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?