Has sourcing from China become harder in the last 18 months? Yes, says Steve Ganster, and he lists several reasons: China has reduced its rebates of export taxes, wiping out the margins for many Chinese suppliers. The yuan has appreciated enough to narrow suppliers' margins. Foreign consumers and governments are increasingly concerned about the quality of Chinese products, so suppliers have to spend more on quality control. Raw material and energy prices remain high, and new Chinese labor laws will further raise wages.
That's why so many global companies are taking a harder look at their sourcing processes in China, not just jumping into relationships with the first suppliers who promise to deliver goods at bargain-basement prices, said Ganster, senior vice president at Technomic Asia, a consulting firm. How can U.S. companies reduce their risks? More than ever, successful sourcing begins with building strong personal relationships with the right foreign suppliers, Ganster said. "To build relationships between organizations, you need to build relationships at multiple levels," he said.
U.S. companies need to understand the five most common myths about sourcing in China, said Michael Matteo, senior vice president, sourcing and operations, at ThreeSixty Sourcing Inc., which provides global sourcing services in China. Matteo was among several who discussed China sourcing at the annual conference of the Council of Supply Chain Management Professionals.
The first myth, Matteo said, is that "sourcing is easy." Sourcing decisions "require a thorough process of due diligence," he said. Jumping to judgments on the basis of unverified information about a foreign supplier is dangerous. "A lot of things you see on the Internet are not real," Matteo said. A Chinese manufacturer may send you a photo of a product to demonstrate what he can manufacture, but it may turn out to be a photo of your own product with your supplier's label on it. "There may be absolutely nothing behind that Web site," Matteo said.
Michael Ksiazek, vice president of operations at ACCO Brands Co., which designs office products, said some U.S. companies mistakenly believe they don't need to design their own products in China, and that all they need to do is send samples or technical specifications to Chinese manufacturers who promise to supply them for the U.S. market. "But the Chinese factory cannot design or innovate your product that way, so you cannot control quality or costs," Ksiazek said. "You must design the product and innovate, and you must provide product details for inspectors and factory workers."
A third common myth is that U.S. companies don't need to inspect every shipment they get from their suppliers in China. Ksiazek said it is "very risky to leave inspections to your suppliers, because they may substitute other materials for yours, and they may not realize that causes a problem. The product may look great but not meet your performance specs."
"You have to be there when your products are made," Matteo said. "You need to have transparency back through your supply chain. You can't just inspect the final product."
A fourth myth is that logistics costs in China cannot be controlled, given the vast distances that separate China from the United States. "It is wrong to assume that your supplier will get you the best possible transportation cost," Matteo said. "You have to monitor costs and stay in control."
U.S.-based companies can also manage excess inventories despite the distance. "You can order less of a single product from one or multiple plants, yet still consolidate your orders into a single shipment," Ksiazek said.
James Horrigan, senior director, Alaris Consulting, said global companies in China can select the right transportation mode and freight forwarder who meets their service needs in their specific sector. It's easier to consolidate shipments if there are more suppliers in a region of China.
A final common myth, Matteo said, is that "Vietnam is the next China," so if things don't work in China, it makes sense to jump straight into Vietnam. "The reality is that China is not going away," Matteo said. "No other country has the infrastructure capable of producing so many products, and as China's infrastructure continues to improve, it will become more efficient to source from China."
Companies need to establish rigorous procedures for evaluating their sourcing decisions, Horrigan said. That means identifying all of their costs and establishing a process for handling situations when something needs to be sourced somewhere else. Some companies also overlook the costs that a sourcing decision often has on other parts of the company.
Under what conditions should companies bring their sourcing closer to the U.S.? There are complex tradeoffs. For example, labor rates are rising in China's more developed eastern provinces, but many foreign companies may decide to source from central China, where costs are lower but the transportation network is less efficient. As usual, there are no simple answers, Horrigan said.
Alan Field can be contacted at firstname.lastname@example.org.