Benefits of Outsourcing Procurement

“Manufacturers that have outsourced procurement functions or processes reported strong returns on their efforts, such as the following:

• 14% average reduction per transaction in procurement transaction costs;

• 13% shorter procurement cycles;

• 13% reduction in number of suppliers;

• 12% improvement in order accuracy; and

• 11% improvement in process compliance.

For manufacturers that face cost-cutting and process improvement pressures, these are solid returns. However, some lag the returns that Best in Class enterprises say they have experienced. For instance, the Best in Class reported 19% reductions in sourcing cycles and in number of suppliers, and an average 17% drop in procurement transaction costs".

AberdeenGroup, ‘Manufacturers Target Direct Materials for Outsourcing’, Sector Insight, Global Supply Management , June 2006

Managed Procurement = Success

“The more a company can accomplish before a single hand starts processing a single physical good in China, the fewer surprises and delays will occur downstream. The procurement process of identifying, qualifying, and contracting with new manufacturing partners needs to be done thoroughly. This means it should be executed by people on the ground in China with the right expertise who understand both the local environment and a company’s specific supply chain requirements”.

AberdeenGroup © 2004.

How Companies Are Managing — and Improving — Their "Inbound from China" Supply Chains

The China Trade Management Strategies Benchmark Report

Supplier Management Vital

"Prospective manufacturing partners often do not have transparent quality programs, so on-site quality assessments are vital during the sourcing stage. Because manufacturing lines are highly manual and employee turnover is high, in-country factory management, continual training, and monitoring are important to maintain and improve quality levels over time".

AberdeenGroup © 2004.

How Companies Are Managing — and Improving — Their "Inbound from China" Supply Chains

The China Trade Management Strategies Benchmark Report

1. Orient yourself. China is the world’s third largest country. An ex-works unit price from a supplier in Inner Mongolia will look a lot less attractive by the time it reaches Australia. Look for suppliers close to transport links. The most advanced manufacturers are in the coastal provinces from Hebei in the frozen north near Beijing to Guangdong in the lush, sub-tropical south, but remember Sichuan province, too - western China is developing quickly.

2. Do your homework. Sifting quotes from 15-20 potential suppliers takes time, but it’s worth it. Weed out the outrageously expensive, and the too-good-to-be-true offers, before following up with phone calls and a visit. Politely reply to unsuitable suppliers that you hope the two of you can do business another time. Be super nice to the English-speaking sales managers. They will be your contact with senior management.

3. Visit the factory. We reckon seeing is believing. Before selecting the optimum supplier, pay a visit to the finalists in the quotation stakes. What to look for includes: Does the factory actually exist? Do they have the proper equipment to do the job? Are they currently exporting? Is the management investing in new technology or spending profits on cars and concubines? Are they likely to be easy to deal with over the timeframe of the project?

4. Be clear about what you want. Having your technical specifications and other requirements such as lead times and projected quantities in a presentable format will both speed up and smooth the entire project. Talking abstractly in English to a Chinese engineer whose grasp of your language is basic is frustrating for both parties, and opens up the potential for mistakes. The typical Chinese engineer, while certainly able to innovate, will be happier to be told exactly what you want achieved, and how to achieve it.

5. Present well. In many cases, the senior managers you will meet on your visit will speak no English. In the same way that you will instinctively judge them according to the way they dress, their tone of voice and general behaviour, so will they form an opinion on whether or not they want to do business with you. For most Australians, a slightly more formal and reserved manner seems to be appropriate. Offer your business card with both hands. Never bow – that’s for the Japanese.

6. Enjoy the banquet. This is where the initial business relationship can take a step towards becoming a trusting, workable relationship. It is also a useful venue for intelligence-gathering. New product innovations and industry gossip can be confided after a few toasts. Remember to raise your glass to the most senior Chinese representative first. If you don’t drink alcohol - say so. Your decision will be respected. And never falsely pretend you love that jellied pig’s trotter dish, as your delighted host will immediately refill your bowl. Chinese food is justly world-famous, but regional cooking varies enormously, and is not always to everyone’s taste. A polite refusal is fine.

7. Stay in constant contact during production. Be proactive in requesting updates on progress and troubleshooting problems before they can get out of control. If you can, get your own independent QC team to the factory. Remember that English is not the first language there, so keep emails short and to the point, or enlist the services of a Chinese-speaker to maintain good communication.

8. Why eight tips, not ten? Eight is a lucky number in Chinese. In spoken form it sounds like ‘prosperity’. On this topic it is worth noting that the Chinese are selling to us to make money. They are not fabricating, stamping or injection-moulding anything for their own amusement. Like us, they want to prosper, look after their families, and be able to put their feet up in comfort and safety at the end of a working day. Not mysterious. Not inscrutable. Approach Chinese business relationships in a spirit of goodwill and you will reap dividends over time – but do your homework first, be clear about what you expect and leave nothing to chance!