Developing A Reliable Chinese Supplier

DEVELOPING A RELIABLE CHINESE SUPPLIER FOR SME BUSINESSES

Authored by: Benjamin A. ShobertDirect: 317-777-2926

Email: [email protected]

FRAMIN

G EXPECTATIO

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Major Touchstones

• How to prospect for potential Chinese vendors.• Building a relationship … “guanxi”.• Maintaining product quality standards.• Learning to think like your Chinese vendor.• Common pitfalls.• Best Practices - the differences between “good”, “better” and “best”.

HOW TO PROSPECT

WH

ERE DO

I LOO

K? HO

W D

O I G

ET STARTED?

How to Prospect for Potential Vendors

• In the 90’s, the most common way companies found a vendor was at a trade show … as a matter of fact, a lot of JV partners were first vetted at trade shows (for good and for bad).

• The advantage to a trade-show meeting is that you can prospect in person, in large quantities, with minimal cost.• Just don’t equate this first face-to-face with a factory visit. • A lot of Chinese companies will exhibit product they have either only prototyped or may not

even yet be able to manufacture. • The disadvantage to a trade-show meeting is that you can not necessarily distinguish between a

manufacturer and a trading house.• From the mid-90’s to early ‘00’s, trading houses grew in their popularity.

• Many times these were Hong Kong based companies who acted as an intermediary for a Western company.

• The trading house would offer on-the-ground support ranging from supplier identification, to translation services, to quality audits, to financing transactions.

• This model has become strained with the advent of Alibaba.Com and GlobalSources.com as well as the growth of certified 3rd party inspection services such as AsiaInspection.com and KRT Asia Inspect.

• Successful trading houses today are sector-specific (i.e. injection molding tools for automotive or precision aluminum castings).

•From the early ‘00’s to now, the role of Alibaba.Com and GlobalSources.com has expanded enormously, offering Westerners an easy information-gathering vehicle for identifying potential vendors.

• However, these sources should be viewed as helpful only in the most general sense – they allow you to fill your pipeline with prospective vendors.

• The ability and need to qualify these vendors against your company’s individual sourcing requirements remains difficult to do using only on-line resources.

STEP 1: BUILD

YOU

R PIPELINE

The objective in step 1 is only to build your pipeline – it’s time consuming, involves a lot of dead ends, and can be very frustrating. But if you do it right, you’ll only have to do it once.

• This is less hunting w/ a rifle and more flushing birds w/ a shotgun.• You want to be specific as to the product you are searching for.

• The more specific the better (i.e. toothbrush is good, toothbrush w/ TRP over-molding is better).• You want to pick the right product to start working on.

• Two schools of thought:• Option 1: Needs to be high enough in volume to justify the time and expense.• Option 2: Pick something small, get a victory, internalize, move on.• My opinion: this is a highly cultural determination you have to make based on your management

and level of comfort. Neither is bad, but Option 2 can take longer to generate the underlying ROI necessary to drive the program forward.

• Avoid products where you know you have had problems (i.e. a difficult quality spec, tolerance issues, past supply chain disruptions).

• At this point, do not worry about location.• Be open to locations outside of China. • Many high labor content, low value added manufacturers have either moved in-land away from the

Chinese eastern seaboard or have opened factories in places like Vietnam, Bangladesh and Indonesia. • Immediately eliminate anyone who has “Trading House” or something similar in their title.

• They may be perfectly reputable as business entities (although they tend to represent a disproportionate amount of the fraudulent activity @ Alibaba in particular); however,

• Your objective is to get as close to the manufacturer as possible. • Doing so maximizes your supply chain elasticity (ability to respond quickly to changes in demand) and

maximizes your cost savings (you do not have to account for the trading partner’s margin).


STEP 1: BUILD

YOU

R PIPELINE


• Should I ask for samples?• Feel free to; however,• Take what you get w/ a grain of sand.• It may – or may not – be something they made themselves.• It may – or may not – be something they had their equipment vendor make for them.• It may – or may not – be representative of their production quality.• It may – or may not – be something they aren’t supposed to be showing you.

• At this point, it’s better to ask questions that help you understand their manufacturing infrastructure.• Good questions are:

• Can you send me a PowerPoint of w/ pictures of your factory?• Can you send me a list of your production equipment?• Can you tell me more about the processes you have at your site?• How many employees do you have working here?• What sort of design capabilities do you have in-house? • Where is your tooling made?• What are your largest export markets?

• For most companies, as you get closer to your supply chain, you will learn to ask more specific questions about the sort of manufacturing infrastructure necessary to make your products; that may take a little bit of time, but the objective should be not to ask only about their product capabilities, but their manufacturing asset base.

•What about asking for customers?• You can, although in a highly commoditized industry, you are likely to find that most vendors have done business

w/ most exporters. You will get a better sense of their customer base – who drives their business – when (if) you visit their factory.

• It’s also too easy for them to “fudge” what it means to have Company X as a customer.• You can ask about ownership.

• This can be sensitive, but many western companies find that – in particular – Taiwanese owned businesses operating in mainland China are easier to deal with and require less time to manage long-term.

