Sourcing from China: PAIN or GAIN?

The path towards successful importing from China is surrounded with broken dreams, misplaced trust and suppliers with questionable integrity. Henry Ford rightly pointed out that coming together is a beginning; keeping together is progress; working together is a success. This same maxim applies aptly to sourcing products from China.
To be successful in sourcing from China, it is essential to have a strategy, collaboration and well-documented expectations. Success is not a destination but rather a journey. The journey of converting pain into gain is a long drawn-out process heavily dependent on trust, commitment and the integrity of both parties.

China is still a default supplier to the world

STATISTICS: On examining the numbers it is evident that China plays a dominant role in supplying a wide variety of merchandise globally. The total global merchandise in 2014 was US$18.494 trillion; China alone exported worldwide an estimated US$2.282 trillion in 2015 and this was down by 2.6% compared to 2014.[1] If we summarise these numbers based on estimated conversions, 13% of the world trade was exporting from China. This proves that China is still a default supplier to the world with Australia importing $52.0b[2] from China in 2014 – this contributed 21% to our total imports and $57.105b in 2014–2015.[3]

No Strategic Management of China Supply = FAILURE & PAIN

TRAPS: Some of the fundamental mistakes committed by importers include lack of strategy, research and benchmarking, and failing to set and achieve targeted product quality. When cost is the main driver of strategy, quality takes the back seat. Rick Frasch identified eight common mistakes that US companies make during the sourcing process from China;[4] these include:
1. Lack of a well-defined strategy
2. No well-defined standards for suppliers
3. Inadequate due diligence performed on suppliers
4. Lack of protection for payment and quality issues
5. No written contracts
6. Written contracts not reviewed by attorneys
7. Ignorance of the U.S. Foreign Corrupt Practices Act (FCPA)
8. Not having a Mandarin speaker on the team.

Manage Sourcing as a Core Competency = GAIN

PROCESS: Strategy is critical to sourcing with the first point to ponder is the make or buy decision; once that is addressed the second point to reckon is whether to source from a low-cost country (LCC) or a low-cost product (LCP). The third important point to be considered is the cost impact on all facets of the supply chain that delivers effective operating profit after the capital charge (OPACC).
Once the sourcing strategy is finalised, the second strategy that needs organisational attention is the core competency strategy. Core competency is described as “a harmonised combination of multiple resources and skills that distinguish a firm in the marketplace.[5]” Some organisations may not consider sourcing as a core competency and instead focus on managing KPIs instead of transactions.
The outsourced activities include the decision whether to source from LCC or LCP, managing cultural barriers – including working at the micro level, maintaining quality standards, and meeting the organisational goals with regard to cost, velocity and quality. China is considered as an LCC and Australia imports anything and everything.

China Sourcing Best Practice is Critical = GAIN
BEST PRACTICE: Best practice differs from insourcing and outsourcing from China. There are also differences related to complete goods sourcing and component sourcing. As outsourcing is out of context, the best practice discussed is insourcing practice.

Critical elements to be considered in sourcing from China include, but are not limited to:
• Product life cycle
• Timing of new product introduction
• Product cost to the market
• Inventory carrying costs
• Cultural issues
• Supplier’s integrity reflected in the quality
• Commitment to delivery time.

Sourcing from China does not mean there is no responsibility attached to the sourcing organisation. The onus is on the sourcing organisation in the form of due diligence in identifying the right supplier, negotiating a watertight contract with well-defined payment and delivery terms, owning the product quality before it is shipped and, last but not least, the collaboration with the supplier. It is also critical to develop a well-conceived exit strategy.

Conclusion

A 2010 survey conducted using case studies and the survey found that the total cost of sourcing from China is usually under-estimated in practice.[6] Sourcing from China will be a success story if importers follow a well-structured process and use a well-developed strategy with clarity about the outcome of the decision/strategy. This process will eliminate surprises and business risks. To summarise, if the quality, supplier relationships and cultural issues are well addressed, then sourcing can be a success story rather than a painful process often ending with bitter experience and negative financial impact.

References:
[1] WTO – International Trade Statistics 2014
[2] Australian Bureau of Statistics
[3] Department of Foreign Affairs and Trade – https://dfat.gov.au/trade/resources/Documents/chin.pdf
[4] 8 Common Mistakes U.S. Companies Make When Sourcing Goods and Suppliers In China – Forbes
[5] Concept in management theory introduced by C. K. Prahalad and Gary Hamel
[6] The total cost of sourcing from China by K.W. Platts and N. Song University of Cambridge, Cambridge, UK

Source: https://cheezburger.com