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Producing a very important order in China: margin vs. risk

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Supplier ManagementThis afternoon, I talked with one of my clients. They got a REALLY big order from a new customer they REALLY don’t want to upset in any way. They are studying their options:

  • They can play it safe with one of their long-time and reliable suppliers in Guangdong province. The only problem is that they would get a very slim margin.
  • Or they can place production in Fujian province, where prices are 10-15% lower. But their current suppliers in this province are not reliable enough for this important order.

I suggested that they visit some large factories in Fujian. Most of them are referenced on GlobalSources.com or Alibaba.com, so finding them is not difficult. The advantage of a large manufacturer is that they are more reliable than the smaller workshops my client usually works with.

Why don’t they currently work with a large factory in that cheap province? Simply because their usual volumes are not really interesting to large units, so they can’t get competitive prices.

My best advice, in this case, is to find a large and reliable factory (to lower risks) that accepts to give good prices for these large orders (to increase my client’s margin).

Of course, things are not that simple. Placing a sensitive order in an untested factory is not advised. Rather, they should do it step by step:

  • Placing the first orders in the reliable factory, to minimize risks. A production problem at this stage could stop the business relationship dead, so it must be avoided at all costs.
  • Placing one of the following orders in the new factory, for a better margin. This is a good way of testing these new guys. With a very close monitoring of production, this experience can be stopped early if some red flags pop up.

Why is this more reasonable? It is possible to tell the customer that “we found some issues with the materials, so they are under re-production and it will take 2 more weeks” while the order is actually given to the more reliable supplier–who has already worked on the development of this same product and can hit the ground running.

  • Over time, production can be shifted progressively to the cheaper region. But the reliable supplier should still work on at least 20% of the volumes, because in China a factory can be first rate for a few years and suddenly start making big mistakes.

Does it make sense? Any other piece of advice?