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Effectively manage a China supply chain by communicating clearly!

Managing a China supply chain 

As the China-based partner responsible for managing suppliers and supply chains on behalf of our clients, getting to the bottom of what is really going on at the factory is a key part of our job. It’s very common for suppliers to say one thing and mean another. 

Whether you outsource your China project to PassageMaker, or manage things on your own, here are some tips, tools and strategies learned the hard way during my past 20 years in Asia.

How PassageMaker gets to the truth when talking to suppliers

In the earlier article entitled “Tips for managing a supply chain in China: Secrets of the Gantt chart” we talked about the excess suppliers come up with when target dates and goals are not achieved. It can be hard to know if the excuse is real or just BS. So here are some tools we use at PassageMaker to learn what is really going on at the factory.

Soft questions to get suppliers talking

These are ideal to ask during a factory tour or at the dinner/lunch following the tour, to get the supplier talking. When they are comfortable and at ease, they may go off-script and give you some juicy information.

“What are your plans for the future?”  

Most factory staff are proud of their business and want to tell you all their hopes and aspirations. If they have their eyes set on becoming China’s #1 toilet brush maker and you are asking them for help with toothbrushes…you may have an issue.

“What are your biggest headaches?” 

You may hear about trouble with staff, or rolling black outs, or that their rent keeps going up or that they hate small orders…watch out if any of these issues impact you the buyer! This is a great question to ask because they simply don’t put this stuff in their websites or on their brochures!

How to ask the tough questions about ownership, size and scope of business

Managing a China supply chain with clear communication

It may be uncomfortable to ask for sensitive information like ownership papers, business licenses and client references. Certainly you don’t want to come across as being rude and letting the supplier feel they are guilty until proven innocent, but this is something you have to do to be safe!  

I have found that playing good-cop, bad-cop is an effective solution to this dilemma; usually by saying something like this:  

“Mr. Factory Manager, you run a nice shop and I am impressed with you and your team.  I want to go home and tell my team about what a great supplier you will be, but my boss is a real stickler for detail and he is making me fill out this check list. I could care less about the following, but under our company’s Standard Operating Procedure (SOP) for conducting a supplier audit, I need to get a copy of the following documents….thanks for your understanding and sorry to trouble you”.

If the supplier still tries to wiggle out of giving you the information, it should be a red flag. 

Why the supplier doesn’t want you to see their business license?

Perhaps the factory history, ownership, scope of business is very different from the story they have presented you. Here are the common excuses you will hear:

“Our business license is at another location.”

This is highly unlikely as all businesses in China are required by law to have their business license framed and posted on the wall or other highly visible place in the office.

“Our business license if getting updated and is not available now.”

Highly unlikely as to operate without a pre-approved business license is illegal.

“Here is the license of our parent company (in HK or Taiwan for example).”

This is not a PRC license.

Closing remarks about communications and managing China-based entities

In short, it is sad but true- in China, the wise business person assumes the worst until proven otherwise.  Ask the same question 10 different ways to ensure the answer comes back the same, if the item is important to you. It takes skill to learn how to interpret what is really going on at the factory.  Visit PassageMaker to learn how you can outsource the project management and supplier communications to our team in China.

I’m going to leave you with some more valuable resources to read up on should you want to dive in a little deeper:

How to manage a team to coordinate your supply chain in China

7 things to note when outsourcing supply chain management to China

How to take advantage of the RMB when buying from China

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

Tips for managing a China supply chain: Secrets of the Gantt chart

The secret to managing your China supply chain

As the China-based partner responsible for managing suppliers and supply chains on behalf of our clients, PassageMaker places great emphasis on fostering efficient communication and cooperation among our team, our clients and the suppliers.

Weather your outsource your China project to PassageMaker, or manage things on your own, here are some tips, tools and strategies learned the hard way during my past 20 years in Asia.

Tips for using Gantt charts when managing Chinese staff and factories

What’s a Gantt chart?

A Gantt chart is a type of bar chart, that helps managers and staff visualize the project gates and progress to date. It’s a slick way of keeping track of who is doing what when and why. Gantt charts were considered revolutionary when first introduced in Europe and American before World War I.

While they have been a common tool in the west for over a decade, in China you would be shocked at how many large famous suppliers don’t have a clue about how to use a Gantt chart.  So as buyers, sometimes we need to train our suppliers. Here are some tips. 

How PassageMaker uses Gantt charts to coordinate the supply chain in China

Tips for managing a China supply chain Secrets of the Gantt chart

I love Gantt charts and my Chinese suppliers are always happy to see a well laid out plan for getting the order out the door. The problem is not getting suppliers to commit to a time line and process flow, that’s easy, especially if a large PO hangs in the balance. The problem is getting suppliers to respect the Gantt and meet more than just the first few project gateways.

I don’t think this lack of respect is generation or cultural, I think it is more economical and dependent on the realities of the buyer-seller agreement. Let me illustrate my point by explaining two common headaches I run into in China.

1. The costs of raw materials go up and down, so the supplier tries to play the market and buy his raw materials at a lower cost. If the raw materials keep going up, the supplier may decide to break the contract rather than cut his margin or produce at a loss. As a Westerner used to dealing with Gantt charts and contracts back home that “mean something”, I was totally blown away by this casual attitude in China when I first came here 12 years ago.

