Supplier Development

How to build up a good supplier base in China

10 Tips to Smart Supplier
Engagement in China
www.industryweek.com 1st April 2008

 According to the Chinese calendar, 2008 is the year of the rat --
not the most auspicious symbol, perhaps, for the prospects of
re-establishing American trust in China-centric global supply
chains. Although last year's product recalls involved just a
narrow segment of Chinese imports, the loss of consumer
confidence in all China-made goods served as a wake-up call to
every U.S. company sourcing from China, say Deloitte partners
Clarence Kwan and Tim Hanley.

 As they see it, reducing dependence on Chinese suppliers is
difficult in the short term and potentially undesirable in the long
run. Therefore, Kwan and Hanley say that U.S. executives must
find ways to manage product quality risk more effectively, and
point to a three-stage Chinese supplier development paradigm
that should ensure a solid, profitable and safe sourcing
relationship.

Engagement in China

 Stage One: When first selecting suppliers…
1. Apply your proven vendor selection process in
China -- adapt but don't compromise.
2. Don't overemphasize cost as a selection
criterion -- quality, reliability, required lead times
and scalability can all be just as important.
3. Perform vigorous due diligence, including on
your suppliers' suppliers -- otherwise, you will
never understand the extent of the risk
involved.

Engagement in China

 Stage Two: After the ink is dry…

4. Focus on building trust and sustainable
relationships -- be accommodating within
reason.

5. Commit to your supplier and always seek "win-
win" solutions -- that way, when you raise the
bar, your supplier is more willing to go along.

6. Communicate, communicate, communicate --
not just to enhance the relationship, but to
create additional synergies as well.

Engagement in China

 Stage Three: Ensuring quality supply over the long
haul…

7. Don't rely on relationships alone to manage risk in the supply chain
-- take concrete steps to monitor the supplier's adherence to
standards of quality, timeliness and efficiency.

8. Third-party compliance monitoring will never be as good as having
your own pair of eyes on the ground. (Also, rotate your people
periodically.)

9. Not every problem originates with your supplier -- make sure your
monitoring program takes in the full spectrum of the supply chain

10. Don't be shy about letting the world know about what you're doing -
- their increased confidence in your products means enhanced
shareholder value for the company.

What changed until 2010?

 Nothing really changed.
 Extract of a interview with Theo J.M.
Timmermann, Webasto Group Vice
President Purchasing by Michelle Fan
Gasgoo.com
 March 11, 2010


 Gasgoo.com: What do you think of the possible quality risk
working with the purely domestic Chinese suppliers?

 Theo J. M. Timmerman: It is a risk, but it is a calculated risk. If
a company invests at the right time with the right people to
support the Chinese suppliers, like Webasto has done, then the
risk is controllable. If you supply no help -- no engineering help,
no quality help, no supplier development help, then the risk is
extremely high, because the expectations for quality level and
supply level are not the same on both sides of the table. That’s
what in the past when people first started to source in China
often forgot, because of the long distance, people didn’t want to
travel so often, therefore the right support was not given to the
local suppliers. And then people ended up by making the safe
and easy choice -- to go to the old western supplier with a
location in China, because it is easier. But today the focus
should be on both.


 Gasgoo.com: Do you have more
supplier development staff than
purchasing staff in China?

 Theo J. M. Timmerman: I still seek to
grow the supplier development
capability here in China, because that is
going to help us achieve faster
introduction of new China suppliers.

Wuxiconsulting

1. Apply your proven vendor selection process in
China -- adapt but don't compromise.
 Assessment based on the automotive Audit
Processes
 Scan of all processes, not just production

Production can just perform if the preparations
are performed professional. This includes the
whole administrative process of a vendor.

Wuxiconsulting

2. Don't overemphasize cost as a selection
criterion -- quality, reliability, required lead times
and scalability can all be just as important.
 Communication with the supplier as well as
training in Process Control Techniques
 Communication and adjustment of expectation
on Buyer and Vendor side

Investments are necessary to participate in the
middle and long-term cost savings.

Wuxiconsulting

3. Perform vigorous due diligence, including on
your suppliers' suppliers -- otherwise, you will
never understand the extent of the risk
involved.
 Involve the suppliers’ supplier in the assessments
 Explain to the supplier the importance of good
performance of their supplier for his own business

Communication and adjustment of expectations is
one of the key for a successful cooperation with
your supplier

Wuxiconsulting


4. Focus on building trust and sustainable
relationships -- be accommodating within
reason.
 As representative of the Buyer wuxiconsulting
is available every time and fast for the supplier.
 This builds trust and shows the will of the
Buyer to build up a sustainable relation ship
 Wuxiconsulting understands the way of
thinking in China and is able to give the
accomodations within reasons.

Wuxiconsulting


5. Commit to your supplier and always seek "win-
win" solutions -- that way, when you raise the
bar, your supplier is more willing to go along.
 Involving wuxiconsulting will be understood
from the supplier as commitment to him
 Wuxiconsulting is able to advice when and how
the Buyer can raise the bar and ensure a “win-
win” solution.
 The supplier will become a partner and not just
supplier.

Wuxiconsulting


6. Communicate, communicate, communicate
-- not just to enhance the relationship, but
to create additional synergies as well.
 Wuxiconsulting will communicate for the
Buyer in his interest.
 Wuxiconsulting is able to concentrate on
the items, without being distracted by the
daily business.

Wuxiconsulting

 Stage Three: Ensuring quality supply over the
long haul…

7. Don't rely on relationships alone to manage risk
in the supply chain -- take concrete steps to
monitor the supplier's adherence to standards
of quality, timeliness and efficiency.
 Wuxiconsulting has years of experience in
monitoring, planning and implementing of steps
of a excellent Supplier Monitoring System.