STEP 2: QU

ALIFY VEND

ORS


• At the end of Step 1, a picture should start to coalesce: • Geography – are the vendors concentrated around a particular region?• Capabilities – what sort of machine capabilities do these vendors have?

• Don’t be overwhelmed at this – it will be pretty obvious once the information starts to come in who is credible and who is not as well as who has the best manufacturing infrastructure.

• You may find that 50% of the companies you reach out to are not able to populate a list of equipment or present you with an overview presentation.

• Products – who easily pointed you towards either a close enough or exact match to what you are looking to source?

• Communication – which businesses have been the easiest to communicate with? • In China, the best part of most businesses is their export department. If your

experience working w/ them in the first stages is bad, you are not going to have a good experience if you advance them to the next stage.

• In almost every case, at this stage, the list will pretty obviously narrow down to between 3-5 potential vendors.

• Occasionally in highly competitive “me-too” industries, this number may double; however, most companies are surprised at how asking the right questions initially serves to help them discern who is a good candidate and who is not.

• And this is when you will make one of the most important determinations in this process:• How am I going to qualify these vendors?

STEP 2: QU

ALIFY VEND

ORS

How Am I Going to Qualify These Vendors?

Companies who make the decision to put eyes on the vendors who make it to Step 2 are never sorry they invested the time and money to do so.

Companies who decide to “cut steel” or “release a trial order” without having seen the bones of their proposed manufacturing partners many times come to regret not

having made the investment up-front to visit.

For the latter group of firms, many times they end up spending un-necessary capital to develop parallel supply chains, encounter remedial quality problems, or simply do

not benefit as much as they could have in terms of savings if they had visited.

This visit is also valuable relationship building, a key component to which we will talk about in more detail later.

Ideally this is something we do together; but it does not have to be.

STEP 3: PICKING

THE RIG

HT PARTN

ERWhat am I looking for?

• During a visit, the sort of things you are looking for would include:• Equipment: age, maintenance, country of origin, capabilities.• Facilities: independent power grid, clean, well-organized, assembly capabilities, work-

flow.• Quality Control: job boards, inspection tables, SPC, ISO.• Engineering: what CAD / FEA capabilities do they have in-house? • Tooling: can they modify (dial-in) new tools themselves, or do they have to send out? • Inventory: how much, what kind, where is it going (region) and who is going to

(customer)?• Capacity: shift schedule, current capacity, seasonal bottlenecks, ability to respond to

opportunity.• Midnight Manufacturing: are products being manufactured under license? • Labor: acceptable working conditions?

• You will leave with a very precise understanding of what they are actually capable of manufacturing.• At this point, more than likely you will be down to 1-3 potential vendors. • It is then, and only then, that I would have them quote on anything. • And, it is then I would ask for references (ideally in your export market).

BUILDING A RELATIONSHIP … “GUANXI”

BUILD

ING

GU

ANXI

Relationships

• Westerners new to China tend to blow off the importance of guanxi.

• Guanxi is all about relationships: who has it, who doesn’t, what you can get if you do, what you won’t get if you don’t.

• It matters when you need to …

• Get that last 5% price concession out of the vendor.• Have them pull labor away from one customer’s job to finish your rush job.• Extend terms when you need to modify cash flow. • Hold them accountable to an agreement.

• You get it in two ways: face-to-face meetings and the length of time you do business together.

• Consequently, since the latter is entirely new and thereby of little help in the short-term, the face-to-face meeting is important.

• For a growing organization w/ limited managerial bandwidth, it is common to split this into two parts:

• Part 1 – visit via BAS.• Part 2 – visit via manager / business point of contact.• This approach also minimizes the out of pocket concerns common to the time investment for a China

trip. Split into two parts it also ensures management’s time is focused on the best supplier candidates.

MAINTAINING PRODUCT QUALITY STANDARDS

ANTICIPATIN

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PREVENTIN

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UALITY PRO

BLEMS

Maintaining Quality Standards

Unfortunately, part of the “China” brand is quality problems.Some companies anticipate this and prepare systems to catch the inevitable problems.

Other companies establish the bare minimum standards and react once a problem occurs.You’ll never make this problem go away, but you can pre-empt its impact to your business.

What sort of problems should you anticipate?

• Most Common:

• Spec creep – the gradual & deliberate testing of what you will accept. • Preventing this from happening requires a combination of:

• Proper documentation (material specs, drawings, 3D model, etc.).• Translated prints, material specs, inspection sheets, etc.• Ideally, job boards w/ “go” / “no-go” samples attached.• Approved first article that you retain ownership of.• Random first article tests for new (repeat) orders of existing SKUs. • 3rd party inspections (inexpensive & good insurance).

LEARNING TO THINK LIKE YOUR CHINESE VENDOR

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Learning to Think Like the Chinese

• You may be asking yourself two things by now:• “Is all this work really worth it?” and …• “Why do the Chinese do this?”

• Yes – it is worth it; but, • No – it is not worth it if you do not put the up-front work into vetting and developing a vendor.• Why do the Chinese do this?

• A cultural & historical drive to please, in particular those in positions of authority.