These days when I place the PO or give a deposit to start the order, I make it real clear to the supplier that I expect him to purchase the raw materials ASAP and I have my team (or 3rd representatives) on site to verify materials have been purchased. In other words “I verify and enforce the Gantt myself at every key gateway” before it gets a chance to run too far off course.

2. You would think the above step would solve things, but….think again. Even after verifying the materials for my order were in the factory, now and again, I would get a call at the 11th hour stating the supplier couldn’t ship and usually some reason was made up like “power outage”, “lack of workers” and the most common fake reason- “equipment or tooling problems”. 9 out of 10 times, when I looked into it, I learned that another more important buyer (in the eyes of the factory) twisted the arm of the supplier to use my stock for their order.

If you are buying 10,000 neck ties and Wal-Mart walks in to your supplier with an order for 1 million, you may find the supplier ready and willing to break the terms of your agreement to make more money from somewhere else. That is why I try to find factories that are an appropriate size where my order will get the respect it deserves. Another tool I use is to build a “goodwill piggy bank”.

I try to maintain good relations through holiday greetings, frequent visits/ meals and even vacation invitations so that the suppliers get to know me as a good friend rather than just PO #. This goodwill has saved me a few times when my suppliers opted to honor the friendship when the contract alone would not have been persuasive enough.

Closing remarks about using Gantt charts and managing China-based entities

In short, a Gantt chart is an essential tool of project management. But it takes a project manager to enforce the tool and if the project managers don’t have goodwill or legitimate “carrot and stick” power over the supplier, even the best project manager and most detailed Gantt chart will not always lead to meeting targets for lead time(s), price and quality. Perhaps the most frustrating things about China sourcing is that the buyer (not the supplier) generally ends up doing the project management. This kills a lot of small projects when the buyer doesn’t have the resources or budget to manage the supplier. 

Visit PassageMaker to learn how you can outsource the project management to our team in China and let us build the Gantt charts (that’s the easy stuff) and motivate the suppliers (that’s the hard part!).

Learn how to manage manufacturing in China by fostering clear communications with your suppliers here!

How to manage a team to coordinate your China supply chain!

Boots on the ground

My sales team wanted me to answer the question with the recommendation “just outsource it to PassageMaker”. While our company would certainly be happy to provide this service, I hate blogs that are advertisements, so for this article I decided to offer a behind-the-scenes look at how to manage Chinese staff and a China supply chain.

Because many factories, even the large professional manufacturers in China, lack basic project management skills, the buyer ends up having to take point on building communications with the factory to ensure project goals for price, quality and lead time are achieved.

You may be surprised to learn that many factories simply don’t bother to update clients on project status, unless the clients ask. In China, no news is usually NOT good news. The last thing you want is to hear about a problem AFTER the ship date has been missed.

But there are tools and techniques to overcome the lack of project management at the factory side.  Here are some tips and skills to master:

Tip #1:

Consider having a member of your home office join the Project Management Institute. This site offers training materials and courses on professional project management. I have been a member for over 5 years and have encouraged my staff to get certified with PMI. It pays dividends for all involved.

Tip #2

While PMI is great for general project management, they don’t offer a course on China Project Management.  You can find this type of course at China Sourcing Academy and if you don’t want to learn the business on your own, you can always outsource supply chain management to an agent.  Regardless of which option you choose, here is more information on two essential skills that you and your team will need when managing projects in China:

Skill #1: Writing and enforcing specifications

As professional buyers we need to be picky with our China suppliers. But more importantly, we need to be professional in our ability to create a written standard for our expected quality. The best way to avoid defects is for the factory to have a crystal clear understanding in terms of what is your standard and how to inspect for that standard (including what tools and techniques are required).

This article explains how: ”How to clarify specifications and avoid surprises?

Skill #2:  How to meet or achieve target dates for critical project steps

How to manage a team to coordinate your China supply chain

After 20 years in China, here are the 4 most common reasons projects miss their target dates.

1. Incomplete Design Databases

This is the A-#1, super-duper granddaddy of all causes of delays. You really, really, REALLY need to have all the elements of the design finalized before going to production. Leaving even the smallest element of the design open to interpretation will lead to the supplier interpreting it in the way exactly opposite from what you wanted.

2. Payment delay

China is pretty close to a cash economy unless you are a buyer for a Fortune 500 company. All Purchase Orders (POs) will require a deposit, in most cases because the manufacturer is going to use that money to pay cash for the raw materials. Tooling is typically 30% At Time of Order (ATO), 40% at 1st article and 30% at final approval, before delivery. Production is most often 50% ATO and 50% At Time of Shipment (ATS), which means in practice, 100% is due before the product leaves the factory. All these terms are clearly communicated early in the project, but at least 80% of the time, there are delays from clients not paying in a timely fashion.

3. The uncommunicative buyer

It is not uncommon for projects to get caught in the doldrums and go nowhere for days, weeks, even months because the client is AWOL. It is very, very common to play “hurry up and wait”.

4. The buyer who’s in a hurry

While this might seem to be right attitude to keep things moving fast, the buyer who is in a hurry often places speed over accuracy. They want to cut corners, skip prototypes, skip writing a Product Quality Manual (PQM) or not bothering to proof-read the PQM, etc. Sometimes this works out, but not often. More commonly when you deviate from the normal project flow, you end up causing more delays.

