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.”

  • All excellent suggestions, especially now. I have clients now who are struggling to get cost reductions even in the case where they took big hits on raw materials 6 months ago.
    I’d be interested to hear other readers take on the use of 3rd party providers to assess the financial status of plants in China. I have not had much luck in this field and would hope to learn from others.
    I would add one suggestion for those using China sources: Develop contingency plans for quality problems and for losing your supplier without notice. It is much better to take a few hours to build a plan now than to come up with one on the fly.

  • John Branch

    Dan,
    I as well agree with Ashton Udall. I own a small Quality Assurance Business in Qingdao area and from the quality side I hear to many horror storys of people from the west in trouble because they either don’t know how to inspect the product, did not provide enough detail or just stopped. China companies are no different than the western companies, everyone these days are looking for cost reductions, however I believe that they maybe looking in the wrong place, more savings can be achieved by looking inside their own company, this is true for Chinese companies as well. Most companies are full of waste but don’t like to look at themselves as the blame for cost overruns. Anyway if someone does want to change suppliers for cost savings they need to remember that the suppliers are doing so as well and both of you may get what you pay for. It is wise to have someone look over here before you buy,costs are low.

  • Dan

    Ted,
    We have been using a company out of London, of all places, to do quick and dirty (and cheap) financial assessments. I am sure we could find cheaper in China and I am also sure this company uses its own people in China, but their rates are fine and their work is good. If you want their contact info, just let me know.
    You are, of course, 100% right regarding contingency plans. We are actually right now working on a bad product matter for a Western Company who does not want to pay the remainder owed to the Chinese company, but worries that if it doesn’t pay, it won’t be able to meet its product commitments because it has no back up suppliers in its sights. So we are stalling while they are out a looking….

  • arg2arg

    So, let’s see if I got this right
    #1 is to tighten the screws on the supplier, or dump them
    #2 is done to make sure you have not bankrupted them
    #3 is done to make sure the suppliers (under the new agreement) don’t cut any corners or hide any cost savings that could undermine the efforts of #1
    #4 is just code for “take them to KTV and massage” to make them feel better about the arrangement.
    Is Udall working with Mattel or Wal-Mart?