Guanxi -- Relationship in Chinese -- Is Overrated

Run a Google search on the Chinese phrase “Guanxi” will get you over 500,000 hits on topics mostly concentrated on doing business in China.  The phrase has been over-used, over-quoted, and over-rated, for the past 20 years since China opened its commercial door to the rest of the world.  Sometimes, the phrase has been hailed as the center and the focal point of running a successful business in China.  Everything else, such as a sound business plan, a strong financial background, and genuine knowledge of the industry, becomes only the supporting cast.  With Guanxi, some believe that running a business in China is as simple as taking a deep breath.  Without it, it is deemed that any business will fail even with a sound and solid plan.  The author is not trying to downplay the importance of maintaining a good relationship with your business associates in China.  He believes, however, that a business built only on Guanxi is doomed to fail in the long run.

After years of development, transformation, and most of all, growth, businesses in China is no longer a closely knit society protected by the confinement of the Chinese laws and regulations.  Instead, they are competing in the global economy, where quality, time to delivery, innovation, and cost competitiveness are the source for success.  Instead of a proliferation of Guanxi, here are a few examples that the Chinese suppliers are developing themselves into the world class suppliers:  

• Supplier transformation: Chinese suppliers are now equipped with the latest technologies, armed with the best talents, and sourced from the most competitive areas, to provide the world the most innovative products at the most competitive price.  The Chinese auto industry, which has seen an amazing growth in the past 10 years, is projected to pass the total production capacity of that of United States within this decade. 
• Rules and regulations advancement: Smart suppliers are focused on becoming the best of their respective businesses.  Many are adopting the rules of the ISO, FDA, CE, and other government regulating agencies.  The notable ones are ISO16949 for the automotive industry, ISO13485 for the medical device industry, and ISO14001 for Environment management. 
• Information technology investment: Oracle, SAP, and other ERP software now forms that basis of many Chinese suppliers IT infrastructure.  Further investment in IT to fill other needs such as Customer Relationship Management (CRM) and Supplier Relationship Management (SRM) are now making its way across China.  These tools have been widely available in United States, and now the Chinese suppliers are quickly adopting them.
  

Guanxi may have played an important part during the growth of the China economy over the past decade.  It will still play a role in the future.  However, Guanxi is not going to develop the technological advancement that is required to support the growth of the auto industry, to help comply with the many rules and regulations around the world, nor to transform the information technology landscape.  Instead, a successful business in China will require a sound business plan, strong financial background, and genuine knowledge of the industry.

Related Stories:

• Strategic Supplier Relationship Management Process And Beyond 
• Simple Way to Become FDA 21 CFR Part 11 Compliance  
• The China Supplier Transformation And The Effect On Sourcing From China

 

   

Identify, Select, and Source From The Perfect Supplier in China (Part 2 of 2)

Part 1 of this article focuses on the identification of suppliers.  Now that a pool of suppliers has been narrowed down to a manageable group, it is time to further flush the list to a selected few.

Selecting Suppliers:

• Get buy-in from within: depending on industry, qualifying new suppliers can be a lengthy, and sometimes dreaded, process.  It is important to get management buy-in, BEFORE starting on the supplier selection and qualification process.  For companies with multiple divisions, myriad of production lines, and countless products, this is especially important.
• Trim the fat: Some of the current suppliers may have been “excluded” or “trimmed” during the identification process.  Common wisdom may tend to include them even if they appear to be less desired.  There is no argument to put a score and preference for current suppliers.  However, one must NOT put too much weight on current relationship and ignore the potential with the new suppliers.  As the company grows, requirement will change.  It is important that the supplier carries the same vision.  If the current supplier is significantly lagging, or decides to go into a different direction from that of the company, it is necessary to “trim the fat” and transfer all parts to more deserving partner.  Further, after years of non-committed business without a vision to implement a global sourcing strategy, the current base may become complacent, or may not be committed to the customers.  Unfortunately, this is much harder said than done.  One must acquire management support, supplier buy-in, and internal as well as corporate alignment.
• Invest the time in qualifying the suppliers: the importance of this step can’t be stressed enough.  Depends on the level of part customization, qualifying new suppliers is often a time consuming process.  Though, during this process, one can learn a lot about the potential supplier’s capability, level of commitment, and other tangible qualities that are essential to a fruitful relationship.  If resource is limited, enlist local sourcing experts when appropriate.
• Get PEOPLE involved: this is usually one of the most obvious but usually ignored aspects of any successful projects.  In the case of China sourcing, this is even more so the case.  All stakeholders must be timely informed on a regular basis.  Conduct meetings and training session whenever necessary.  A seamless sourcing implementation requires coordinated efforts among engineering, quality, R&D, purchasing, material planning, and warehouse.