Here’s more related content for you to read up on:

How to keep sourcing projects on schedule

Options for recruiting local staff in China and what tasks can be assigned to them.

How to select a professional agency for outsourced manpower

An expert view on how SMBs can set up a China supply chain

The first and probably most important step in setting up a China supply chain is finding the right supplier.  My sales team wanted me to answer the question “how to set up a supply chain” with the simple answer “outsource it to PassageMaker. ”  While our company would certainly be happy to provide this service, I hate blogs that are advertisements, so for this article I decided to offer a behind-the-scenes look at how professional sourcing agents find and validate factories on behalf of their clients.  I hope this article will help “buyers DIY Source” if your project is small and/or you don’t have the budget to hire professionals like PassageMaker.

Finding the right supplier

The problem isn’t finding “a supplier”, the challenge is to find the “right supplier” for your particular needs.  Here is how to do it:

Long before you start engaging potential suppliers to collect samples and ask for quotes, you need to do two very important things:

1) Make sure you know what you are looking for.  

If you have a rough idea on the back of a napkin, it is going to be very difficult to get accurate quotes.  A DFM package (design for manufacture) should be completed to define material specs, dimensions and other features of quality or function that are important for the particular product and its packaging.  (Feel free to contact the author if you would like introductions to design and engineering firms.)

2) Determine at which level of the distribution you should be sourcing.

If your orders are small, the MOQ  (minimum order quantity) will prevent you from going factory direct and you should be researching wholesalers and/or agents. If your orders are large, you will get the best price by going factory direct in most cases and you want to avoid the wholesales and other intermediaries. For the sake of this article, as most PassageMaker clients are large enough to create a factory direct relationship, when I talk about supplier selection, I am referring to finding the right factory as the term supplier is too wide (factory vs wholesaler vs retailer).

Finding the right factory

Making apples‐to‐apples comparisons of factories at a national level can be daunting. The following article is a behind the scenes look at a how PassageMaker assists its clients find vendors in China. This system outlined below is based on 20 years of experience in China and 1000’s of sourcing programs in 100s of production categories.  This research can also be used as tool for supporting negotiations with existing suppliers.

In addition to finding out the cost for a given widget in China, a professional sourcing feasibility study also covers:

  • Security assessment (how to avoid suppliers turning into competitors)
  • Door-to-door cost modeling. This includes shipping estimates, duties and Value Added Tax (VAT) analysis
  • Analysis and ranking of actual suppliers based on your price, quality, and lead time criteria
  • Contact details (phone, fax, email, and web site)
  • Business size, scope and production capabilities
  • Assessment of factory’s English language capability
  • Comparison of samples and production methods

This sourcing feasibility study / supplier identification research should have a clear methodology for defining, measuring & verifying the desired attributes of the ideal supplier.

Step One: Defining the ideal supplier

The “right supplier” is unique to each buyer. Force yourself to list all the desired attributes of the product and factory and rank them. Beyond the holy trinity of price/quality/lead-time also think of attributes like location (do they need to be near a certain port or in area where you have other vendors), Capacity, Service Attitude, Language, Intellectual Property, Warranty Terms, Factory Ownership, Equipment, Export Experience and so on.

PassageMaker uses a proprietary and customized attribute survey to transfer this information from buyer to research team.  Here is a snap shot of part of the attribute survey to give you a feel for the kind of information that should be transferred to the research team.

Attribute Survey

Step Two: Measuring the suppliers against each other

At PassageMaker a typical supplier identification research project for complex and customized products takes 30‐45 working days assuming multiple components and production methods need to be explored, at a national level. The process is as follows:

  • Initial research generates a list of 50‐100 potential suppliers using web directories like www.globalsources.com, www.tradesparq.com and other industry/trade show directories. PassageMaker’s Approved Vendor List (AVL) can be consulted to see if any known suppliers should be added to the list.
  • Review the 50‐100 candidates’ websites and brochures against client’s desired attribute list. But hold off on asking for price or even contacting the potential suppliers until the next step. If you start asking about price too early you will subconsciously gravitate to the vendors with the lowest price. That may or may not be the best overall option. And if you ask 50-100 suppliers for quotes, you will be overwhelmed. So it’s best to do the initial round of vetting with “desk research”, narrow it down to 5 to 15 qualified suppliers, then finally make “first contact in the follow ways:
  • Send an e‐mail or make a phone call to ask for initial product‐specific information (price, minimum order size, lead time).
  • Are samples available? If they don’t have samples readily available, they probably don’t deal in your product on a regular basis.
  • Granted the sales team will be the most polished in terms of English skills, but how is their understanding of your basic requests? If you ask for information on a red umbrella and get sent a sample of a blue shoe, you are going to have problems with communication down the road!
  • Confirm the actual production location and ask for ownership papers of the factory. Be explicit that the production location may be audited and that this location cannot be changed w/out approval of buyer. (You would be surprised at the number of middlemen who will take the buyer on a visit of a factory only to change the location to a less expensive and poorer quality option after the buyer leaves).

To help visualize how the suppliers stack up against each other, PassageMaker’s sourcing feasibility study incorporates charts like the following.

