A few days ago I had a good discussion with Jeremy Gordon, director of China Business Services, about supplier due diligence.
We both agreed that due diligence is necessary, but not sufficient.
1. Due diligence, before working with a new supplier
Conducting due diligence on a potential supplier consists of several steps:
- Background checks – the idea is to confirm the company’s track record, but also to ensure they are not close to bankruptcy.
- Factory audits – this tool gives a good idea of a factory’s capacity, processes, and quality system, among others.
- Discussion and signature of a contract
- Starting small and ramping up gradually
- An on-boarding service to make sure the quality standard is well understood by the key people at the manufacturer
I don’t think any buyer would argue that due diligence is not necessary.
Unfortunately, things change very fast in China. A factory might double in size every 9 months, or might suddenly become highly unreliable. That’s why smart importers keep a close eye on their key vendors.
2. Business intelligence for established suppliers
Professional purchasers generally have two strategies to collect information:
- They schedule regular face-to-face meetings (at least twice a year) with decision makers at their suppliers
- They ensure QC inspections and/or engineering assistance services are performed at the factory
In addition, I have met a few very savvy buyers who instruct their staff to collect very specific information of this sort:
- Has the boss just bought a new car?
- Has his wife stopped managing production?
- Are they building a new facility?
And some well-structured importers have a continuous improvement program that calls for regular re-audits.
Maybe some readers can suggest other ways of collecting business intelligence on Chinese suppliers?
Asking for a supplier’s bank account details can often be quite revealing. Firstly, if they give you any kind of personal account it’s a huge warning sign, no matter what justifications they try to give for it.
Secondly, you can ask to see the bank account license for their business account, which may be useful in some cases as it corroborates the legal representative or responsible person for the account, and the company name. You can also check if there’s anything surprising in the location in the name of the operating bank. Plus of course the bank account license confirms the bank account number. As with any documentation there’s the potential for fakes, but it’s another check to add to the chain.
Thirdly, in order to successfully make a bank transfer to their account, they’ll have to give you the correct address and account holder name. This makes it harder for them to hide any abnormalities around company names (which should reveal the type of company) and locations in the payment chain.
Very good tips for due diligence! Thanks Matt.
Hi Renaud,
Could you explain the reasoning behind what each of these questions may reveal?
Has the boss just bought a new car?
Has his wife stopped managing production?
Are they building a new facility?
Thanks
Sure.
Has the boss just bought a new car?
–> Are they making money? Are they putting it in priority in new equipment or in a Porsche Cayenne?
Has his wife stopped managing production?
–> There is often one key person who micro-manages the whole production (for factories under 400 people). If that person leaves or gets busy on other priorities (e.g. setting up a massage parlor down the street), production quality & speed can be severely affected.
Are they building a new facility?
–> Switching to a new & bigger production place means a longer lead time (since they are certainly organized in batch & queue), less stable quality (over the first year), and higher prices to the client (because this new investment needs to be paid by someone).