By Edwin P. Nance
Sourcing internationally, especially to China and other low cost countries (LCC’s) involves a lot of strategy, ‘rolling up sleeves’ and is much more than just managing the concept of ‘purchasing’. Global sourcing involves all aspects related to helping make the product ‘happen’ on time, on budget, and with quality standards good companies have come to expect.
By signing international sourcing agreements, executives put their name (and their company) on the line. Decisions to manufacture company products half way across the globe are not made lightly.
When sourcing offshore or overseas, more often than not, supplier and buyer management can be comprised of significantly different cultural backgrounds. Additionally, foreign management may also have quite different business objectives and, sometimes, may even employ business ethics that could be deemed questionable.
For instance, in the global electronics contract manufacturing sector, some Asian companies have been known to access new roads of business by virtually giving away the assembly portion of a potential OEM customer’s hardware outsourcing program in exchange for exclusive rights to source material and components for the OEM’s product bill of materials (BOM).
Many North American and European electronics contract manufacturers might see this as unethical, but in the grand scheme of things, this demonstrates the extent to which suppliers may go in order to gain an edge over the competition in the increasing competitive world of outsourcing.
Below are several points of interest international sourcing managers should consider if they want to increase chances for global sourcing success.
1. Familiarize yourself with local social and business cultures. Lack of familiarity with foreign social and business cultures and, communications issues that surface based on differences, are the biggest reasons international sourcing activities fail, particularly in Asia.
2. Establish clear communication channels with functional departments and management levels at your company corporate base. You must be in a position to be able to address and deal with issues within your company at the corporate level while developing a cooperative team to address offshore or outsourcing issues that will arise. If top management is not behind you, your job will be more difficult.
3. Source from within your geographic region, first, if internal prototype and pilot production capabilities do not exist. Mexico or other mid-cost regions, such as Taiwan, can come into play afterward — until product manufacturing matures – before moving production to China (or other low-cost regions) and then, only if it makes sense to do so.
Too many companies find themselves in a deep hole after sending teams of engineers, quality assurance personnel, and other staff on extended trips to low-cost regions after a design or product quality issue surfaces during production. This type of reactive activity can send total cost of ownership (TCO) through the roof.
4. Understand basic technical aspects of items and products to be sourced. This does not require you need to be a design or software engineer. However, you should at least have a basic, working understanding of components; subassemblies, and finished products you are sourcing.
5. Identify suppliers in low-cost regions carefully. This should be followed by rigid procedures involving supplier qualification (including design, quality, production, and financial capabilities) of potential suppliers at their factory sites (not supplier corporate offices). This also involves verification of relative ISO and other international standard certifications.
Additionally, the process should include potential supplier qualification for subcontractors (e.g., plastics, metal, and critical components not manufactured or produced by your direct product supplier).
6. Develop a working knowledge of contracts. Be able to negotiate not only price but also payment terms, return or repair compensation, and safety or buffer consignment inventories, to mention a few items key to good supplier contracts. Of noteworthy mention, many Asian companies working together do not have thirty-plus page contracts.
7. The curse of 10-day supplier visits. Avoid the temptation to try and evaluate eight suppliers in ten days. Such business trips are penny wise and pound foolish. International trips to Asia can seem exotic but they are tiring, the jet lag is a real contention to deal with and, in general, companies should plan on spending two days (maybe more) with each potential supplier in order to properly assess capabilities (i.e., design, quality, production, financials) as well as the working chemistry of senior management.
Additionally, hotel costs in LCC’s can be reasonably priced, especially in factory areas, so the incremental costs of an extended visit are negligible considering the investment risk to reward ratio. Staying in or near industrial factory areas also helps save valuable time by reducing the need to travel back and forth to Hong Kong or Shanghai at the end of each day.
8. Beware of the factory ‘sales’ tour. Many LCC suppliers provide pre-determined, well-tuned customer tours of (oops, a part of) their facility. Make an effort to get off the beaten path to see additional areas; other buildings or, out back — where scrap is sorted — to find out what’s really happening. Some suppliers try to present only the latest high tech portions of their factories that may have nothing to do with manufacturing processes required by your products.
