Intercedent Insight – May, New Observations on Sourcing in China

The earthquake in Japan and trucker’s slowdown in Shanghai are examples of unforeseen events which can exert pressure on global sourcing networks.  Clearly, companies face a range of risks in what is becoming an increasingly complex web of supply.  The financial resilience of suppliers – the focus of buyers during the economic downturn – is now accompanied by other potentially disruptive events including natural disasters and workplace related issues.

It is time to review sourcing practices in China and the key issues will be:  (1) what measures can a buyer take to protect itself and its customers from interruptions stemming from force majeure or similar events? (2) what steps can be taken to improve quality control and costs of purchasing in China? (3) how long will cost-effective procurement from your current Chinese suppliers last?

To address the risk of supply chain interruption buyers should insist that the definition and remedies for force majeure are clearly spelt out in purchasing contracts. International companies sourcing in China should consider building inventory. Consideration of the engagement of a third party aggregator is suggested.  

Companies should source from suppliers located in different regions, particularly to the north and west of China where increasingly lower cost manufacturers can be found. A third country supplier might be identified, certified and brought into production as an alternative source of supply which can provide a fall back in case of currency changes, natural disaster, or changes in trade policy at home or in China. Do you have the leverage to convince your existing supplier to set up another plant in China or in another nation?

The management of procurement including identification and qualification of new suppliers, purchasing and logistics, quality control, banking and reordering can be an expensive process. Suppliers and buyers should identify internal and external software and internet applications to control or reduce the administrative costs as a buffer against increases in production costs.

Cost escalations and long term pricing trends have started to impact on China’s attractiveness as a production center. Factors such as rising labour costs due to inflation and growing enforcement of mandatory workplace benefits, strengthening of the RMB, gradual reduction of VAT rebates, higher energy costs and strengthening enforcement of China’s safety, tax and environmental regulations are all relevant.

Make sure your trusted China supplier plans to stay in business and still enjoys sufficient margins to not compromise quality by using sub-standard parts and components.  Buyers that ignore the cost pressures on suppliers may end up with either interruptions in supply or, worse, bad quality.


© 2010 Intercedent | Site by ChinaNetrix