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The path towards successful importing from China is surrounded with broken dreams, misplaced trust and suppliers with questionable integrity. Henry Ford rightly pointed out that coming together is a beginning; keeping together is progress; working together is a success. This same maxim applies aptly to sourcing products from China.
To be successful in sourcing from China, it is essential to have a strategy, collaboration and well-documented expectations. Success is not a destination but rather a journey. The journey of converting pain into gain is a long drawn-out process heavily dependent on trust, commitment and the integrity of both parties.

China is still a default supplier to the world

STATISTICS: On examining the numbers it is evident that China plays a dominant role in supplying a wide variety of merchandise globally. The total global merchandise in 2014 was US$18.494 trillion; China alone exported worldwide an estimated US$2.282 trillion in 2015 and this was down by 2.6% compared to 2014.[1] If we summarise these numbers based on estimated conversions, 13% of the world trade was exporting from China. This proves that China is still a default supplier to the world with Australia importing $52.0b[2] from China in 2014 – this contributed 21% to our total imports and $57.105b in 2014–2015.[3]

No Strategic Management of China Supply = FAILURE & PAIN

TRAPS: Some of the fundamental mistakes committed by importers include lack of strategy, research and benchmarking, and failing to set and achieve targeted product quality. When cost is the main driver of strategy, quality takes the back seat. Rick Frasch identified eight common mistakes that US companies make during the sourcing process from China;[4] these include:
1. Lack of a well-defined strategy
2. No well-defined standards for suppliers
3. Inadequate due diligence performed on suppliers
4. Lack of protection for payment and quality issues
5. No written contracts
6. Written contracts not reviewed by attorneys
7. Ignorance of the U.S. Foreign Corrupt Practices Act (FCPA)
8. Not having a Mandarin speaker on the team.

Manage Sourcing as a Core Competency = GAIN

PROCESS: Strategy is critical to sourcing with the first point to ponder is the make or buy decision; once that is addressed the second point to reckon is whether to source from a low-cost country (LCC) or a low-cost product (LCP). The third important point to be considered is the cost impact on all facets of the supply chain that delivers effective operating profit after the capital charge (OPACC).
Once the sourcing strategy is finalised, the second strategy that needs organisational attention is the core competency strategy. Core competency is described as “a harmonised combination of multiple resources and skills that distinguish a firm in the marketplace.[5]” Some organisations may not consider sourcing as a core competency and instead focus on managing KPIs instead of transactions.
The outsourced activities include the decision whether to source from LCC or LCP, managing cultural barriers – including working at the micro level, maintaining quality standards, and meeting the organisational goals with regard to cost, velocity and quality. China is considered as an LCC and Australia imports anything and everything.

China Sourcing Best Practice is Critical = GAIN
BEST PRACTICE: Best practice differs from insourcing and outsourcing from China. There are also differences related to complete goods sourcing and component sourcing. As outsourcing is out of context, the best practice discussed is insourcing practice.

Critical elements to be considered in sourcing from China include, but are not limited to:
• Product life cycle
• Timing of new product introduction
• Product cost to the market
• Inventory carrying costs
• Cultural issues
• Supplier’s integrity reflected in the quality
• Commitment to delivery time.

Sourcing from China does not mean there is no responsibility attached to the sourcing organisation. The onus is on the sourcing organisation in the form of due diligence in identifying the right supplier, negotiating a watertight contract with well-defined payment and delivery terms, owning the product quality before it is shipped and, last but not least, the collaboration with the supplier. It is also critical to develop a well-conceived exit strategy.

Conclusion

A 2010 survey conducted using case studies and the survey found that the total cost of sourcing from China is usually under-estimated in practice.[6] Sourcing from China will be a success story if importers follow a well-structured process and use a well-developed strategy with clarity about the outcome of the decision/strategy. This process will eliminate surprises and business risks. To summarise, if the quality, supplier relationships and cultural issues are well addressed, then sourcing can be a success story rather than a painful process often ending with bitter experience and negative financial impact.

References:
[1] WTO – International Trade Statistics 2014
[2] Australian Bureau of Statistics
[3] Department of Foreign Affairs and Trade – https://dfat.gov.au/trade/resources/Documents/chin.pdf
[4] 8 Common Mistakes U.S. Companies Make When Sourcing Goods and Suppliers In China – Forbes
[5] Concept in management theory introduced by C. K. Prahalad and Gary Hamel
[6] The total cost of sourcing from China by K.W. Platts and N. Song University of Cambridge, Cambridge, UK


Source: https://cheezburger.com

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The Story of Three Arrows

three arrows

As we all know that the Global Economy is not heading in the right direction.  One of the best indicators of global growth is oil prices.  Oil prices (Brent) are assumed to average about $105 per barrel (pb) in 2013-2014, compared to $110 pb in 2012.  Unemployment remains elevated in many developed economies, with the situation in Europe being the most challenging. A double-dip recession in several European economies has taken a heavy toll on labor markets. The unemployment rate continued to climb to a record high in the euro area during 2012, up by more than one percentage point from one year ago. Conditions are worse in Spain and Greece, where more than a quarter of the working population is without a job and more than half of the youth is unemployed.