• Admitting you do not know how to do something or are not clear about something is a loss of face.

• Cutting corners was a matter of survival. • Testing limits allowed them to eek out a

living in the midst of famines and political turmoil.

• But the best and most practical way to avoid these problems is this …•Learn when to ask leading versus specific questions.

• Bad question: do you have a 350T injection molding machine?

• Good question: what is the maximum tonnage injection molding machine you have?

THE FIFTH

SHIPM

ENT FO

LLY

IT’S YOU

R BRAND

BEFORE IT’S TH

EIR PROD

UCT

Blaming the Wrong People

Most Americans remember the lead-paint problem Mattel experienced with their Hot Wheels toys made in China.

But, most Americans had tuned out of the story by the time the Mattel CEO issued a formal apology to China.

Why?

Not just because Mattel needs China – although that is certainly the case. Mattel apologized because they had missed two of the

most basic quality control issues that can happen with a cast metal car which effect consumers.

First, the wheels can come off and become a choking hazard.

Second, the paint can have lead in it.

Before any of Mattel’s vendors made a Hot Wheel, Mattel knew what the most common quality problems were, and they were not

checking to make sure their Chinese vendors did not push the envelope.

Mattel did not cause the problem, but Mattel forgot that before a Hot Wheel was their Chinese vendor’s product, it was Mattel’s

brand.

If they had remembered that, they would have been much more aggressive about pre-empting these sort of quality problems.

COMMON PITFALLS

MAXIM

IZING

YOU

R OPPO

RTUN

ITIES FOR SU

CCESSCommon Pitfalls

• “Hope To” versus “Can Do”• The desire to please and the drive to grow their business can be a bad combination

when you need someone capable today of meeting your expectations.• Quality Problems

• You have a lot of control over this, but it requires a little more up-front time and cost.• It also requires internal processes for how vendors are managed and audited.

• Intellectual Property• Very much an ongoing problem in China.• Midnight manufacturing can be at your expense (they make your licensed product for

someone they are not supposed to), or to your benefit (they offer to make you something they should not, or they sell you something that is covered by a pre-existing license).

• Tooling Ownership• Supply contracts need to specify who owns tooling in event you terminate business

relationship with them. • Again, this is why the up-front vetting is so important – these problems can be

minimized by due-diligence.• This is always difficult to execute on, and requires a willingness to litigate. • Tends to be an issue for projects with expensive tooling or where ownership of the

tools introduces the possibility they could compete with you (or sell to your competition).

BEST PRACTICES

FIND

ING

THE RIG

HT FIT

Good / Better / Best

It is important to determine what your business needs in these areas – what is enough to protect your interests, and what is overkill (in these areas, overkill equals overhead and un-necessary cost).

• Detailed Product Specifications• Good: an approved first article.• Better: an approved first article + product specs w/ quality documentation.• Best: an approved first article + product specs w/ quality documentation + on-site job boards.

• Building the Relationship … the “guanxi”. • Good: meeting at an exhibition. • Better: meeting at an exhibition + 1 solid face-2-face.• Best: meeting at an exhibition + 1 solid face-2-face + production visit(s).

• Inspection• Good: they ship you a first article prior to production run first time only.• Better: they ship you a first article prior to production run first time only + every production run.• Best: they ship you a first article prior to production run first time only + every production run + 3rd party.

• Supply Contract• Good: a relationship.• Better: a relationship + a supply contract in English.• Best: a relationship + a supply contract in English + a supply contract in Mandarin.

• Other examples of these determinations include executing a Non-Disclosure Agreement (NDA), whether you should develop a parallel supply chain, and how frequently you should pay for 3rd party inspection.

FIND

ING

THE RIG

HT FIT

The Interplay between what is best and what is necessary …

The best practices need to be the right fit for your business’ DNA.

A combination of “good” in one category and “better” in another and possibly “best” in none is likely to make the most sense.

You need to identify what drives your business, what the major bottlenecks are in meeting your supply chain’s needs, and then piece together the right fit.

However, a couple of key pieces to the puzzle will always be:

1. You’ll never regret spending time and money on early-stage missionary activity and relationship building. View it as future cost savings – later on, costs could come in the form of

supply chain problems (quality, delivery, T&C, etc.).

2. Don’t under-estimate the power of personal relationships for problem resolution and negotiating.

CON

TACT INFO

RMATIO

NContact the Author

Benjamin A. ShobertPhone: 317-777-2926Skype: ben_shobert

Email: [email protected]

Ben is a member of the National Committee on US-China Relations and holds an advisory board seat at Indiana University’s Research Center on Chinese Politics and Business. He is a columnist for the Asia Times on US-China trade and economic policy matters, with a particular focus on how relations between the two countries are being impacted post the 2008 financial crisis.

Ben has successfully managed supply chain projects in China across a number of industries, ranging from consumer goods to more complex engineered products. Regardless of whether the program must meet the needs of an American SME or a Fortune 500 company, Ben brings a practical focus to making your China supply chain as cost-effective and responsive as possible.

He holds his MBA from Duke University in Raleigh, North Carolina.

mailto:[email protected]