The weakened economy has served to highlight the renewed need to engage in best practices when securing product from China and Ashton Udall over at the Global Sourcing Blog has a nice post out on what companies need to be doing on this front in these tough times. The post is entitled, “Global Sourcing Outlook: Staying on Top in the Short Term.” In it Udall makes “four suggestions for actions you can take now, to make sure your business does not get burned on the supply side, particularly if you have manufacturing sources offshore” in a “recessionary world economy.”
Do a cost audit of your current supplier(s) and consider new suppliers. Prices negotiated 6 months ago may be uncompetitive now. Manufacturers are hungrier. Some, if not many, of their costs of production have dropped. Many of these cost reductions are driven by falling world demand (which we hope, and I believe, is a short-term phenomenon). Cost saving opportunities and their causes will vary from supplier to supplier, so reviewing price at your existing factories as well as looking at new sources, may yield an opportunity for short-term cost savings that could help your bottom line now. When demand picks up, it will be on your supplier(s) to raise the issue of rising costs with you. But, there is always a lag time between increasing costs and rising prices, so don’t fail to capitalize on current conditions.
Monitor the financial health of your sources. Factories, both domestic and offshore, are facing very tough times and many are closing shop. Generally, when this is happening, their isn’t much incentive for factory owners/managers to let their customers know, “hey, we may not be around in a few months”. While “credit checks” in low-cost country sources (LCCS) are generally not typical of what we might consider a credit check in the U.S. (i.e. running a credit check through Dunn & Bradstreet), informational audits that can be performed through 3rd party information gathering can aid your assessment of your supplier(s) financial health and risk. There are companies that perform these services in popular LCCS’ like China, India, Mexico, etc., and you can generally get an idea of a factory’s current credit situation and perhaps some current financial information. This could give you the heads up you need to start securing second and third sources of supply, in case your primary source suddenly stops responding to your emails and phone calls, and their website disappears. Performing these kinds of audits are not too expensive, $US500 to a few thousand dollars, and may save you your business in the long run.
Continue monitoring your quality control, and if you haven’t been doing so very well thus far, START NOW! Don’t become a quality disaster/recall headline or a product liability defendant. When times get tough, suppliers look for ways to lower costs and maintain margins. Many may feel inclined to let the quality of materials or workmanship slip to save a few cents on your next order. If there is ever a time to continue your quality control program or implement a quality control program, it is when companies supporting you are potentially hurting.
Don’t treat your suppliers as the enemy. An honest conversation may open up new opportunities for mutual gain. When times get tough, people often begin looking for easy scapegoats and targets. It may be tempting to push unreasonable demands and threaten even your best suppliers. None of the recommendations above are intended as a suggestion to get absurdly tough on the vendors supporting you. Be diligent, negotiate well, and expect results. Approach the need for businesses to survive during these challenging times from the perspective of “how can we work together to mutually survive and eventually flourish?” Gaining transparency in the supply chain (“transparency”– basically sharing information) is a best practice in good and bad economic conditions. Being forthright and reasonable with your suppliers will not only earn you their respect and appreciation, but may open opportunities for new ways to reduce costs, improve efficiency and/or quality, and present new business opportunities. This is such an easy, but often overlooked method of dealing with supply chain challenges, and it might begin with a simple and honest conversation.
This is all good advice, particularly the one about costs. I was talking with a client of mine the other day who told me that his company just secured a big cost reduction from their China supplier “without having to cut costs even one penny on our own product.”