Sourcing from Supplier (I will skip the obvious but lists out those that are often ignored):

• Introduce the new suppliers to the company and all stakeholders: this is especially important in China.  A supplier does not only exist in the ERP, MRP, BOM, and Vendor Master.  Instead, it is important to let the supplier to have a face to face meeting with the company.  Invite the supplier to come to the company and shake a few hands.  This will help the transitioning process.
• Define stringent yet flexible requirements during the transitioning period: this is commonly referred as the honeymoon period, where corporate standards are relaxed slightly to the new comers.  The same must be applied to a new supplier introduced to the corporate structure.  One must be firm, and sometimes be stringent then the incumbent suppliers, on the technical requirements.  This will help to establish a mutual expectation at the early stage of the relationship.  On another hand, it is reasonable to grant the supplier a free pass if mistake is made on non mission critical requirements.

A successful sourcing project takes a long time to build.  It is not a ONE time event, as many companies have mis-interpreted.  The work of the sourcing department is not simply collecting quotes and inputting them into the ERP system.  In contrast, the work has just begun when a part is “sourced”.  Managing the supplier relationship and improving supplier performance is the true value that a successful strategic procurement department brings to the company.

Related Stories:

• Identifying, Selecting, and Sourcing From The Perfect Supplier in China (Part 1 of 2)
  
• Avery Dennison's Supplier Selection Insights
• Buyers search the globe for the right logistics partners, strategy
• Evaluate spend strategy in Asia
• Global Supply Chain Management

Identifying, Selecting, and Sourcing From The Perfect Supplier in China (Part 1 of 2)

A quick search using many of the supplier identification and matching services will easily yield hundreds of potential “matches”. Some of the sites even provide a list of so called “trusted” suppliers, where they have been “visited”, “verified”, and “approved”. There is no question that these suppliers are better of the bunch. However, there is rarely sufficient evidence to choose any of these “selected” suppliers. The best that these services could provide is a long list of potential suppliers. Unless you are blessed with unlimited resources to perform an in-depth evaluation of each supplier, the odds of finding the perfect supplier from the list, unfortunately, are slim. To improve your chance of sourcing success, here are some methods to help you to navigate through the sea of suppliers:


Identifying Suppliers:

• Define the company’s sourcing “value”: Whether is it low cost, high quality, high technology, willingness to invest in technology, future expansion plan, company size…etc. One can refer to the global procurement strategy to determine the sourcing target for your industry. In theory, all requirements stated are “important”. However, using a score card to determine the sourcing value, it will make selecting suitable suppliers a lot easier.
• Determine the area best suited for your source: Good suppliers are scattered all over the world. You could spend the next life time to visit each of them. Again, it is best to have a global procurement strategy, and focus on one area to fulfill your procurement needs. This will not only minimize the sourcing efforts, but also reduce the logistics cost.
• Start with a LARGE pool of suppliers: Once a location has been defined, establish a long list of suppliers. Some of the common methods are: Internet, word of mouth / reference, trade publications…etc. You can also solicit from your current supplier base for potential suppliers. The goal of this exercise is to force your sourcing department to look “outside the box” in search of the most suitable suppliers.
• First pass evaluation: Match the pool of suppliers against the company’s sourcing value. This could be done using phone interviews, online surveys, site visits, or sales presentations. The goal of the first pass evaluation is to narrow down the large pool of suppliers down to a manageable group. Depends on the size of the sourcing project, and the associated monetary value, it is appropriate to narrow down to about 5 to 20 suppliers.
• Call up the suppliers: Email in general is the tool of choice in United States. In China, however, it is best to call up the sales, or the general manager, if the contact information is known. Introduce your company to them to gauge the interest level. I can’t usually stress enough that even with technology nowadays, a human voice, or putting a face to a name, is an important aspect of conducting business in China.

