Sourcing Savings in China

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As noted in yesterday’s post, foreign companies account for 58.3 percent of Chinese exports, and the flow of businesses setting up manufacturing or sourcing operations in China continues to expand as they seek cost savings in order to remains competitive. But, according to a report from McKinsey and the American Chamber of Commerce (via an article from the FT), these companies are not taking full advantage of the opportunity, and are only achieving about one quarter of the potential cost savings. Reasons included:

    • Under-use of China for sourcing (volumes could be trebled).
    • Lack of devolved decision-making powers to local management.
    • Shortage of good local sourcing personnel.
    • Poor handling of local suppliers.
    • Poor negotiation

McKinsey also noted that “foreign buyers [should] shift from ‘supplier management’ to ‘supplier development’…helping suppliers to perform better”.

Of course McKinsey is not the only big consultancy looking at this issue. AT Kearny’s “2004 Assessment of Excellence in Procurement” study adds the following:

    • 72 percent of companies will source from China by 2009, up from less than 30 percent in 1999.
    • Only 53 percent “have category strategies that indicate a clear understanding of the supply chain and logistics costs” in places like China.
    • Only 41 percent have made local language and other relevant skills a high priority for their sourcing people.
    • Only 39 percent “have formal plans in place to increase their supplier base from global sources”.

I have also written about these issues before, and pointed out the value of procurement audits (see here). Some of the problems that are often encountered when sourcing in China were outlined in that post, including:

    • Agents charge high commissions for poor services.
    • Buyers place orders with their favored suppliers in return for kickbacks. Anecdotal evidence suggests that illicit commissions can amount to 5%-10% of FOB prices.
    • Merchandisers become complacent and do not do their utmost to achieve the best cost price.
    • Contractual arrangements do not adequately protect buying organizations.

China does present a valuable sourcing opportunity, even for smaller companies, but the process needs to be put in place as part of a strategic plan, with adequate resources, and a full understanding of final costs (not just the quoted supply cost, but logistics, management etc.). Luckily the good people at McKinsey, AT Kearny and – of course – China Business Services, are there to assist!

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2 Responses to “Sourcing Savings in China”

  1. Razib Ahmed Says:

    I agree with this approach but the main problem is supplier development is a very long process. Many time it will happen that the value system of the suppliers of the country will not coincide with that of the company. This is really a big challenge.

  2. Jeremy Gordon Says:

    Very true. This is why we always advise that people do not try to do too much too quickly in China – and that they invest in understanding their partners and developing real relationships for long-term cooperation. Of course they also need monitoring and other systems to ensure that the interests of both parties remain aligned over time.

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