Over the past 15 years, foreign buyers of Chinese goods have developed direct relationships with manufacturers. Many of them have tried to bypass Hong Kong trading firms and Chinese “import & export companies”, in search of lower prices and greater control.
The trend, overall, has been toward direct sourcing. In the process, some large importers have set up their local offices in China. These offices are often in charge of everything, from finding suppliers to following orders and controlling quality.
Over the past couple years, though, many have been wondering whether this process was starting to reverse. Sourcing companies, also called “contract manufacturers” because they don’t own factories, have started to gain business at the expense of local buying offices. For example, Li & Fung acquired the sourcing division of Tommy Hilfiger in 2007 and that of Liz Claiborne last year.
What were the motives behind these moves?
Some brands are more comfortable managing design and merchandising activities, and leaving actual production to specialists. The objectives are higher efficiency and better focus. This is not only true in the apparel industry–see how BMW has outsourced some of its production to Magna Steyr.
It seemed like Wal-Mart, which is probably the largest purchaser of Chinese goods, was following this trend. In October 2008 they laid off about 180 employees in their local offices and outsourced quality control. And the amount of products it buys from China has been slightly declining in relative value over the past few years. This means it has been buying Chinese goods indirectly, through American importers that place orders specifically for Wal-Mart and organize freight and warehousing into the US.
But last week Wal-Mart announced a move to buy 80% of its private label products directly from manufacturers, up from 20% currently:
Eduardo Castro-Wright, the head of Walmart’s US stores, has said that the retailer sees the opportunity to consolidate global sourcing as “a major source of leverage for the company in years to come”.
With annual sales of more than $400bn, Walmart is famously tough in negotiating with its suppliers, exploiting the scale of its buying to gain discounts. It spends about $100bn on purchasing private label products such as its Faded Glory and George brand clothing, or its Great Value food and home products. But it acquires less than a fifth of these goods directly from the manufacturers, and has generally made its purchases on a country-by-country basis.
Mr Castro-Wright has estimated that shifting to direct purchasing could reduce costs by 5-15 per cent across the supply chain within five years – suggesting potential savings of $4bn-$12bn if the retailer were to meet its long-term goal of shifting to sourcing about 80 per cent of purchases directly.
The article does not mention much about China, but this seems to be a global initiative. It will have a major impact on the intermediaries that depended on Wal-Mart for most of their business.
So, is there really a trend that everybody follows?
I don’t think so. It seems like we can distinguish 2 models:
- Brandname companies that are very focused on design and marketing are probably better off relying on sourcing firms for managing production.
- Multiproduct retailers (e.g. general supermarket chains such as Wal-Mart or Carrefour) should try to control their supply chain and squeeze inefficiencies out.
And what about quality control? Specialized sourcing firms usually have their own QC department for factory audits and product inspections, and they rely on third-party providers mostly for laboratory tests. On the other hand, supermarket chains tend to rely more on QC firms–at least for their inspections and lab tests.