Christine Lagarde, Managing Director, International Monetary Fund (IMF), described the global economy recovery in 2013 as “fragile and timid” because the Eurozone is prone to political crisis and slow decision-making processes.

Some believe that China is the engine that propels global economy growth in the right direction.  There is a belief that China is recovering and that signals global recovery.  However, the statistics reveal a mixed result according transport intelligence.com.  The February figures from Container Trade Statistics (CTS) show that, if anything, container trades are heading downwards. Overall, Asian exports – including on intra-Asian trades – fell by 26.4% as compared to January and by 8% as compared to February last year. In addition, import activity for Asia fell by 10% compared to January 2012, whilst on a year-on-year it was down by 12%. The export traffic indicates a twelve month low.  This is confusing and one thing is certain and that is economic downturn is here to stay some more time.  When we look at the major air cargo carrier performance during the first quarter, the results are no different.  Lufthansa Cargo has reported a 1% increase in its aircraft utilisation in the first quarter of 2013. In a difficult market environment, the cargo carrier scaled back capacity by 7.4%. Due to a smaller decline in sales, by 5.9%, the company was able to increase its load factor to 71.4%.  Overall, Lufthansa Cargo carried approximately 400,000 tonnes of freight and mail in the first quarter of the year – a decline of 7.2% compared with the same period in 2012.

Keeping in view of the global financial trend, business houses have to develop strategies that will take them through the tough financial conditions.  Any organisation will target three different improvements and they are, top line revenue growth, bottom-line improvement and increase satisfied customer base.  In order to meet the above, organisations will develop number of objectives, each describing a desired future condition toward which efforts are directed. An objective is a statement that clearly explains actions to be taken or tasks to be achieved by an organisation. If the objectives are accomplished, then the business should be a success.

Research reveals that most of the business organisation will have two types of business objectives and they are Economic and Socio-human objectives.  However, the organisation can focus on socio-human objective only when they are financially successful.  Hence, the focus is on economic objectives and they are mainly three objectives targeted by most of the entrepreneurs.  They are (1) Business prosperity through improved margins and increased sales volume (the upward arrow); (2) Speed to the market place to maximise product availability (the side way arrow) and (3) Cost reduction/optimization to make the product competitive to sustain in the market place (the downward arrow).  In fact all three objectives are inter-related and driven by cost trade-off decisions within supply chain.

The purposes of objective setting are, to establish a standard for evaluating the success of the business and set priorities for its management and staff. Objectives help keep management and staff focused on achieving set targets and keep them away from distractive activities that drain business resources.  The appropriate organisational goals will also to address the challenges of global economy.

The risks of doing business and competing in a global economy seemingly change by the day. At the same time, risk management and cost seem to go hand in hand, leaving many executives to wonder: Is it possible to reduce risks and still grow the top line? The answer is yes, and there are stories to prove it. A key ingredient is a “conscious” approach to managing risks in your organization’s supply chain. Every business that depends on goods and services in a global supply chain is at risk for various supply chain disruptions, or worse: contamination or product failure.

It is evident that the key to the success of any organisation lies in Supply Chain efficiency.  The industry has realised that if one manages the supply chain efficiently aligns it to the business dynamics; the success of the organisation is assured.  The optimisation of Supply Chain was handled by different section of experts in different ways.  Some think that technology is the solution to the supply chain efficiency some believe that the strategy is the key to the success. And some believe that people (the right team) are responsible for supply chain innovation through thought leadership.

Supply chain performance has never been as critical as it is today. In today’s dynamic world what is good today can turn into ugly tomorrow in market place.  At some stage buffer inventory was recommended to meet the demand fluctuations (JIC) and now carrying inventory more than required levels is undesirable and JIT is the favoured option. Under these ever changing circumstances, supply chain efficiency plays a very vital role in keeping the organisations alive. In order to achieve maximum benefit from a supply chain and creating competitive advantage in the supply chain wars, a supply chain must be performing at its best and continue to perform that way.  We have seen organisations flourishing through the product innovation and we are today witnessing organisational superiority in the market place through innovative supply chains.

If we take a hard look at the IT hardware industry, most of the big brands and your local assembler provide more or less same product.  However, there is huge price variation which is possible due to supply chain innovations.  When we look at the retailers, the product range is the same, origin of supply is the same and the quality of the product is almost the same.  However, there is huge price variation.  The reason is supply chain efficiency.  The procurement strategy, the distribution strategy and the organisational objectives make the difference.

Supply Chain efficiencies cannot be ignored by any industry in today’s economic downturn.  However, the truth is that some of the organisations do not recognise what is appropriate for their supply chain and pursue inappropriate policies and concepts.  Fortunately, we have only two supply chain processes and they are known as Pull and Push. The failure and success of the business model mainly depends upon selecting the appropriate process.  If a retailer who predominantly follows push process decides to use pull process, the end result would be a catastrophe.  At the same time if an IT hardware manufacturer decides to use push process, will end up with high inventories and obsolete stock in the warehouse.  If one can align the supply chain with the business dynamics, it is truly possible to register revenue growth and improve velocity and also reduce costs.

In today’s world what is critical to the business success is the right supply chain strategy that could meet customer expectations and the last but not least is the right team with the ability to think outside the box and innovate with thought leadership.

save costs

Image credit: San Francisco Sentinel

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