Sourcing in China: Trends and Best Practices Steve Ganster Managing Director of Technomic Asia, A Division of Tompkins Associates

Transcription

1 Sourcing in China: Trends and Best Practices Steve Ganster Managing Director of Technomic Asia, A Division of Tompkins Associates ROI Management Consulting AG 1

2 Topics China s s regional centers China s poor infrastructure Typical sourcing mistakes Recent changes in China s s landscape Shift to strategic sourcing Solving the relationship gap VOS voice of the supplier Characteristics of a successful buyer Modern supply chain management An effective supplier selection process

3 China s s Regional Centers Manufacturing is slowly diversifying from historical centers Minimal manufacturing, old SOE facilities, limited development Heavy industry, many SOEs Beijing Dalian Light to heavy manufacturing, more modern, many foreign plants Evolving center of activity, mostly Chinese companies, gov t emphasizing development Guangzhou Shanghai Tends to be lighter manufacturing/assembly and high-tech, major export focus

4 China s s Poor Infrastructure High transport costs 40-50% higher than West 25% shortage in railway capacity High internal toll rates (20%) Air freight in early development stage Cheap river but no standards, poor tracking/handling Low technology (manual) warehousing 60% of logistics companies with no IT systems Multiple government industries involved Corruption

5 China s s Poor Infrastructure There are roughly 18,000 3PLs in China, none with significant market share and very low margins. Breakdown of total logistics costs Transportation: 54% Management: 11-12% Storage: 34-35% Country/Region Total Logistics as % of GDP USA 8.9% Asia 11% Europe 12% Japan 15% China 18%

6 Many Mistakes Have Been Made Structure before strategy Too opportunistic Lack of due diligence on supplier selection Not considering total delivered cost Poor relationship management Insufficient resources on the ground

7 Leading to Disappointing Performance Poor delivery rate and consistency Inconsistent quality Lack of bargaining power for price reduction Too many people handling the transactions (touch points) Inefficient and slow product development and design process Communications breakdowns with suppliers Lack of a meaningful supplier management system and development plan Poor logistics from dispersed base of suppliers

8 Recent Changes Making Things Tougher Recent changes Reduction in VAT rebate RMB appreciation New Labour Law Doubts about the economy Concerns over quality Rising raw material and energy costs Crowded ports Rising shipping costs Impact on sourcing Sourcing retrenchment Re-considering geographic locations Evaluating product SKUs Re-evaluating processes Adjusting supplier portfolio Re-thinking supplier relationships Considering alternative logistic structures and routes

9 Putting Stress on Supplier Competitiveness Volume versus profit driven Tax avoidance Low cost equipment Lean sales structure (grey tactics) Low cost land/building (subsidy) Minimal R&D/management overhead Knows how to play VAT tax Variable Fixed Tax/Profit Use and cost of labor Competitive raw material sources/supply chain Low cost utilities Guanxi effect

10 Shift to Strategic Sourcing These stresses are changing the approach to sourcing Relative costs have changed Current systems do not have a clear strategy or alignment to the company s global supply chain Resulting in too many suppliers, in too many locations, supported by a weak procurement strategy, processes and technology Further handicapped by a lack of effective buyer-supplier relationships Opportunistic

11 Which Has Led to Increasing total China buy Localizing more sourcing functions Diversifying geographic locations Investing in logistics and information systems Creating unified decision-making systems Better integration of Asia/China with global supply chain Adoption of best practices, and Re-thinking supplier relationships 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Average Profitability of Survey Participants* 12.00% Source <35% of materials locally +117% 26.00% Source 35% locally *Source: AmCham Shanghai China Manufacturing Competitiveness,

12 The Relationship Gap SRM versus SRM Japan and American management is 95% the same and T. Fujisawa, co-founder of Honda In US, it is dating (or 1 night stand) in Asia it is marriage Key cultural gaps Large vs. Small Power Distance I vs. We Focus High vs. Low Context Communication

13 Large Vs Small Power Distance Chinese Proverb Let the emperor be an emperor, the minister a minister, the father a father and the son a son Five relations: ruler /subject, father /son, elder brother /young brother, husband /wife, friend /friend American Proverb All men are born equal Country Power Distance Rating China 80 USA 40 Germany 35

14 Collectivist Vs. Individualistic Cultures American chicken vs. Chinese chicken Individual realization Capital I The lead bird gets shot Middle way Country China 25 USA 91 Germany 67 Individualism vs. Collectivism

15 High Vs. Low Context Communication High Context Low Context Less explicit communication More internalized understanding of what is communicated Multiple intersections with others Long-term relationships Strong boundaries Knowledge is situational, relational Decisions and activities focus around personal face-to to-face relationships People play by external rules More knowledge is codified, public, external, and accessible Separation-- --of time, of space, of activities, of relationships More interpersonal connections of shorter duration Knowledge is more often transferable Task-centered

16 Voice of the Supplier (VOS) Bring established VOC (voice of customer) techniques to VOS Capture supplier requirements and needs, as you would a customer Input findings into all buying processes Develop appropriate and measurable metrics Measure frequently Get an independent view Recognize and adapt to the relationship challenges

17 Example Relationship Gap Supplier s s View Buyer s s View of Buyer of Itself (1 to 10 scale with 10=best) Parameter Rating Rating Remarks/Explanation Forecast/planning Buyer is dependent on customers Supplier s s most problematic area Design Input/support Engineering support Manufacturing process know-how Component sourcing Quality control instruction 1 8 Does not involve supplier-has ideas to help Buyer could enhance supplier performance with more attention Buyer does not share process knowledge hurts performance Qualification process of vendors is too slow In sync Communication Many areas of complaint by supplier

18 Characteristics of a Successful Buyer 1. Always considers total delivered costs 2. Frequently visits with suppliers 3. Pursues one-on on-one one relationship building 4. Reviews performance regularly at all levels 5. Has appropriate resources on the ground in China 6. Stratifies suppliers so the most important are given the most attention 7. Keeps core suppliers in tune with company strategy/vision

19 Characteristics of a Successful Buyer 8. Has a formal process for finding and qualifying Asian suppliers certify suppliers 9. Takes personal responsibility for product quality 10. Tracks the quality of finished product and in-process quality of Asian suppliers. 11. Has a formal Asian supplier development plan (SIP) 12. Seeks to change behavior (not just process) 13. Views Asian sourcing strategically

20 Modern Supply Chain Management Successful supply chain management promotes innovation Old Controlling Costs New Enabling Innovation Key Metric: Total Landed Cost Key metric speed to market LCCS value of a sourcing market is its absolute low product cost Vendor-customer supplier relationships No alignment to company strategy Voice of Supplier listening to suppliers needs and ideas Supplier partnerships suppliers participate in product innovation Strategy aligned from supplier s supplier to customer s s customer Cost benchmarking knowing the details of your competition s real costs Logistics Point A Point B B Logistics Just in Sequence

21 Strategic Sourcing Process Our process to establish an effective and sustainable China sourcing activity comprises the following key phases Phase 1 Confirm Confirm Strategic Strategic Intent Intent Phase 2 Select Select Product Product Portfolio Portfolio Phase 3 Identify/Qualify Identify/Qualify Best Best Suppliers Suppliers Phase 4 Negotiate Negotiate Terms Terms and and Relationship Relationship Structure Structure Phase 5 Set Set Purchase Purchase Process, Process, Logistics Logistics and and Organization Organization Key process features Phased approach Interactive with client management Transfers learning process Observes the 6 Ds (due diligence, due diligence, due diligence) Assures alignment of sourcing activities to client s strategic goals for growth

22 Just remember In China, everything is possible but but nothing is easy!