How to find and manage suppliers in China by leveraging professionals!

How to vet your China supply chain partners

If you care about safe payments, price, quality and lead time, you must be proactive and ensure that you have the right team in place to oversee the supply chain and coordinate the vendors. But how to build and manage a team? What tasks could this team perform? Where should this team be based? And how much does it cost? Answers to these questions below…

Hiring a dedicated team to find and manage your suppliers in China

At the end of the day, buyers need to balance the costs of having the right supply chain management team vs the financial exposure to defects, late deliveries and supplier contract violations.

The safest but most expensive option is to build a team in-house to manage your global supply chain.  The most dangerous, but least expensive option is to hire freelancers in China. The middle option is to engage a sourcing agency.  Depending on the professionalism of the agency, engaging a sourcing agency can be an effective method to improve your sourcing program, or it can be a total waste of your time and money.

For your reference, in “How to vet your China supply chain partners” we cover how to find, manage and compensate professional agents.  But for the sake of this article, I’d like to talk about the options for hiring a dedicated team on the ground in China who answer to you, rather than the agent.

Here is an overview of the most typical tasks which can be assigned do this dedicated team:

Supplier Selection

  • General due diligence
  • Vendor assessment & auditing
  • Operational & financial due diligence
  • “All-in” Cost Modeling & Budgeting
  • Product Verification
  • Lab testing
  • Safety compliance
  • Environmental impact
  • Supplier Contract Creation, Review and Negotiation
  • Intellectual Property Planning & Registration

Purchase Order Coordination

  • Review of key documents (Invoices, PO, Service Agreements) for the order
  • On-going coordination between supplier and client to ensure delivery of desired products, units ordered, lead times, packing methods, etc.
  • Liaison with secondary vendors related to the PO such as client appointed raw material providers, printers & packaging providers
  • Payment tracking
  • Project management

Quality Assurance

  • Review and adjustment of factory’s internal quality control system
  • On-going collection and review of the factory’s internal quality control data generated during the production of the client’s PO
  • Organizing independent lab testing
  • Arranging 3rd party quality inspections on site at supplier’s production facility

Logistics

  • Cost analysis & contracting
  • Documentation review and coordination of shippers, and brokers in China and in the home market

Now that you have an idea of the tasks that need to be done, the next question becomes “who to hire to complete these mission critical steps?”  Here is a case study of an Italian buyer’s situation if you are considering hiring people in China and paying them direct from your accounts back home.

Be wary of who you hire!

manage suppliers in China by leveraging professionals

Technically, only a China based entity can hire a Chinese individual. Yes, you can hire independent contractors IF they have set themselves up as a registered business or are paying taxes on their income from overseas. Very few do. Since they didn’t have a formal contract in place, there was no labor contract in place in China and thus no formal “legal” employer to handle mandatory benefits like insurance or arrange payment of individual income tax. Doesn’t sound like a big deal as these are issues the “employee” should worry about. BUT here is what went wrong for an Italian company that hired a team of freelancers in China.

They had a falling out with the “employee” over some ethical issues (she was extorting funds from suppliers) and they terminated her contract. A few days later, a manager from the Italy office was in China on a business trip and the former “employee” caused all sorts of problems by turning the Italian in to the local labor bureau for breaking the law and hiring from abroad a Chinese individual. I know it sounds crazy as you would think the labor bureau would go after the Chinese individual instead.

Anyway, the foreign buyer spent days in the various government offices and was forced to leave China on short notice. Also placed on a blacklist and unable to return to China for 10 years.

Now the worst part. Later we learned that the so-called employee had set up her own hidden commission arrangements with the Italian buyer’s Chinese suppliers. Because the Italian company had no legally binding contract with “employee” their hands were tied despite clear evidence. The employee was blatantly skimming from the buyer, but there was nothing that could be done.

Avoid having a mess like this on your plate

1. Consider setting up your own legal office in China

Much easier now than before. Keep in mind that setting up in HK doesn’t solve any of the problems above if your “employee” is based in mainland China as PRC looks at HK as a special region outside of PRC.

2. Consider working with a reputable legally registered agency in China to do your project work

In the case of the sourcing agency- PassageMaker, if you already have some local freelancers on your team that  are really good, PassageMaker can formally hire them and manage the staffers in a professional setting. This gives your employee a formal place to legally be employed, plus you have legal recourse in the event things go very bad like the case above.

According to resent US census data, the average annual salary (exclusive of bonus and benefits) for a Purchasing Manager is USD 90,558. A US-based manager with even basic Asian language skills and Asian sourcing experience will command an even hirer salary.  Additionally, a team of managers and support staff will need to be hired, trained and supervised if there is a desire to have the in-house resources needed to manage an international supply chain.

Spending time in Asia at the factory is almost a pre-requisite for success, but the cost of sending staff to Asia on multiple business trips can be cost prohibitive. The figures above are for direct salary only. All in cost to the American company to hire staff in the USA is significantly higher after bonus, overheads, mandatory benefits and other in-direct costs are calculated.

According to recent PRC census data, the average base salary (exclusive of benefits) across all industries in the Guangdong providence is under 5000 RMB per month.  Even after adding bonus, mandatory benefits, dorm/housing and meal allowance, the direct labor is still under 15,000 USD per year.

That number may sound very attractive but know that the “average person” didn’t attend university, doesn’t speak English and has very little international trade experience.  A review of the internet job forums in China will show that a Chinese manager with a university degree and 5 years’ experience in general sourcing or trading can earn around 12,000 RMB per month in a major Chinese city.  Candidates with specialized skills can earn much more.

Even at around $30,000 a year for an experienced Sr. Chinese manager, the cost is still a fraction of the funds needed to engage professional staff in a developed economy like N. America, EU and Australia/NZ.

The advantages of outsourcing Supply Chain Management to a lower cost country is two-fold

  • Significantly reduced HR costs
  • Physical proximity to supply base

Almost all small-medium sized firms and even the majority of large buyers don’t actually set up their own office in China because hiring and managing a team in China is no easy task from a culture, administrative, legal, linguistic and economic point of view.

For those reasons, China-based agents are often engaged and there has been an explosion in the number of sourcing agencies in China over the past 10 year. Unfortunately, there is a lack of professionalism, transparency and experience among these China based agents.  Far too much overpromising and under-delivery.  These agents often receive hidden kickbacks from the factory. As a result, the so-called “buyer’s representative” is actually working for the factory!

 

2 replies
  1. Sami
    Sami says:

    Great Article! Just to let you know in this subsection “Consider working with a reputable legally registered agency in China to do your project work” In the second line of the the first paragraph I think you mean to write “Hire” and not “Higher”. Thanks for writing these articles. I definitely learning a lot.

    Reply
    • Pinky Morada
      Pinky Morada says:

      Thanks. I have not updated the article to fix the spelling error. BTW, last week we moved to a new server and launched the website. We are still diagnosing small glitches. I just wanted to write to you today to ask if the website worked well for you and if you were able to access everything you were looking for?

      Thanks for your feedback.

      Reply

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