Sourcing Working Group Meeting Go back »
-
Time2007-03-30 | 14:30
-
Venue:Sourcing Working Group Meeting
-
Address:8th Floor, Sofitel Galaxy
-
Fee:Members: 60 RMB |
Non Members: 150 RMB
Participants
To see the list of participants click here.
Agenda
1. Registration
2. Introduction (by the chairman)
3. Presentation on how to realize “Successful Sourcing Projects” in China (Mr. Toby Li, Bureau Veritas Shanghai)
4. Coffee break
5. Roundtable discussion
6. Outlook for April/May (Future organization and potential topics of the Working Group)
Discussion points
Introduction
The Business Manager announced that the current Chairman of the Working Group, Mr. Ender Erat, has to step down from his position and presented his successor – Ms. Stella Huang (Manager Supplier Development in International Purchasing Department at Jiangsu BS Home Appliances Sales Co., Ltd)
Ms. Stella Huang introduced herself as the new chairman of the working group. Ms. Huang also emphasized the general aim and idea of this Working Group, which is to work together and exchange information in order to face the typical challenges of sourcing in the PRC.
Presentation: “Successful Sourcing Projects in China”
Introduction
When observing the implementation of sourcing projects in the last decade some important global trends can be pointed out. Initially a bigger company always sourced all required preliminary products in-house, the whole production process was thus done inside the company.
Around 1990 bigger companies launched their first outsourcing projects, i.e. started buying preliminary products from the outside. They took the role of buyers, who would evaluate the market situation and choose among the available products.
This role changed at the beginning of the 21st century when they started viewing suppliers as trade partners with which one wants to establish a long-term cooperation. This way they were able to not only choose among the products a supplier would offer them, but also to make a supplier produce exactly what they needed. Thus we can say they converted into decision makers.
This change was mainly carried out because firms wanted to reduce the costs of production by outsourcing all production activities that could be performed cheaper outside the firm than inside. This attempt to reduce costs went even further and let to the annulment of the inventory policy used so far: instead of having a reserve of preliminary goods and production factors, one would try to synchronize the production and supply processes so that goods are delivered exactly at the time they are needed. This however requires a complex Supply Chain Management.
This change of attitude also had an impact on the firm’s planning: where there had been a product management (one first plans the product and then finds out, how/where the resources/preliminary products can be sourced), this soon changed into the supplier’s external resources management (the supply situation and the possibilities it provides is already taken into account when one starts considering which product to produce i.e. one might produce a certain good rather than another just because of the supply situation).
A more flexible planning also requires a better monitoring and possibly a quicker reaction. This was simplified by the abundant use of e-business and new means of communication and transport.
One always has to be aware that such planning does not only decrease the costs of production, but also increases the risk (trade off). A firm can however increase the security of its supply chain by better monitoring and by collecting reliable information concerning the future market development and the situation of its suppliers. All kind of certificates can be considered as such reliable information since they impartially verify that a supplier fulfils certain criteria.
Sourcing challenges
Since a flexible JIT planning entails a high risk one has to be very careful when establishing a supply chain. The money spent at this stage is actually an investment in the company’s future. The better the supply chain is planned, the lower is the risk for future production. Later costs caused by failure might be higher than what one has to spend initially to put up a secure supply chain.
The five criteria taken into account when searching for a supplier are quality, cost, delivery, service and social accountability. However, a buyer in China can often only get incomplete or uncertain information about a supplier.
If a product is not successful, this can actually be a product or production failure (doesn’t match with the customer’s expectations e.g. because of its design, material, handling), a distribution or delivery failure (e.g. because one aimed at the wrong market or the good is not in time/not in its required condition delivered to the customer) or a supplier system failure (the supplier is not able to deliver the required goods/ is not able to deliver them in time; the quality of the goods does not fulfil the expectations; environmental, health, safety standards and/or social standards are not followed as agreed).
Building up a secure and reliable supply chain is usually a difficult and complex venture. Additionally one can highlight some special challenges one has to face when sourcing a product in China. Firstly it might be difficult to identify a potential supplier. This is mainly caused by a lack of clear norms, standards or certificates. Secondly it is very hard to cooperate with local Chinese suppliers because of language and cultural barriers. Most local suppliers have no or not enough working experience with international firms and are thus not familiar with the processes and requirements. They tend to misunderstand international standards and specific requirements (they might not know about a certain certificate/ norm and thus make a wrong offer since they are not aware they don’t fulfil the criteria). Also Chinese people are used to a completely different business environment (where one relies rather on his guanxi than on a certificate) with which most westerners are not familiar.
