By Mike Bellamy
Finding trustworthy and vetting 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.
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.
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 in vetting China supply chain partners and selecting 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.
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.
The post is originally written by Mike Bellamy of PassageMaker Solutions. It is featured here as part of Smart China Sourcing’s promotion of China Sourcing Academy’s courses. Check out their courses here.