, but at about the 5th minute the video dives right into the topic by providing avery good into a number of the security issues and stories surrounding sourcing in China. For some it is a bit scary, but the most interesting (and least covered IPR violation) that he mentioned is that rather than it being some over achieving Chinese supplier knocking off your product.. it may be a home growth competitor that is try to product a like product.

His 4 levels of integration, each having their own + and -:

  1. Be your own factory – good for big buyers with high volumes or a high level of technology
  2. Sensitive packaging or brand considerations – purchase components in China and assemble in external site
  3. Captive supplier – where one owns a large piece of a factory’s capacity – risk in future of controlling suppliers sales channels
  4. Traditional buyer/seller – most common (easiest to set up) and most dangerous (lack of control)

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This is a bit of an over simplification as many firms (assuming their volume is high enough) will employ a multi layered approach. for us, this means sourcing raw materials from some suppliers, assembling some products in a their location, stamping and processing a different part of the portfolio at 4th and 5th locations, and so on. We are assigning different levels of trust a responsibility onot different suppliers as we see fit, and as a way or reduce our overall risk

Session 2: how do you qualify a vendor – security tips.

[youtube width=”425″ height=”335″][/youtube]

The speaker , starts off by listing a number of security tips/ tools
for buyers when getting ready to source in China.. and identify their factories:

  • Register brand imagery, trade marks, and patient: he correctly points out that for a small expense one can (and should) file for a patent in China. At this point, I am even suggesting clients do these regardless of the China platform as products can end up being made here without the knowledge of U.S. manufacturers.. and then are dumped into the China market, third markets, and in some cases the home market with little the U.S. company can do.
  • Spread it around: Spreading it around is a must. Typically, we like to work with 3-5 samples and spread around to a few factories we know through previous work or are introduced to by existing suppliers, and since each of these suppliers have different price/ quality, it is important to find out which has the best. However, never give the completed product to any one group, nor look to do that even if they win the bid. Always assemble outside the loop.
  • Avoiding trading companies With regard to avoiding trading companies, I agree in principal of one has high volumes and will have a team in China to oversee quality, but for smaller buyers there are two things that must be considered here. Are you able to order the minimum order quantity of a factory? If your product portfolio is big.. do you ave the capability to identify, narrow down, and manage the multiple suppliers? Can you do that for less than a trading company? Of course, there is a risk as he points out that you will not be next to the manufacturer yourself.. but if your volumes are too small you cannot get next to the manufacturer anyway.
  • Nondisclosure of final user and/ or market is a given at this stage. Don’t tell suppliers anything more than they need to know to get their quote. Any additional information is adding risk into the system
  • Who are you dealing with Who are you dealing with. as for references, dig around a bit… check your gut.. and then make the call.

During the production phase, the tactics change :

  • Don’t’ rely solely on legal documents: Legal documents are a good idea, but he recognizes the fact that it can be difficult to enforce in China. totally agree, and that is why many feel this is like the wild wild west…
  • Own the tooling: Owning the tools is important.. but in reality, it is not much leverage as the tools cannot simply be put into a tool box and carried away. Often times they are Big, and BULKY.. and most importantly.. HEAVY… oh, and should the deal go south, who is to say whether or not the tool was dropped on accident???
  • Frequent visits: there is no single point in this list that I agree with stronger, but leave the baby pictures and company gifts at home. I have written a half dozen posts lately on how firms need to have frequent visits as part of their program. A trip once a year is not enough… twice a year not enough.. once or twice a shipment is ideal.
  • “way of doing business” agreement:another useful agreement, but again the effectiveness and usefulness of this will be based on one’s volume

Overall, there is some solid advice that has been given. At no time, more than now, have companies become of some of the risks of outsourcing. Sure, people were weary before, but it is only after a thousand cats an dogs died, a recall of 450,000 tires, and toothpaste that the FDA says may increase the risk of cancer over a long period that U.S. companies looking to outsource began considering the safety of their supply chain.

Stay tune for the next installment..

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