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.

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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.

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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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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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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.

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