Now that you have identified a group of potential suppliers, it is time to select the best of the bunch. We will discuss some of the methods used to successfully source in China.

Related Stories:

• Avery Dennison's Supplier Selection Insights
• Buyers search the globe for the right logistics partners, strategy
• Evaluate spend strategy in Asia
• Global Supply Chain Management

Strategic Supplier Relationship Management Process And Beyond

There are well published examples on using Supplier Relationship Management (SRM), or Supplier Performance Management (SPM), process to enhance the strategic relationship between the buyers and suppliers. Specifically, SRM refers to the following rules of engagement:

1. Define goals and performance targets for the supplier, and track them: borrowing from the common performance measurement index for employee, the targets must be S.M.A.R.T., namely: Specific, Measurable, Attainable, Realistic, and Timely. Some of the common measurement techniques for supplier performance are: MOQ, lead time, on time delivery percentage, cost reduction, quality / defect percentage…etc. Some of the lesser used techniques are: environmental improvement, production capacity enhancement, technical capability, reaction time for problem resolution…etc. Though the measurement may be different and must be industry specific, the goal is to provide a good basis to measure supplier against its peers.
2. Recognize top performers and top offenders: the best and the worst suppliers could be selected based on the performance targets that were set. Company could enhance the business relationship with the top performers with higher business volume, thus achieving a mutual gain situation. On another hand, immediate improvement action plan can be put in place for top offenders to minimize the impact to the company’s supply chain. Further actions can be taken to eliminate the repeated offenders.
3. Integrate the supply chain for more efficient transaction: SRM integrates the supplier into the company supply chain. The supplier will gain insights to forecast, sales projection, inventory level…etc. This allows the supplier to prepare and stock material ahead of time, instead of waiting for the purchase orders from the customer. This not only shorten the lead time to gain an edge in the ever-more competitive business landscape, but also streamline the overall inventory level, thus reduce cost.

All points above are well developed and documented for a successful supplier relationship. However, SRM doesn’t just stop there. Here are a couple lesser used concepts to reap further benefits from a well managed supplier relationship:

1. Train the customer: supplier relationship is not a one way street. Instead, the time a company spent on supplier development is as essential as the time the supplier spent on “customer development”. For example, an electronic gadget design company could invite its preferred printed circuit board manufacturer to conduct training courses on PCB design. The customer may be best in designing electronic gadget; however, the engineers can always benefit from someone dealing with PCB on a daily basis. The suppliers also treasure these training opportunities since they are given the chance to present in front of a focus group of design engineers, who are now more inclined to design according to the supplier’s specification. These are great business development opportunities that no suppliers will turn down.
2. Involve supplier in the early stage of product development: one of the many struggles for procurement professionals is company in general does not involve procurement in the early stage of product development. Instead, procurement function is deemed as an overhead process similar to accounting and finance. When the product is finally launched, the procurement department is suddenly held responsible to wring out every penny possible of the design. Instead of using higher impact cost reduction concepts such as DFA, DFM, material selection…etc, procurement officers are only left to conduct hard negotiation sessions, which is never a pleasant experience for suppliers. By involving the preferred suppliers during the product development stage, the company can ensure the best design is already a shoe-in feature, and manufacturing transition could become irrelevant, since the suppliers are already familiar with the design.

A well managed supplier relationship is essential to remain competitive in the current business landscape. It also allows the company to improve its bottom line, and direct its capital to more productive means.

Related Stories:

• Getting Started with Supplier Relationship Management
• Foundational Principles of Supplier Performance Management
• Supplier Relationship Management: It Takes the 'Big R' to Win Global Sourcing Game
• 10-point Action Agenda for Strategic Supplier Relationship Management
• Transforming the process of innovation - TEAMCENTER

Low Cost Country (LCC) Sourcing In A Tough Economy

There is no denying that we are in a recession. Most industries are bracing for the worst, re-adjusting the sales figure during mid-quarter, to limit the damage of a potential stock price plunge during the quarter financial reports. To add salt to the wounds, they are also facing a monumental task of controlling raw material price, while minimizing the impact to the consumers, already beaten down by high inflation, stagnant job growth, and a gloomy economic outlook. Overseas, China Bao Steel recently agreed to an 85% increase from its steel supplier. This has sent a shockwave signal to the auto and construction industry. Further, Dow Chemical has jacked up the price of its products by as much as 20% effective June 1, 2008. Price increase to the consumer is imminent.

