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.

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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.

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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.

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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.

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