Map

Step Three: Verifying the top factories and picking the best supplier from short list

The above research should narrow the field down to 2 to 5 highly qualified candidates. At this stage, PassageMaker QC engineers and Sourcing Managers (joined by the client and technical auditors when needed) visit the factories in person to review quality systems, confirm production methods, negotiate pricing and look for any red flags. 

In other words, the buyer or buyer’s representatives should visit the production facility to confirm the information given during the initial research was accurate and truthful. This is an essential yet often overlooked step by those looking to cut corners during research. Unfortunately, due to the massive number of trading companies and aggressive China sales staff who will say almost anything to get your business, visiting the production line in person (or via your appointed representative) is the only way to confirm the real situation.

Based on the results of the factory visits, the next phase is sampling, trial order or even Purchase Order placement with the top vendor or two.

More tips for finding the right factory

The above process sounds easy enough, but if you don’t follow some simple tips, things can get messy.

  • Give the supplier your RFQ form to fill in which specifies the attributes you care about. That way all the suppliers are filling out the same form with the same fields. This will make it a lot easier for you to compare options.
  • For reference, also ask them to offer a quote in the standard format they use. If they don’t have a formal quote sheet, run away. That’s a red flag that they are not professional.
  • Be as specific as possible in the product description. Ask the supplier to quote to your spec. If they quote off-spec, ask them to explain in detail where their quote differs from your specs.
  • Assume the vendor is a middleman until proven otherwise, not the other way around.
  • Avoid factories that refuse to list the name or location of the production facility. If they only show a HK, Taiwan or other non‐PRC address, then they probably don’t own the PRC factory and are a middleman of some sort.
  • Focus on those factories that can clearly show production experience with your particular product or production method.
  • Be aware that polished English skills do not reflect production skills. Often the most polished websites are set up by trading companies.
  • Look for clear information about operation size, equipment and staffing.
  • Most important: Don’t be seduced by the siren’s song of low price. The lowest unit price can be the most expensive supplier after you factor in the cost of defects, missed deliveries and operations headaches!

Read more on avoiding middlemen in your supply chain here!

Avoid middlemen in your China supply chain and save on all fronts

There are good agents and bad ones. The good ones add legit value, the bad ones cause problems. For the sake of this article, a “bad middleman” or “under-performing agent” is an intermediary who provides little value (or sometimes negative value!) in the supply chain, perhaps only playing match maker but building in a margin.

Having an intermediary is not always a bad thing, but far too many middlemen actually provide negative value in the supply chain!  Because they don’t know their options, many importers are paying brokers, agents and middlemen a commission to actually mess up their China supply chain!

These bad brokers get paid to lose money for the client! The reason it happens so often is two-fold:

1. Sufficient research was not conducted by the client when selecting an agent to represent them in China. Essentially, they have picked the wrong partner.   It’s not fair to place all the blame on the buyer, as many of these agents have a very slick marketing message. Plus, most business people simply don’t have the in-house experience to know what questions to ask when engaging an agent on the other side of the world.  They don’t know how to separate the good agents from the bad one.

We’ll offer solutions in this blog post.

2. Agents have all sorts of tricks and techniques to lock the client in for the long term. So the client can’t leave, even if they want to. Here are three common examples:

a) Buyer doesn’t know the identity or location of the actual manufacturer. So they can’t go factory direct and cut out an under-performing agent.

b) Tooling and other upfront costs are paid by the client but the ownership of this tooling remains with the agent.  Bad idea!  You paid for it, but can’t move it if the agent messes up.

c) The agent will convince the client that problems with quality, lead time, price are the “client’s fault.” Because the client may not have experience dealing with China, the agent is able to convince the buyer that their expectations are unrealistic in China. When in reality, the root cause is actually the agent’s inability to get the job done in China. And that leads up to the next big question “why can’t these agents get the job done?”

Why do agents fail to improve costs, quality & lead times?

Here are the three most common traits found among buyer-agent relationships that have failed. 

1. Great marketing- Horrible service

If the client doesn’t have any China experience, then even an agent with just a tiny bit of China experience is going to look like an expert in the eyes of the client.  You shouldn’t put your agent up on a pedestal just because he was an exchange student in China for a few months! Just because your agent is Chinese or speaks Chinese, doesn’t mean they know how to manage people, projects or supply chains!

It’s so easy for startup agents to make a nice website, attend some trade shows and buy some Google adwords.  Marketing skills do not equate to sourcing skills!

2. Too much product knowledge – Too little sourcing skills

Buyer of technical, complex or customized products, often make the mistake of engaging agents based solely on their product knowledge. The result is that the representative on the ground is very familiar with the product but lacks the China-side understanding. This problem is particularly evident when the sourcing agent is a “one man band”. 

At the end of the day, it’s you, the agent’s client,  that has the deepest product knowledge. You may be in for a rude awakening if you are assuming an agent on the other side of the world knows your product and your customers as well as you do.  So I would encourage you to find an agent that has strong account management and customer service skills plus a clear track record of completing complex projects in China. Even if those projects have somewhat different BOM from your own.  

An agent can be trained up on a new product or technical feature in a short period of time. But it takes years to develop general sourcing skills in each of the key areas: negotiation, contract law, quality systems, project management, leadership, IP protection and especially language skills. 

3. Their interest is aligned with the factory not the client.

We will cover this problem in detail later in the blog post.

