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The China Supplier Transformation and the Effect on Sourcing From China

Jason Fong
 


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China as a low cost, low tech manufacturing powerhouse is over

The days of the Chinese suppliers dominating the low tech, high volume, and minimal skill industries are gone. The same strategy of targeting the lower echelon of manufacturing capability, one that has jolted the Chinese suppliers into the world renowned industrial power, has also doomed many of the suppliers who once thrived in this business environment. With tighter environmental regulation, higher wage standard, stricter labor protection scheme, better living standard, and the rising strength of the Chinese Yuan, China, unfortunately, is no longer among the elites of the low cost countries that sourcing professional once sought after.

China is losing battles to its lower cost Asia-Pacific neighbors such as Philippines, Thailand, and Vietnam. This development could spell disaster to the Chinese economy, one that relies heavily on exports, which generates billions of dollars of trade surpluses every year. To combat this movement, China is going through a “mini-industrial-revolution" similar to that of the United States in the 18th century, where significant improvements in social, economical, and technological are realized.

China supplier transformation and those who are left behind

To break themselves free from the previous mode of low tech operation, some Chinese suppliers are transforming their facilities to serve the regulatory controlled, compliance driven, and quality focused high tech industries such as medical, automotive, and industrial applications. Gone are the ISO 9001 and GMP, which has become the unspoken requirement for doing business in China. The new buzz words are ISO 13485 and ISO 14971 for medical device, ISO 16949 for automotive, and ISO 14001 for environmental management.

For those who have adapted well to the new business environment, they are primed to enjoy the next era of a still-thriving economy. Those second comers, unfortunately, are scrambling to play catch up. Some have engaged in a not-so-ethical-way of “buying" themselves into the path of regulatory compliance. For a nominal fee, one could buy a plague and a certification, completed with an official approval stamp from the authoring agency, and become an “authorized" manufacturer in a break-neck speed. Unfortunate for the sourcing professionals, on top of the well published issues like language barrier, cultural difference, and logistic risk, one must also factor in business ethnics when sourcing from China.

Get to know your supplier, assess them

To combat the issues stated, general wisdom and usually company policy requires sending an elaborate team of quality, engineering, and supply chain professionals, to physically assess the suppliers. Obviously, this is not the most cost effective methods, especially for companies without the financial backing to hire a dedicated team in the targeted country. Another method is to hire an independent vendor assessment consultant who is familiar with the local procurement industry, and preferably located at or near the suppliers of interest. With the assessment, management will not only be able to make an informed decision, but also minimize the sourcing risk in the future. In the era of strategic sourcing, where supplier relationship management, product life management, spend analysis, and vendor rationalization has become the front runner of the sourcing profession, one shall pay special attention when finding suppliers in China. While supplier transformation has brought on many exciting sourcing opportunities for high tech industries unseen in previous years, it has also spread a generation of inferior suppliers pretending to be top shelf, which should be weeded out in the early stage of the sourcing processes.

Jason Fong, managing partner of http://www.SourceLimit.com a company specializes in providing the BEST vendor assessment service in China for Medical, Automotive, and Industrial clients overseas. Our service not only allows the client to make informed strategic sourcing decision in an efficient manner, but also enjoy the seamless supplier relationship enhanced by having a local representative.

As the procurement industry progresses, SourceLimit believes that companies will no longer tolerate the 10% - 30% commission charged on every purchase order. Instead, a fee for service, consultation based service will be the new business model. SourceLimit adds value to your global procurement office by having local presence at a nominal cost. This allows you to reap the benefits of global sourcing, without having to maintain a fully staffed offshore procurement office.

For more articles on Strategic Sourcing in China, please visit our blog on http://sourcelimit.blogspot.com

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