Despite the challenges and the relatively high risk there are important incentives for one to launch a sourcing project in China. The top-management has to face a trade-off between cost reduction and political risks (internal, i.e. caused by a wrong decision and external i.e. caused by decisions of Chinese authorities). The executive management might benefit from such a project since it would provide the opportunity for travel and new experiences, but by realizing it they would possibly risk their relation to their current suppliers. In addition to that they might not be aware of the risks and difficulties they will face in the PRC as well as the language barrier.
Summing up all this, one can say that generally Chinese suppliers have not enough working experience with international firms. They fail to understand the processes/ requirements (e.g. they don’t know that it is quite usual if there are three years between a Quick scan and the actual order, so they wonder why they don’t hear from the buyer sooner) and tend to apply strategies they use on the Chinese market while dealing with them (e.g. their initial offer is too good and shall please the buyer but is not long-ranging). Those strategies are generally misunderstood by international enterprises and therefore the establishment of a long-term cooperation is difficult. Local suppliers do not make the attempt to enter the international market as long as they can still realize a sufficient profit on the local market.
Characteristics of Chinese suppliers
Besides the above mentioned lack of experience there are further characteristics of Chinese suppliers which make it difficult for international firms to deal with them. It might for instance be difficult to find out who is the actual decision maker when one approaches a supplier. In addition to that such key person on the Chinese side might not primarily realize the interest of his company, but try to get personal advantages himself. This forces the buyer to offer not only a good deal, but also special advantages or benefits to the key person in order to stay competitive. Furthermore the supplier might apply strategies he is usually using on the Chinese market, especially offer exceedingly high or low quotations. Not knowing the amount of a usual quote from the existing suppliers the international buyer is unable to choose among them and to calculate the costs of production in each case. Also the supplier might deliver a very good sample but fail to meet the requirements when it comes to mass production. In addition to that an international firm is likely to find out that the suppliers are more interested in acquiring knowledge about ones technology and ones product than in actual cooperation and that one needs to procure them with further incentives in order to increase their motivation for a long-term cooperation. However, in a lot of cases the buyer might also find out that there are only very few suppliers which are able to meet his requirements and therefore doesn’t really have a choice. In this case, it is even more crucial for him to be able to establish cooperation and overcome all the challenges mentioned above.
Role-play exercises
Mr. Toby Li conducted two role-play exercise where participants of the Working Group were divided into three groups – 2 buyers and 1 supplier which clearly pointed out that there are quite a lot of common interests between buyer and supplier. Cooperation is nonetheless a difficult venture firstly because of each side’s personal interest and secondly because of the difficult situation and the barriers it entails.
The business environment in China and Western countries is completely different which makes it difficult for westerners to deal with Chinese people and vice versa. In China work and personal relations are not parted. It is quite usual to also spend ones leisure time with business partners. Pleasure and entertainment is part of the work.
In Western countries work and private relations are strictly parted. The general rule is to never mix business with pleasure.
Searching for an explanation for this main difference one can point out that in all western countries there are a lot of standards, regulations and norms which define each person’s duties in cooperation.
In China this is not the case. Regulations and standards are inexistent or insufficient. Also their implementation is not strictly carried out. Therefore one is more likely to be cheated on in cooperation. In order to prevent this, everybody will at first establish a personal relationship with the person he wants to cooperate with (guanxi) so that he can trust him. One should aim to always be introduced in the social environment of his/her business partner, so that one can have a larger impact on his life in case that the supplier tries to cheat. The outcome of this is that in China most of the time questions concerning the concrete project are only discussed later on. The first aim is to establish a personal relationship and to gain the other person’s trust and estimation. This process is often misunderstood by foreigners.
The feedback showed that such role-plays might be even more beneficial than a round table discussion since everybody is automatically involved and has to participate.
The meeting ended with discussing the future agenda of the Working Group. Each of the three Groups suggested three topics that are of interest to them and they would like to discuss in future meetings of the Working Group.
The next meeting of the Sourcing Working Group will be held on May 11th (Friday).