Are you really going factory direct?

Are you really going Factory Direct in China

You would be surprised at how many buyers think they have established a factory-direct relationship when in reality they are dealing with an intermediary.  Here are some tips and red flags regarding middlemen and how to spot them:

  • Assume they are middlemen until proven otherwise!
  • The most common spin you will hear from the western middlemen is that “they leverage their overall buying power to help you get the best price with the factories they have pre-qualified.” 99% of the time this is not true and is simply a slick sales message to make the buyer feel safe and keep you at arm’s length from the factory.
  • Chinese middlemen may even say that they “own the factory”, but when it comes to factory visits you hear excuses like “the power is off” or “let’s just meet at our HK sales office” in hopes you never get to see the production base.
  • Avoid suppliers that refuse to list the name or location of the production facility.
  • Be aware that polished English skills do not reflect manufacturing skills. Often the most polished websites are set up by trading companies.
  • Be aware that Chinese language skills do not necessarily reflect China sourcing skills. Just because somebody speaks Chinese, doesn’t mean they understand quality systems and know how to manage supply chains!
  • Ask for ownership papers of the agent. Do they have hidden partners with hidden agendas?
  • Be explicit that the production location may be audited by you in person and that this location cannot be changed without approval from buyer. Tricky middlemen will take the buyer on a visit to a nice factory only to change the location to a less expensive and poor quality option after the buyer leaves!
  • Most important: If the intermediary is not transparent in where their margin lies, then most likely the actual value  for their inspection or project management service has been greatly inflated. Before you sign up with an intermediary simply ask that they separate the costs for their “service” from the “production costs”. If they fight this, then you know they are trying to hide the fact that their actual value to you is minimal.

Hidden dangers of letting the agent introduce a supplier for free

Wake up. Nobody does anything for free. There is always a catch when a valuable service is provided for “free.” Here is an insider’s look at what is really happening behind the scenes.

1. Many agents claim to be independent, but behind the scenes they have close relationships with certain factories. Essentially they are the sales team for the factory rather than the buyer’s representative.

2. “You get what you pay for”. They don’t plan to conduct in-depth research on a national level. If someone is providing research for free, they may not be as conscientious about understanding your goals and helping to find the right supplier. Keep in mind that finding the right supplier is the single most important factor in determining if your project will succeed or fail.

3. In exchange for doing the supplier selection for free, they won’t disclose the identity of the factory and will build in a hidden mark up on the production.  If they do not disclose the actual manufacturer, then you have no way to validate the quality process in place and you have lost control over who has access to your intellectual property. They plan to cover the internal costs of the initial research by charging you an inflated per-unit cost once production starts. In the long run, the buyer pays too much.

In China quite often the “for free” model is the most expensive in the long run. 

“Can I trust the China sourcing agent if I am paying them a commission to represent me?”

Unfortunately, even if you pay a company in China to represent you, you can’t automatically assume they are looking out for your best interests. It is common in China for trading companies to milk both ends, in other words charge the buyer for a research fee or commission while getting a kick back or other commission from the supplier. Therefore, you must perform due diligence on your research partners as well. I know it sounds crazy, but in the China sourcing game, you need to do due diligence on the agents you are hiring to do due diligence on the suppliers!

How to find an honest and affordable buyer’s agent in China?

When considering an agent in China, make sure you ask about the following:

  • ownership
  • formal service agreement detailing compensation structure & services to be provided
  • client references
  • non-compete clauses
  • research methodology
  • full disclosure of sub-supplier pricing and identity
  • company history
  • warranty terms 
  • plan for protecting your intellectual property

Ideally they understand the importance of trust and transparency, so it’s absolutely clear where compensation comes from and that the agent’s interests are 100% aligned with the buyer. 

Conclusion

On the surface, in order to have more perceived value, the agent may claim an intimate relationship with the factory, but if they don’t allow you to communicate directly with the factory, then you are dealing  with a middleman. If the intermediary is providing legitimate value (for example logistics, project management and/or quality inspection) then perhaps there is a place for them in the supply chain. Perhaps I’m jaded after 20 years of doing business in China, but I assume the worst until proven otherwise when it comes to agents, brokers and middlemen.

Tips of the trade: How to vet your China supply chain partners?

How to find and manage suppliers in China by leveraging professionals

Finding trustworthy China supply chain partners

Sadly, in China, placing the purchase order to a factory is the start, not the end, of the vendor coordination process.  Unlike back home where you place an order to a domestic supplier and the supplier does the heavy lifting to ensure the shipment arrives on time at the agreed price and quality level; when sourcing from China, 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? And where should this team be based? And how much does it cost?

If you are in a high-wage area like US, EU or Australia, outsourcing supply chain management tasks makes strong economic sense when you consider that for the same budget as hiring just one US-based Purchasing Manager (90,558 USD is the average annual salary, exclusive of bonus and benefits) in your HQ you could engage an entire team of China-based sourcing professionals who speak the local language and understand the business culture.

Even if you are in a low-wage area, somebody needs to manage your supply chain and while the labor rates in China may be higher than in your home nation, if you don’t have the skill set in-house, it still makes economic sense to find partners on the ground in China to look after your project because a professionally managed supply chain drives costs down.
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.

