Why Not Buy From China?

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During a recent high level review with a global vehicle manufacturer we discussed many issues but one of the most bizarre was their efforts into low cost country sourcing. Having established an IPO near Shanghai staffed by an experienced Chinese sourcing professional and five highly qualified engineers with deep expertise in: castings/forgings, machinings, painting, heat treatment and metal fabrications, the firm rather expected buyers at their western manufacturing operations to jump at the opportunity to achieve cost savings. But very much to the confusion of the IPO office and the group’s senior management, sales from the IPO to the group firms still only amounted to a few million dollars out of a global spend in excess of a billion. So in an effort to take a quick litmus test we gathered 20+ of the clients purchasing managers and commodity managers in a room and brainstormed the reasons. You may not be surprised by the consolidated list below (shrunk from over 8 flipchart sheets!):

  • ¢ Quality – in many and varied flavors was a repetitive theme
    ¢ Impact on cash flow of holding inventory on the water
    ¢ Reliability of supply
    ¢ Logistics challenges
    ¢ Currency fluctuations
    ¢ Differences in business culture and time zones
    ¢ Intellectual property risks
    ¢ Extended lead times
    ¢ Effect on change orders with so much material in the supply chain
    ¢ Different quality standards

These opinions were based almost completely on hearsay and rumor, not hard experience. Out of 22 buyers, the only one (the steel buyer) with any experience of buying from China, and who currently still does, held a different opinion.

As a matter of interest here were a few of their suggestions to overcome the risks as they saw them. These are high level ideas and the details were for later evaluation:

  • Establish a quality gate in China such that products sourced would have a quality check prior to dispatch
  • Create a staging or buffer warehouse facility in the USA and Europe to hold sufficient incoming material to ensure continuity of supply
  • Secure extended payment terms from the suppliers to ease cash flow
  • Personnel exchanges to create better understanding and allay fears
  • Mandate China supply to be included on all Global Sourcing Projects

As a firm we don’t have an axe to grind either way, we have seen many situations in which LCCS works very well for some products and some firms, and we have seen others where it is a disaster. What we found in this situation though was that failure to make a success of their IPO asset was almost solely due to opinion based on little or no experience ” clearly this firm had a bigger change management challenge than anything else.

–Stuart Burns

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