Wuxiconsulting

long haul…

8. Third-party compliance monitoring will never be
as good as having your own pair of eyes on the
ground. (Also, rotate your people periodically.)
 Wuxiconsulting is a Third-party
 Wuxiconsulting is located in China
 Wuxiconsulting has the necessary knowledge
without creating the high costs of internal
monitoring

Wuxiconsulting

 Stage Three: Ensuring quality supply over the long
haul…

9. Not every problem originates with your supplier --
make sure your monitoring program takes in the full
spectrum of the supply chain
 Wuxiconsulting as a Third-party is focusing on the
full spectrum of the supply chain at sub-supplier,
supplier and customer side.
 Wuxiconsulting does not need to “fear” internal
restrictions in pointing out necessary improvements
on the Buyer side.
 Wuxiconsulting is indipendend and objective.

Wuxiconsulting

long haul…

10. Don't be shy about letting the world know about
what you're doing -- their increased confidence
in your products means enhanced shareholder
value for the company.
 It additional increases the confidence of your
supplier in your way of doing business
 It increase the “face” of your supplier
 Your supplier will reward you by fulfilling your
expectations.

Market

 China is based on its rapidly growth used to be
a seller-market.
 The global economic crisis had a large impact
to the market situation in China.
 China is moving from a seller-market to a buyer-
market, which is not realized by most supplier on
the Chinese market.
 The transformation will be slow, caused on the
high request of the global market for low-price
supplier.

How to control a Chinese
supplier?
by Renaud Anjoran on March 10, 2010

 Western Buyer Experience:
 They experience late shipments,
unacceptable quality, and/or price increases
mid-way through production. Sometimes
they get no response to their emails. They
have the feeling that the supplier does not
care about them.

What should they do?

supplier?

 Work on the supplier’s incentives and
follow production closely.

And how to do it?
I have listed 4 solutions below
1 “carrot” and 3 “sticks”
They will help you control a supplier
more effectively.

supplier?

1. Be seen as a “good customer”
 Do not be associated with small and unprofitable orders…
○ Because they are seldom given attention and priority.

 Make your orders look more appealing:
○ Don’t drive their profit margin down to zero.
○ Be clear in your requirements
○ Keep development work easy (for example by providing a sample to copy)
○ Do not stay in the factory for two weeks in a row

 Find suppliers who will value your business:
○ Your orders might seem insignificant to a big manufacturer
○ try to find a smaller factory.

It is important that top management
keeps an eye on your orders.

supplier?

2. Know what is really going on
 You let your supplier ship the goods without somebody
checking quality on your behalf?You are running huge risks.

 It is safe to estimate that the average Chinese exporter ships
products that are inadequate – for one reason or another – at
least 20% of the time.

 You cannot control quality by yourself, get assistance from an
inspection company. They propose tools for different situations.

Here are two of them:
1. Detect quality problems before shipment, because a container
cannot be returned to the factory. So most serious buyers
conduct a final random inspection, to confirm that quality is
acceptable.
2. Catch the issues early (and avoid poor re-work and late
shipping) with an inspection during production.

supplier?

3. Tie payments to results
 “If you owe $100 to your bank it’s your problem; if
you owe $100 million to your bank, it’s the bank’s
problem.”
 As long as you owe money to a supplier, he has to
comply with your requests (for fear of a cancelled
order or a request for discount).
 Settle final payment only after an inspection is
passed AND the goods are shipped out. This is
totally standard, and you should not hesitate to
require it.
○ Let’s take an example. You write “Penalties for late
shipment: 5% per week after promised ETD” on your
P/O, and you negotiate to wire 70% of payment after
shipment. In this case, the supplier will think twice
before delaying your order.

supplier?

 Restrictions:
○ There are cases where this will not help you
control your supplier:
 You give orders in a continuous flow, and you
depend on your supplier for a good part of your
business.
Solution:
In this case, try to work with several suppliers to
minimize risks.

 You purchase products with no customization, and
the supplier can easily sell them to somebody else.

supplier?

4. Sign a contract
 If you cannot follow the above recommendations, you can try to do
business on familiar grounds: with a legally-binding contract.

 There are lots of misconceptions.

○ No, a purchase order is not a contract.
○ No, Chinese suppliers are not used to signing contracts;
○ Sometimes they don’t even read them.
○ Yes, a contract can be enforced (in China only, except if the supplier has
assets in your country) if it is drafted by a lawyer specializing in Chinese
law.

 A contract can give you more control over a supplier, in many ways.

○ If you approve a factory, it can discourage sub-contracting.
○ If you have valuable intellectual property, it can prevent copying (or re-
use for other buyers).
○ If you are not happy about your supplier’s behavior, a demand letter can
frighten him into cooperating.

supplier?

NO GOES:

 Developing a personal relationship with a factory boss.
 It might help. But importers often think that it is sufficient, and they are
mistaken.

 That’s why so many local trading companies cannot control
the behavior of the manufacturers they work with–even when
they pretend to own the factory. Sometimes they have all
wrong:
 The factory sees them as a bad customer, since they have access to
so many other manufacturers and they push prices down.
 If they have a personal bond with the factory boss, they don’t dare to
inspect quality, and they don’t even think of a contract.
 Their payment depends on the importer’s payment, so this element of
pressure is somewhat lost.
 This is good news for savvy importers. If they use the right tools, they
can control their suppliers. If they want to take care of sourcing by
themselves, they do not need any intermediary.

Successful buying in china

Follow :

 Rules & Regulations
 International
 Local Chinese
 Advices of experienced contacts in
China
 Recomandations out of this
presentation

Supplier Development

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