As a rule of thumb, if you are spending more than 30 million USD per year in China, it may make sense to set up your own sourcing office in China.  If you are spending less than 30 million USD, the typical cost-benefit analysis almost always indicates that outsourcing the vendor coordination and supply chain management to a 3rd party (often called a sourcing agent or purchasing agent) makes more sense than setting up your own office and team in China.   But how to find this agent, what do they charge and can you trust them?

The single most important factor in determining the success or failure of your China sourcing program will be finding the right partners.  The goal of this blog post is to give the reader the tools needed to find and select an appropriate service provider to support their China sourcing projects…

As recently as ten years ago it was much harder to find professional China based firms providing support to foreign buyers. The situation has changed dramatically. Today it is no problem to find a list of potential service providers as there has been an explosion of service companies operating in China in recent years. However, making apples‑to‑apples comparisons of service providers in China can be daunting and it can be very difficult to pick the right service provider that is a good fit for your particular needs from a large group of options for the following reasons:

1. There is no entity at a national level in China such as the Better Business Bureau to regulate and monitor the service levels offered by firms in the PRC.

Tips of the trade How to vet your China supply chain partners

In other words, there is no code of ethics. You will encounter both Chinese and Foreign firms in China who exaggerate their capabilities. In short, there is a lot of over promising and under‑delivering. A nice website is no real indication of a firm’s professionalism.

2. In the past few years, China has seen a spike in the number of foreigners moving to China.

Many come as exchange students or English teachers. After a short period of time on the ground, their knowledge of the language and business culture (which is often quite limited in reality) is perceived to be substantial in the eyes of overseas buyers who themselves may have limited experience in China. In essence, it becomes a case of the blind leading the blind.

3. There is a massive population of ethnic Chinese living overseas.

While they may understand both Chinese and English for example, ethnicity alone is not a replacement for sound business experience. For example, it is not unheard of for Chinese exchange student in the USA to be tapped by local businesses to help with their Chinese sourcing projects. Pulling the top student from the Biology department and asking them to be your representative to Chinese suppliers is more times than not, a recipe for disaster.

4. Distance, time, language and culture create a lack of transparency.

Buyers may not know clearly what the consultant is doing and where the advisor’s compensation is taking place. Buyers need to be very concerned about the ʺdouble dip.ʺ It is not uncommon for agents engaged in China sourcing to charge the client a commission only to also have a hidden payment from the supplier behind the scenes. The result is that the agent works for the supplier when you think they are working for you. In short, as there is a lack of transparency in China business, it is essential to pick a service partner with high ethical standards and a proven track record.

Selection strategy

Engaging 3rd party support can be an effective method to improve your sourcing program, or it can be a total waste of your time. Here are some criteria to help you select effective service provider.

  •  Are they a legitimate company with proper business licensing?
  • Do they have a clear track record of performance? If they can’t give you some client references, run away. That is a very big red flag.
  • Do they have their own infrastructure or do they leverage another company’s staff, skills sets, office space, licensing and/or manufacturing?
  • Are they focused on a certain set of services or do they try to everything for everybody? Yes, even the 3rd party service providers have been known to outsource to others just like some factories outsource production without telling the buyer.
  • Is their pricing structure and service agreement well defined and transparent? It is a major pitfall to do business with a 3rd Party service provider without a clear contract in place that outlines the service, costs, time frame and other desired attributes of the partnership.

Conclusion

Looking at locally owned and multi‑national service providers as separate groups, you will find there some great companies and a whole lot of not‑so‑great companies among both groups operating in China. You would be doing yourself a disservice if you ignored one group to focus on the other. Instead, it is suggested that you look at all options and make an educated selection. Regardless of the nationality of the service provider’s ownership, you absolutely need to validate your assumptions if you believe the firm is a good fit for your requirements.

 

Father of the shipping container passes

Father of the shipping container passes

When I began this blog two years ago, my first post was about the passing of Norman Borlaug, the Father of the Green Revolution. Mr. Borlaug’s research created varieties of wheat, maize and rice that helped feed literally hundreds of millions of the world’s poorest people, including the pre-reform People’s Republic of China.

Mr. Borlaug’s inventions produced a great deal of good for the world – fewer starving children strikes me as quite good – but his detractors argued that cheap plentiful food was a bad thing. Too much food would lead to too many people, and Gaia must be saved. Their compassion only extended to mankind in the abstract. I guess some people are never happy.

Now today a coworker sends me a fascinating article on the passing of Keith Tantlinger, the inventor of the modern shipping container. While Malcom McLean usually gets most of the credit for moving the world to containerization, Mr. Tantlinger was the man who actually designed the containers themselves. If there is one item that made “Made in China” possible, the shipping container is it.

Here is his obituary and here’s the blog post sent by my coworker.

I don’t know if Mr. Tantlinger knew he was creating technology that would truly change the world, enabling the export led growth that allowed so much of Asia to crawl out of miserable poverty in such a short period of time. That change allows me and millions of other consumers around the developed world to enjoy inexpensive imported products that would be priced out of the market if they were Made in America. Indeed, many of these products would never have been brought to market, as the initial investment in tooling would have been prohibitively expensive. Anyone up for a $2500 iPhone?