If you are touring the latest micro BGA line incorporating automatic visual surface mount testing and your product is primarily RF (radio frequency) with calibration and mechanical assembly requirements, ask to see assembly areas that can support your product. If your host balks, it could be a sign the pre-determined tour you are on is not the supplier’s real world. Meanwhile, if the supplier welcomes your request, you may have found a flexible partner you can work with.
9. Work closely with suppliers from prototype and new product introduction (NPI) through first article unit inspection and production volume increases. Develop a working knowledge of product test yields (focus on first pass yield) and reasonable rates for product field returns. Product export documentation requirements; freight consolidation, and other aspects of supply chain management through product end of life (EOL) are also each equally important to understand.
10. Good suppliers anticipate problems. From general experience, Japanese and South Koreans companies are typically good at anticipating problems. Taiwanese organizations are becoming more like the Japanese in this area. However, many mainland Chinese suppliers sometimes run off the edge of a cliff and do not see it coming with regards to problems that surface.
My experience has proven this to be particularly true when planning future raw material requirements. Additionally, I’ve seen many Chinese suppliers lose control of internal manufacturing processes for no apparent reasons.
11. EMS ‘kidnapping’. Nearly all of the top 10 EMS (electronics manufacturing services) providers have facilities worldwide. Large outsource providers can take a company’s design and prototype it in North America or Europe then transition it to Mexico or Eastern Europe as it begins to mature. This is followed by transfer to an Asian LCC as product and volume production fully matures.
Meanwhile, as the above is unfolding, many OEM sourcing managers and company senior management teams are often tempted to let EMS providers administer and execute product engineering changes; revise product tooling and test equipment requirements, and related program documentation or product assembly instructions.
In these scenarios, depending on how business relationships are formed and contracts are written, OEMs may have no rights to take such equipment or materials with them should they want to change EMS providers. Essentially, OEMs can lose control of their product and find themselves in a hostage situation.
12. Beware of local sourcing agents. Employ caution if the decision is made to use local, Asian sourcing agents.
- Perhaps not surprising, companies paying the best commissions typically get the best service since sourcing agents rarely work with one client.
- Some sourcing agents in LCC’s will get a 3% FOB value fee from your company and an additional 5% kickback from the actual supplier.
- Inconsistent quality can sometimes be an issue because documented procedures can be ‘forgotten’ in order to get a shipment out (and get you off of their back). If shipping by sea, your company could find itself in a situation with one to two months worth of marginal product already on the high seas en route to you and you won’t yet know it.
13. Setting up a sourcing office offshore. There may become a point in time when it makes sense to significantly reduce traveling back and forth to the LCC.
An offshore sourcing office staffed with trained managers and staff for purchasing; quality control, production control, product engineering, export documentation and other functional areas can be the solution. This location may also provide capable product design activity. After all, there is a practical limit as to what can be managed effectively and efficiently from half-way around the world.
While offshore sourcing offices could appear to help reduce total cost of ownership (TCO), they can also create headaches. Just as sourcing managers must understand the social and business cultural differences of the LCC, the sourcing office general manager on the ground in the LCC must understand Western culture and business practices, especially those specific to his company.
The need for this type of understanding becomes readily apparent when companies try to root cause supply chain or product issues while driving issues to resolution with a true sense of urgency.
14. International sourcing is not purchasing. Global sourcing managers must have a broad background across several functional disciplines; have access to corporate resources, and employ a great deal of common sense. It is foolish to proceed with any international sourcing activity or outsourcing program thinking an out-of-the-box solution can be applied in an organized and thoughtful manner.
15. China is not the only low cost solution. China has become a ‘buzz word’ for many companies. Sourcing managers must be prepared to objectively inform company management whenever it is determined the company should not go to China on a particular component; sub-assembly, or product program.
One good measure for this, currently, is that many suppliers in LCC’s are not good at manufacturing low-volume / high-mix products. Their factories tend to be geared more toward high-volume / low-mix manufacturing. Companies may find better solutions in Mexico for the latter types of products.
Ed Nance lived in Hong Kong and China for more than 18 years and has more than twenty years of Asian sourcing strategy, implementation and offshore supplier management experience.
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