Preventing Unnecessary Delays in your China Supply Chain

Best Quality & Sourcing Articles

As usual, I kept a list of interesting articles to share with my readers. Here is the list for April and May.

Urgent Delivery Time Checklist

Jacob Yount wrote a list of questions that will guide an importer desiring to avoid unnecessary delays. For example, what are the steps to follow until production can start, what components/processes will be handled by third parties, how to keep some pressure on timing, etc.

7 Ways to Prevent Quality Issues & Scams When Buying from China

Fredrik Grönkvist summed up nicely what small buyers need to know as they import products from China. He insists on working with the right type of supplier, using samples to communicate about expected quality level, signing a formal agreement, inspecting quality and only after that paying the supplier in full, performing lab tests, and using the proper packaging.

Managing your sourcing in the Age of China’s Shrinking Factories

Over the past few years I noticed that a number of large factories, which used to employ 1,000+ workers and were supplying large big-box retailers, have lost significant business and only employ 100-200 people. I guess they grew too fast and couldn’t control their costs and quality, and in the end they simply couldn’t keep losing money on large contracts.

This article describes and discusses this micro-trend, and points to the risks it represents for importers.

A tightening grip

The Economist argues that “rising Chinese wages will only strengthen Asia’s hold on manufacturing”. The article discusses China moving up the value chain, progressively automating its factories, and unfavorable demographic trends. It forecasts a transfer of production to Southeast Asia, rather a “reshoring” movement back to Europe and North America.

Is the Reshoring of U.S. Manufacturing a Myth?

Over the past two years, journalists have been prompt to point to examples of re-shoring (production being brought back in North America or Europe, generally from China) and to predict a vast trend. New research shows this is not the case, and mentions other trends.

(On the same topic, you can read Onshoring Creates New Textile Jobs, but What About Apparel? — more centered on textile production.)

Getting Counterfeit Products Off China Websites: It’s Possible

Have you found your own product designs posted without your consent on alibaba.com, taobao.com, or other websites? Most of them have procedures to request those designs to be taken down. Dan Harris explains how lawyers can be involved if necessary.

How to protect shipments from moisture damage

This infographic explains how to reduce the risk of “container rain” or “cargo sweat” during seafreight.

3 Challenges Ahead for China Procurement Offices

The procurement offices (also called buying offices or sourcing offices) of medium to large size companies that import from China all seem to be under intense pressure. Many are restructuring, slimming down or on the contrary internalizing functions they had been subcontracting, changing their operating model, stretching geographically, and so on.

I observed three main challenges that I listed below.

1. Extreme pressure on costs

In many cases, to preserve the economic viability of the whole company, the total landed cost of goods MUST stop increasing. And who becomes in charge of reaching that goal? The purchasing staff.

I see three ways of keeping costs low:

Internally, by focusing on the procurement organization’s efficiency. Many companies adopt, or switch to a new, ERP system that promises to automate many repetitive tasks — not to mention, reduce the temptation for purchasers to get kickbacks on the side.

Externally, by switching to a different of way of working with suppliers, as I described here.

Overall, by looking at the entire supply chain and focusing on areas with large potential savings, as I explained here.

2. A need to explore other sourcing markets

A solution to reduce costs is to move production to other Asian countries like Vietnam or Indonesia. Some manufacturers are setting up operations there even though most sub-suppliers are in China. In some cases it can work out well.

For example, I know of a European manufacturer of home appliances that is seriously studying the option to move its operations from China to Vietnam in an effort to contain costs. The key for their success is to keep their dependence on China low when it comes to buying components. Their objective is to become more vertically integrated.

Another solution is “near sourcing”, i.e. Turkey, Romania, or Poland for Western Europe; Mexico and a few other Latin-American countries for North America. In most product categories I see those countries as the real competition to China.

The difficulty is, there is usually no equivalent to the Canton Fair in those countries. It takes time and efforts to find potential suppliers. And it is only the start…

3. Adapting to the “way of doing business” of those new sourcing markets

An executive working in the buying office of a large British retailer told me the culture shock was stronger when they opened their office in Poland than when they opened it in mainland China (after they had already operated an office in Hong Kong for a number of years).

The truth is, many “China buying types”, who are used to working with Chinese suppliers, are now having to change their assumptions and their habits. Here are a couple of examples:

  • When buying certain wood products in Europe, don’t try to agree on tolerances and AQL limits. Many producers will not even understand you.
  • When requesting lab testing certificates, make sure to communicate abundantly with those suppliers that are not located in Asia. They may not understand that requirement. In their minds it might not be compulsory.

What do you think? Do you see other challenges?

Review your Business Performance in the Market – Part 19

This is the final post in our series on the New Product Development process.

Let’s assume you have your new product selling and business is established. It is time to review how well you have done. How is your progress compared to the original business forecast? What are the areas for improvement?