I know what the pessimist side will say, international trade has cost American jobs. I can probably find a thousand economists on either side of this argument, but my first hand impression having done business in emerging markets like Mexico, Eastern Europe and China is this – economic growth is a good thing and not a zero sum game. The Czech Republic right after the fall of communism desperately needed economic growth to recover from the damage done by the previous regime. Should we have refused to trade with the Czechs? What would have happened had there been no blossoming of the export sector? I can’t think of any alternate scenario with a happy ending.

I could write for days on why American industry is or is not competitive or why you should or should not source in China. I will agree that there is always a cost to every transaction (there is a benefit too), and sometimes that cost is measured in manufacturing jobs lost to foreign competition. I will agree that “free trade” with China is a stacked deck. But billions of people are benefiting from global trade and the USA has seen its ship rise right along with everyone else. None of this would have happened without containerized freight.

So thank you Mr. Tantlinger, may you rest in peace. Those of us in the China supply chain management game wouldn’t be here without you.

Thoughts on China sourcing: Despair is a sin

Thoughts on China sourcing Despair is a sin

I don’t fit in well in my home town in America anymore. Oh, I was born and raised here, have friends here, go to the church where I was baptized, confirmed and married, but having been an expat, spending a couple months a year in China, having a workday that spans the globe, and making a living “taking American jobs overseas”, suffice it to say conversations are often awkward.

My view on China sourcing can be summed up thus:

  1. I might change things in the rulebook if it were up to me, but it’s not. The game is played by rules written by others, and until someone makes a change, the world is a global market and one man or one company cannot change the system by refusing to play. When I came back from my first experience living in Asia in 1994, I told everyone in our company that the “great sucking sound” from Mexico was not what we were really hearing. It was the tidal wave headed across the Pacific from China. I knew that our company was not going to stop that wave and we could either drown on the beach trying, or get a board and learn how to surf. PassageMaker’s services can be described many ways – China supply chain management, vendor coordination, China sourcing, China contract assembly, blah blah blah blah blah – but we are really surfing instructors for hire. It’s my job to keep you from drowning, not change the world.
  2. China moving from a desperately poor nation to a more prosperous one is a good thing. I would rather 1.3 billion Chinese people feed themselves than starve waiting for foreign aid. That doesn’t mean I’m in love with the government or that I think Chinese people are perfect or better than Americans. America’s problems are mostly our fault and entirely up to us to fix. The solutions are there, and most business owners I know, regardless of political affiliation, will prescribe the same solution – get the government out of the way and let me get to work. Nothing is accomplished by blaming others or giving up hope. To quote Jerry Pournelle:

Despair is a sin.

At the end of World War II, much of Germany was in ruins. Large parts of its infrastructure was attacked or bombed by the Allied Forces. The city of Dresden was completely destroyed. The population of Cologne had dropped from 750,000 to 32,000. The housing stock was reduced by 20%. Food production was half the level it was before the start of the war; industrial output was down by a third. Many of its men between the ages of 18 and 35, the demographic which could do the heavy lifting to literally rebuild the country, had been either killed or crippled.
During the war, Hitler had instituted food rations, limiting its civilian population to eat no more than 2,000 calories per day. After the war, the Allies continued this food rationing policy and limited the population to eat between 1,000-1,500 calories. Price controls on other goods and services led to shortages and a massive black market. Germany’s currency, the reichsmark, had become completely worthless, requiring its populace to resort to bartering for goods and services.
In short, Germany was a ruined state facing an incredibly bleak future. The country was occupied by four nations, and soon it would be divided into halves. The Eastern half became a socialist state, part of the Iron Curtain that was heavily influenced by Soviet policy. The Western half became a democracy. And caught in the middle was the former capital of Berlin, which was divided in two, eventually separated by what became known as the Berlin Wall.
But by 1989, when the Berlin Wall fell and Germany was once again reunited, it was the envy of most of the world. Germany had the third-biggest economy in the world, trailing only Japan and the United States in GDP.

Read more: http://www.investopedia.com/articles/economics/09/german-economic-miracle.asp#ixzz1YRwTIuT4

There is a way out of this Depression. Our lands do not lie in ruins. Our fields are not cratered from bombs and filled with mines. Many of our idle factories still exist. Wonderful machine tools and laboratory instruments are sold at scrap value on eBay and at public auction. There is lots of unused productivity in this land, and we know the formula for prosperity. It is liberty. That has always been the secret of American exceptionalism. We had founders whose goal was to insure the blessings of liberty for themselves and their posterity.

Freedom is not free. Free men are not equal. Equal men are not free. We have always known this. We know it still.

China sourcing is a tool businesses can employ to help make themselves more competitive. That doesn’t mean you should source in China. And that doesn’t mean it is the only way to compete. Blaming others solves nothing. Time to get to work.

Supply chain in China: From ‘just-in-time’ to ‘just-in-case?’

Supply chain in China: From 'just-in-time' to 'just-in-case?'

Glenn Reynolds, aka Instapundit, wrote a great op-ed piece in the Washington Examiner recently, on the impact the Japanese earthquake and tsunami are having on supply chains around the globe.

Quoting the Professor in full:

Japan’s earthquake/tsunami has occupied the news and also spurred a lot of thought. Among other things, it has underscored the fragile and interconnected nature of modern society, and caused some to question the wisdom of “just-in-time” manufacturing approaches in today’s unsettled world.Instead, it is suggested, we might want to focus on “just in case” approaches designed to be more resilient under stress.

