Securing Your Supply Chain in China – Part 2

Thursday, August 2, 2007 2:18
Posted in category From the Factory Floor

Part 3 starts off with a case study of working with a car accessory project (wanted a quality product at a savings) that started with 30 suppliers, and then narrowed down to 5..

but there were some issues:

  • All of them were trying to aggressively looking to expand to U.s., so educating a potential competitor
  • Decision was made to find to use his firm to do assembly, packaging, and export as a firewall
  • no big surprise, and the case is pretty basic

[youtube width=”425″ height=”335″][/youtube]
For anyone dealing with a commodity like brake pads, this is going to be the case. Especially if one can find 30 suppliers that are readily accessible to a search. Were the product more specialized, perhaps the maturity of suppliers would be lower, but one would be hard pressed these days to find a supplier that is not going to Europe for a trade show.

The big takeaway from this part is that it is best to use a firewall, and I agree wholly.

  • It prevents the supplier from identifying the ultimate buyers and going around them
  • Quality assurance
  • Money flow

In all cases, we have a firewall. Some are more creative than others, but there are components that remain throughout, including an entitiy in the U.S. that imports all the goods in our name.

On a more complex level, we bring in components to our site in Changzhou, assemble, box, containerize, and arrange for the logistics provider to take the container to the port. The container is loaded, imported by our entity in LA, and then delivered to our customers. It requires time and planning, but once in place it is something that never hass to be worried about.

For many building a firewall, the most important aspect is the fact that by building this, all of the subsuppliers are blind to customers and customers are blind to the subsupliers. It keeps middlemen safe.

However, for us (Our largest clietns know the subsuppliers) the real advantages in doing this is that by using a third party to assemble, we are able to more effectively QC the goods in process. Not only will we inspect the goods as they are being containerized, but we inspect them as they entere the Changzhou site in component form, and this allows us to better QC the products and make adjustments/ returns if there is a problem.

Steps associated with firewall:
1) Identify your partner
2) identify your subsuppliers
3) Identify logsitics partners (warehouse/ freight)

Costs to be considered in the firewall:
1) Per unit assembly fee – based on labor and management and should not be a flat fee, but relative to the products
2) Logistics – should not be marked up.

With only 5 minutes to run through this, the speaker does a good job on the overall topic, but there are a few things that should be added that are important:

1) Subsuppliers need to be spread out geographically. Peple talk, friends meet for dinner, and if all one’s suppliers in Hangzhou, the firewall will come crashing down. for our construction tools we have suppliers all over china (5 provinces), and none
of them know each other.
2) Assembly site management is critical to this. They will know everything as the goal is that they help manage inbound shipments, documents, and payments. This does raise the risk,however, if the relationship with the assmebly site is solid and the volume is growing, then this goes smoothly

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

Commonly overlooked items:
1) VAT rebate for export – make sure assembly partner can get the rebate
2) Currency converstion – if sub supplier cannot accept USD, then need to work with assemblier
3) Warranty terms – make sure warranties are set with assembier and supplier
4) Document trail – control the documents

Again, he hits all the bases, but somethings that shoudl be further explained are:
1) VAT has been reduced again (see our post here)
2) VAT rebate works like this. as payments are dispursed ot the supplier, receipts are issues. Once the item is exported, then the “exporter”
can make a claim for a VAT rebate. the rebate percentage will change based on teh category, however the rebate can only be claimed by a single party.
3) VAT rebates were reduced in 2006, and again this July. It is highly likely that VAT for many items will be taken out all together next year for many categories, and
as such, buyers need to begin factoring their costs without the rebate.

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One Response to “Securing Your Supply Chain in China – Part 2”

  1. Jeff says:

    May 29th, 2009 at 3:43 pm

    China firewall is lame, use water to put out the fire of the wall but how do you get over the wall? – use to bypass it. You can bypass China Great Firewall and access youtube, facebook, blogger and all other sites which are blocked.