This, however, is the PERFECT time for companies to implement long term, Low Cost Country (LCC) sourcing strategy.

1. Hungry supplier -- In a down economy, Sales department is facing an uphill battle to improving the company’s bottom line by generating more sales. Unfortunately, the general business environment nowadays has put a strangle hold on improving the sales number. This, however, is true to MANY suppliers, who are hungry for new business, and will go the extra mile to win new businesses.
2. Significant impact to bottom line -- For a company that has a revenue stream made up mostly by selling physical products, the cost of goods sold (COGS) is generally in the 20% to 40% range, industry dependent. With COGS being the largest contributing factor to the SG&A, any savings realized from the strategic sourcing department will have a significant impact to the company’s bottom line. In the above example, a meager 10% saving will translate into 2% to 4% of improvement on the Income statement! This is usually a fairly easy sell to the CEO or general manager. 
3. Allowing the company to gain insight and develop new sales channel in other emerging markets -- Globalization is a fact of life. No company can survive without a long term, global strategy. Sourcing from LCC may allow the company to take the first step to achieve those objectives. 
4. Improved supplier base means improved quality -- LCC is no longer the synonym for low tech, cheap toys, poor quality, and any bad reps that are associated with LCC. The suppliers at many LCC, especially China, are transforming into world-class suppliers. (see other blog: The China Supplier Transformation And The Effect on Sourcing From China) 
5. Low risk supplemental sourcing strategy -- If sole sourcing from LCC is deemed too risky, a company can start with dual sourcing from LCC suppliers, while maintaining the commitment with the current suppliers. Though the financial benefits may not be as significant, dual sourcing from a LCC will induce minimal risk to the current process. This will allow time for the company to evaluate and learn. Savings information may be acquired and extrapolated to determine the viability of LCC sourcing. 

Tough economy may be a godsend for companies trying to establish its presence for global procurement. Wise sourcing professionals shall use this golden opportunity to push for global sourcing structure.

Related Stories:

• China-based supply chain becoming a threat?
• Some Low Cost Country Sourcing Insights
• Low Cost Country Sourcing: A Blogger's Perspective
• Supply Chain Shocks Get the Attention of Chief Executive
• Buyers report some of the worst readings since early ‘02
• Dow Chemical to stick with higher prices
  

Simple Way to Become FDA 21 CFR Part 11 Compliance

Many suppliers in China are confused by the FDA requirements. This has further added to the headaches when overseas sourcing professionals are trying to identify suppliers that are FDA compliance. In the FDA maze, FDA 21 CFR Part 11 -- Electronic Records; Electronic Signatures -- (Part 11) has generate quite a bit of press. For those who are unfamiliar with the requirement, I recommend a quick and brief review of the FDA guidance located in the public domain. A pdf version can be downloaded here. In short, FDA has dictated the use of the Part 11 guidance in March, 1997. Under widespread scrutiny by the industries, stating that the original guidance may not be consistent with FDA’s original intent in issuing the rules, and other factors, FDA has withdrawn the original guidance, but remained firm on the future usage of the Part 11. During the transition period to full Part 11 compliance, the FDA has outlined 3 main elements of the guidance:

1. Part 11 will be interpreted narrowly; FDA is clarifying that fewer records will be considered subject to Part 11.
2. For those records that remain subject to Part 11, FDA intends to exercise enforcement discretion with regard to Part 11 requirements for validation, audit trails, record retention, and record copying in the manner described in the guidance and with regard to all Part 11 requirements for systems that were operational before the effective date of part 11 (also known as legacy systems).
3. FDA will enforce all predicate rule requirements, including predicate rule record and recordkeeping requirements.

Basically, instead of a full-blown industry wide adoption, FDA will now use “discretion” and “interpretation” when auditing for Part 11 compliance. This, obviously, is good news for most firms that are not yet FDA compliance. However, the delayed guidance only means that companies will now have more time to determine the best strategy forward, and HOPE that the early adopters will work out all the bugs, where a clean, simple version of Part 11 will be available for late comers to follow. So, what shall an average medical device development firm do in order to prepare itself for future compliance?