Performance_review_iof_new_product

Why it’s vital to review the progress of your business

To start with, you will be focused on the task in hand from a day to day operational point of view (making sure the business is running smoothly). Once the business is up and running, however, it is prudent to spend a bit more time planning the long-term strategy of the business

This is the ideal time to review and compare the business strategy from when the product was launched against where the business is now. It is important to keep the strategic direction of the business aligned, not only with the core of the business, but also the current market trends.

Areas that should be considered when reviewing the progress of your business:

  • Is the business moving in the same or different direction to what you expected?
  • What do you need to do within the business to ensure you can get to where you want to be in the next three to five years?
  • Understanding of market trends and being able to adjust accordingly to maximize the business benefits (commercial exploitation).
  • Are there enough or the correct resources in place in order for the business to meet the targets set within the strategic plan?
  • What methods are being used to measure success, ensure the correct metrics are in place to allow you to monitor the performance of the business and make real time adjustments?

Review your financial status

You can be making a million dollars in revenue and still be losing money. Businesses all too often fail because of poor financial management and lack of planning.

The key elements to review with respect to your company’s financial well being are:

  • Cash flow – This represents all the cash coming in and all the cash going out. It is paramount that cash flow records are maintained and that you understand exactly where you are at any given moment in time.
  • Working capital – Monitor the amount of inventory you have. Having too much inventory ties up cash whereas having too little inventory and you are in danger of running out of stock. Both these scenarios have an impact on the business and need to be managed carefully.
  • Loans or credit – Make sure you have the most appropriate level of credit for your business. You should seek advice from a business accountant who would be able to advise you on what is best for your individual circumstances.

Competitor Analysis

Keeping an eye on your competitors is good practice from a business perspective. Understanding your competitors allows you to make smart decisions for the business, potentially allowing for new product development of a next generation product or to develop a brand new concept to be moved through the New Product Development (NPD) process.

  • Who are your main competitors?
  • Are they differentiating themselves in order to obtain great market percentage?
  • How do you rank from a pricing point of view amongst your competitors?
  • What are their sales distribution channels and how are they different to yours?
  • Is their customer profile different to yours and can you win some of the market share?

These days it is easy to find out what a competitor’s reputation is and how customers have found their experience in dealing with a company, especially with social media sites. That being said, it works just as well for the competition to check up on you and how your customers are rating their experience dealing with you…

Your Business Structure

You need to review the current business structure and understand if what you have now can support the growth of the business, once your new products are on the market. If the business growth is in line with forecasts set out in the strategic plan, is the current business structure flexible enough to support that growth?

Areas to consider when evaluating the business structure are:

1. Premises

  • Are you tied into any long term rent agreements or do you own the land?
  • Do you have the capability of expanding physical if needed?
  • What would the impact be if you had to move location?

2. Facilities

  • From a manufacturing point of view, is all the necessary equipment in place to handle a capacity increase?
  • Do you have a plan in place to cater for over-demand?
  • Is manufacturing optimized from a lean point of view?

3. Information Technology

  • Is the current IT system capable of the flexible demands it may encounter?
  • Is the current system up-to-date enough or does it require upgrades? If upgrades are required, what plans do you have in place for alternative system reviews and training?
  • Can all staff (those that require it) access the business information they require from anywhere in the world?

4. People and Skills

  • Is the staffing level adequate to fulfil the demands within the forecast?
  • Do employees have the correct skills to complete the desired outcome?
  • Make sure the HR plan is kept up-to-date yet flexible enough to adapt to demands.

(The source for most of the checkpoints listed above is “Review your business performance” on gov.uk/business).

Next Step

So now you have reviewed your business. You understand what you are doing and how you are achieving it, and what your plans are for growth over the coming years. You should be in a good situation to consider additional New Product Development projects in order to have new life injected into the business.

Commercialization of your New Product – Part 18

The commercialization stage of any New Product Development process is where the ‘rubber meets the road’ and the product you are manufacturing in China gets introduced into the market. This stage is actually the final stage of the development process.

Commercialization

Commercialization requires proper planning

Commercialization is broken into phases, from the initial introduction of the product through its mass production and adoption. Considerations should be made for production methods and volumes, what distributions channels will be used, what marketing techniques will be implemented, as well as reviewing the sales and customer support requirements.

It is not a case of just launching a product and hoping for the best. There has to be a structured plan — a strategy that has been clearly thought out and can be implemented in a controlled environment.

Commercialization strategy

1. What’s the offering? (What are you trying to provide or create?)

Provide a holistic overview statement which clearly states what your product is and what it does and the benefits of using the product from a consumer / customer point of view. You should also state what the pricing strategy is going to be for both distribution channels and the end-user.

2. How does the product align with your core business?

Understanding how closely the product being launched aligns to the business core can determine some of the strategic directions required for the commercialization plan. The closer to the core, the fewer new strategies are required as a lot of the infrastructure would be re-usable. The more diverse from your core the more work is involved in setting up the new infrastructure.