Japan’s earthquake was in some ways a triumph of preparedness: Thanks to strict building codes, not a single building in Tokyo collapsed. But the earthquake, and the tsunami it produced, have had impacts that go well beyond the immediate.

In particular, the damage is exposing the extent to which modern supply-chain management has produced a system that is so lean it lacks the reserve capacity needed to cope with disasters.

In manufacturing, plants have been idled around the world because Japanese factories — or often, a single Japanese factory — serve as the sole source for a vital component. With the factories sidelined by damage or power outages, the components are unavailable, and production has to stop.

Ford Motor Company idled a plant in Belgium for five days over parts shortages; Toyota warned plants in the United States to be prepared to close for the same reason. A U.S. plant making car seats had to close because of a shortage of premium vinyl made only in Japan. Ford has suspended orders for some models in red and black because the paints come from a single factory in Japan, now closed. Tales like these abound.

Even the New York subway system is affected by the parts shortage: As National Public Radio’s “Marketplace” reported: “Steel from the north of Japan can’t get to Suzuki. Suzuki can’t make the parts for Hitachi. And Hitachi can’t send the parts to New York. The global supply chain breaks down with the removal of just one link.”

As Edward Tenner noted in the Atlantic: “The tsunami has exposed a weakness in global logistics long recognized in principle but disregarded in practice. Lean manufacturing plus heavy reliance on a single plant equals vulnerability to disruption.”

With managers under pressure to keep costs down, there has been a tendency to cut special deals with single suppliers, and to keep stocks of parts as low as possible. So long as everything goes smoothly, this saves money: Single suppliers give you the best price, and low inventories keep you from tying up working capital.

The problem is that we seem to be in a period where things aren’t going as smoothly as they did for a while. And when things don’t go smoothly, the lean approach means that it doesn’t take much to bring things to a halt.

I mentioned this to a friend who’s got a custom-car business, and he said his experience with disruptions in getting supplies from vendors has caused him to move from a “just-in-time” system to what he calls a “just in case” system, where stockpiles are bigger and alternative suppliers are identified in advance. I think we’ll be seeing a lot more of this, post-Japan.

But the problem goes well beyond cars and subways. Lots of more important systems are similarly vulnerable. My wife takes a heart-rhythm drug called Tikosyn; if she misses a dose, she could die.

Walgreen’s doesn’t want to keep it in stock, so they order a bottle by air-freight when her prescription is about to expire. Normally, that’s fine — but if something happened to interrupt shipping, she’d be in trouble.

She keeps a backup supply, but what would Walgreen’s do for others in a similar predicament? A few days of shipping problems and many pharmacies would be out of important drugs.

Likewise, grocery stores now keep only a small supply of food on hand, depending on regular deliveries for restocking. When those deliveries are interrupted, shelves start to empty pretty fast. (And government emergency food stockpiles are nothing like they were in the Cold War era).

Power plants used to keep a 60-day supply of coal in stock. Now they typically keep only 30 days’ worth. That saves utilities money but it means that there’s less margin if deliveries get interrupted. In the past, severe blizzards have left some utilities dangerously close to running out. Most cities have only a few days’ worth of gasoline.

We’ve come off a period of several decades in which weather was better than average, and in which other forms of societal disruption were fairly minor. The 21st century looks likely to be less placid.

As we make all sorts of plans, at the governmental, the business, or the personal level, it will pay to think more about the likelihood that things won’t go smoothly, and about ways we can prepare now to deal with the inevitable problems ahead.

A new subdiscipline called “resilience engineering” looks at how systems can be made more resistant to failure, and better able to recover when they do fail. That kind of thinking, it seems to me, is relevant to all of us, not just engineers.

The ride seems to be getting bumpier. In all sorts of areas, we need more of a cushion.

This advice is similar to advice I’ve been giving for years when it comes to a supply chain in China. Simply put, “your order will be late; plan accordingly”. When I was supplying parts to a large American motorcycle company, I knew that I had to buffer uncertainty with inventory. They often couldn’t give reliable forecasts (or I should say, their forecasts didn’t always filter through the other supply chain members reliably), so I had to keep weeks or months worth of product on the floor to compensate. And that was just the customer – the suppliers were a whole other ration of uncertainty. This is the dirty little secret of the JIT revolution – the inventory levels are often still there, just held by someone other than the OEM.

If you actually both to read past the first chapter in any book on JIT, you will see that stability is a prerequisite for a JIT system – stability in demand and in supply. The system can’t work in chaos. Most Chinese supply chains are far too chaotic to be part of a JIT system (for Apple this is not the case, but chances are if you are reading this blog, the rule applies).

I could go into the math of how to calculate an inventory level based on your target fulfillment goal, but suffice it to say, you are wise to keep some stock on hand. Much cheaper than airfreight.

As for single sourcing, some products don’t have the volume to have multiple sources, but whenever we have a client with substantial order quantities, I always recommend having at least two sources for each component. I also encourage clients to develop domestic sources to support 20% of the normal production, and make sure they have capacity to handle increased orders if there are problems with the Chinese suppliers.

So, when you come to China, do NOT expect to run the supply chain the way the new text books say. Go old school and put some fat in the system. Just in case.