1. Generate a log of documents related to the medical device, and specify whether the master document is being kept electronically, or on paper. For those who have not invested in document control software, the form could be done using a simple Excel tracking sheet. Further, please clearly states on the tracking sheet and on the document that only the printed version kept in the master document control area can be considered as the “controlled” version.
2. Do NOT implement a partial solution as suggested by the Part 11 guidance, i.e. only part of the documents is Part 11 compliance. Some may be tempted to implement a “pilot” solution to test out the document control software, or other software packages. However, this will only prompt for attention during an audit. Please remember a paper tracking mechanism will NOT harm you, but an incomplete electronic trail will.
3. Do start NOW with a pilot project. As with any kind of software adoption project, implementing the solution to all stakeholders will take some time. A pilot project will minimize any confusion for users. It will also help to flush out any bugs before rolling out the solution corporate wide. Many companies offer specific modules tailored for FDA compliance, i.e. Siemens FDA accelerator.

FDA compliance is not as daunting as most thought. On another hand, having the ability to comply with FDA will not only give your company and product the needed edge over your competitors, it may also "force" your company to have tighter quality standards.

Related stories:

• The Benefits of 21 CFR Part 11
• 21 CFR Part 11 : Basics
• Enterprise Quality and Compliance Management Software
• Strategic Service Parts Management

The China Supplier Transformation And The Effect On Sourcing From China

China as a low cost, low tech manufacturing powerhouse is over

The days of the Chinese suppliers dominating the low tech, high volume, and minimal skill industries are gone. The same strategy of targeting the lower echelon of manufacturing capability, one that has jolted the Chinese suppliers into the world renowned industrial power, has also doomed many of the suppliers who once thrived in this business environment. With tighter environmental regulation, higher wage standard, stricter labor protection scheme, better living standard, and the rising strength of the Chinese Yuan, China, unfortunately, is no longer among the elites of the low cost countries that sourcing professional once sought after. China is losing battles to its lower cost Asia-Pacifica neighbors such as Philippines, Thailand, and Vietnam. This development could spell disaster to the Chinese economy, one that relies heavily on exports, which generates billions of dollars of trade surpluses every year. To combat this movement, China is going through a “mini-industrial-revolution” similar to that of the United States in the 18th century, where significant improvements in social, economical, and technological are realized.

China supplier transformation and those who are left behind

To break themselves free from the previous mode of low tech operation, some Chinese suppliers are transforming their facilities to serve the regulatory controlled, compliance driven, and quality focused high tech industries such as medical, automotive, and industrial applications. Gone are the ISO 9001 and GMP, which has become the unspoken requirement for doing business in China. The new buzz words are ISO 13485 and ISO 14971 for medical device, ISO 16949 for automotive, and ISO 14001 for environmental management. For those who have adapted well to the new business environment, they are primed to enjoy the next era of a still-thriving economy. Those second comers, unfortunately, are scrambling to play catch up. Some have engaged in a not-so-ethical-way of “buying” themselves into the path of regulatory compliancy. For a nominal fee, one could buy a plague and a certification, completed with an official approval stamp from the authoring agency, and become an “authorized” manufacturer in a break-neck speed. Unfortunate for the sourcing professionals, on top of the well published issues like language barrier, cultural difference, and logistic risk, one must also factor in business ethnics when sourcing from China.

Get to know your supplier, assess them

To combat the issues stated, general wisdom and usually company policy requires sending an elaborate team of quality, engineering, and supply chain professionals, to physically assess the suppliers. Obviously, this is not the most cost effective methods, especially for companies without the financial backing to hire a dedicated team in the targeted country. Another method is to hire an independent vendor assessment consultant who is familiar with the local procurement industry, and preferably located at or near the suppliers of interest. With the assessment, management will not only be able to make an informed decision, but also minimize the sourcing risk in the future. In the era of strategic sourcing, where supplier relationship management, product life management, spend analysis, and vendor rationalization has become the frontrunner of the sourcing profession, one shall pay special attention when finding suppliers in China. While supplier transformation has brought on many exciting sourcing opportunities for high tech industries unseen in previous years, it has also spread a generation of inferior suppliers pretending to be top shelf, which must be weeded out in the early stage of the sourcing processes.

Related Stories:

• China Global Sourcing
• Globalization and Technology
• What Does Globalization Mean to You?
• The China Story: Why sourcing is changing
• Weak links in the supply chain: Risk can never be outsourced