Chris Zook in ‘Beyond the Core’ addresses several things when looking at a product opportunity with respect to the commercialization plan:

A. Core – Known business strengths and competencies

B. Adjacency – Relationship to the Core ranked from 0 (identical to the core) to Diversification (a completely new area).

C. Shared Economics – There are five dimensions that when evaluated and measure the distance from the core and can be used to determine the degree of relationship to the core:

  1. Customers – Are they the same as, or different from, customers currently served?
  2. Competitors – Are they the same as, or different from, competitors currently encountered?
  3. Cost Structure – Is the cost structure (infrastructure) the same or different?
  4. Channels of distribution –Are these the same or different?
  5. Singular capability/technology – If there is a singular capability (brand, asset, technology) that gives the core business its uniqueness, then is this relevant in the new opportunity?

3. Identifying the target market / customers

From the test marketing carried out in the previous phase, you should have an initial target market and customer profile already identified within the strategic plan. Now it is time to scale up operations and start to capitalize on all the hard work and dedication that has been got the new product this far.

4. Business plan and forecast

Part of the business and commercialization plan is forecasting — generally looking ahead three years. The forecast generally includes most of the following elements:

  • Sales quantities
  • Gross Margin and Gross Margin as a percent of Sales
  • Operating Income and Operating Income as a percent of Sales
  • CAPEX – CApital EXpenditure
  • RONA – Return On Net Assets

5. Commercialization risks & issues

As with any risk analysis, you need to identify all the risks and potential issues that could affect the commercialization of your product. Once the risks have been written down, rate then from high to low and ensure you have risk mitigation actions in place to overcome the risks.

One method of generating a risk analysis plan is to follow the steps below (this is pretty close to a FMEA):

  • Risk Description:- Detailed description of the risk
  • Rank the Likelihood of the risk occurring: – How likely is the risk to occur?
  • Rank the impact of the risk occurring: – What will the impact be if the risk did occur??
  • Calculate risk value:- multiply the two values to get a risk value
  • Assess risk values:- Assess the risk values, good way of doing this is with a Pareto chart
  • Generate action plan for all critical risks:- Actions need to be generated that mitigate the risks as best can be
  • Re-evaluate risks after actions are in-place:- Re-evaluation will allow you to review and assess how successful the actions will be when implemented.

Here is an example (click on the image to see a larger version.)

Risk_Matrix

6. Don’t use a “Ready, Fire, Aim” commercialization strategy

To maximize your chances for success, you need to be thoughtful in developing the strategies behind your new products.  Innovations can happen in the commercialization of a product as easily as in the product itself.  Think about all the ways you can build upon and leverage your commercialization strategy and you might find your sales teams more engaged in the product launch, your customers understanding what’s in it for them, and ultimately your new product goals being achieved. (Source: Lowell Dye.)

What is the Real Total Cost of the Products you Buy in China?

For most importers, reducing the cost of the products they purchase in China means negotiating with suppliers and pushing them to accept lower margins.

Does it make sense? In many cases it certainly does. Some suppliers send quotations based on a very high margin — for molds or LEDs the markup is sometimes over 100%, even for high volumes!

In these cases, it makes sense to keep the supplier’s margin down to a reasonable percentage. The best to achieve this objective is to know your product’s normal price by getting a number of quotations from different suppliers (generally quotations from 10 different suppliers are sufficient to get a good idea of the “market price”), and by understanding the raw material costs.

However, cost reductions can also come from changes in your logistical setup, or from less expensive components/materials.

Optimizing logistics is not easy in China unless you have a foot in the country. But working on the components is often a source of great savings. Below is an interesting example about LED spotlight products.

LEDMost manufacturers of this type of product only do the assembly (simple operations; limited investment). Regular spotlights are mostly composed of drivers, PCB with leds, heat sinks, and a lens. Smart importers also want to source the components on behalf of the assembly factory when the final price (of the whole product) is not low enough. One brand (Cree) is often at half the price of other suppliers. Labels and CE-compliant drivers can also be sourced directly by the importer at competitive prices.

Altogether, in a project we recently worked on, the final price was reduced by over 30%, for the same quality and while complying with CE. That’s the power of applying the “total cost of ownership” approach!

In fact, factories often do a poor job of sourcing their components. In many cases they use traders/wholesalers and their relatives’ contacts to buy subassemblies and parts.

However, many Chinese suppliers are not ready to let you influence the Bill of Materials (BOM) or give you any type of transparency. They don’t feel comfortable with openbook contracts, since they are afraid the buyer will squeeze their margin. Once you agree with your supplier to work this way, though, you start to own your supply chain — you gain strong control over it.

I should mention that the supplier also benefits from the buyer’s sourcing efforts, since they can re-use the same component suppliers for their other orders (for other customers). Good suppliers will be appreciative and supportive.

To sum up, the “total cost of ownership” approach, combined value engineering, is usually where the highest cost-down potential resides. Make sure you get your supplier support for it.

For further reading: Where are Cost Reduction Opportunities?

What do you think?