Practical insights for SMEs who need to develop a new, or improve their management of an existing supply chain.

1. Developing a Reliable Chinese Supplier for SME Businesses Authored by: Benjamin A. Shobert Direct: 317-777-2926 Email: bshobert@gmail.com

3. Building a relationship … “guanxi”.

4. Maintaining product quality standards.

5. Learning to think like your Chinese vendor.

6. Common pitfalls.

9. The advantage to a trade-show meeting is that you can prospect in person, in large quantities, with minimal cost.

10. Just don’t equate this first face-to-face with a factory visit.

11. A lot of Chinese companies will exhibit product they have either only prototyped or may not even yet be able to manufacture.

12. The disadvantage to a trade-show meeting is that you can not necessarily distinguish between a manufacturer and a trading house.

13. From the mid-90’s to early ‘00’s, trading houses grew in their popularity.

14. Many times these were Hong Kong based companies who acted as an intermediary for a Western company.

15. The trading house would offer on-the-ground support ranging from supplier identification, to translation services, to quality audits, to financing transactions.

16. This model has become strained with the advent of Alibaba.Com and GlobalSources.com as well as the growth of certified 3rd party inspection services such as AsiaInspection.com and KRT Asia Inspect.

17. Successful trading houses today are sector-specific (i.e. injection molding tools for automotive or precision aluminum castings).

18. From the early ‘00’s to now, the role of Alibaba.Com and GlobalSources.com has expanded enormously, offering Westerners an easy information-gathering vehicle for identifying potential vendors.

19. However, these sources should be viewed as helpful only in the most general sense – they allow you to fill your pipeline with prospective vendors.

21. You want to be specific as to the product you are searching for.

22. The more specific the better (i.e. toothbrush is good, toothbrush w/ TRP over-molding is better).

23. You want to pick the right product to start working on.

24. Two schools of thought:

25. Option 1: Needs to be high enough in volume to justify the time and expense.

26. Option 2: Pick something small, get a victory, internalize, move on.

27. My opinion: this is a highly cultural determination you have to make based on your management and level of comfort. Neither is bad, but Option 2 can take longer to generate the underlying ROI necessary to drive the program forward.

28. Avoid products where you know you have had problems (i.e. a difficult quality spec, tolerance issues, past supply chain disruptions).

29. At this point, do not worry about location.

30. Be open to locations outside of China.

31. Many high labor content, low value added manufacturers have either moved in-land away from the Chinese eastern seaboard or have opened factories in places like Vietnam, Bangladesh and Indonesia.

32. Immediately eliminate anyone who has “Trading House” or something similar in their title.

33. They may be perfectly reputable as business entities (although they tend to represent a disproportionate amount of the fraudulent activity @ Alibaba in particular); however,

34. Your objective is to get as close to the manufacturer as possible.

36. Feel free to; however,

37. Take what you get w/ a grain of sand.

38. It may – or may not – be something they made themselves.

39. It may – or may not – be something they had their equipment vendor make for them.

40. It may – or may not – be representative of their production quality.

41. It may – or may not – be something they aren’t supposed to be showing you.

42. At this point, it’s better to ask questions that help you understand their manufacturing infrastructure.

43. Good questions are:

44. Can you send me a PowerPoint of w/ pictures of your factory?

45. Can you send me a list of your production equipment?

46. Can you tell me more about the processes you have at your site?

47. How many employees do you have working here?

48. What sort of design capabilities do you have in-house?

49. Where is your tooling made?

50. What are your largest export markets?

51. For most companies, as you get closer to your supply chain, you will learn to ask more specific questions about the sort of manufacturing infrastructure necessary to make your products; that may take a little bit of time, but the objective should be not to ask only about their product capabilities, but their manufacturing asset base.

52. What about asking for customers?

53. You can, although in a highly commoditized industry, you are likely to find that most vendors have done business w/ most exporters. You will get a better sense of their customer base – who drives their business – when (if) you visit their factory.

54. It’s also too easy for them to “fudge” what it means to have Company X as a customer.

55. You can ask about ownership.

57. Geography – are the vendors concentrated around a particular region?

58. Capabilities – what sort of machine capabilities do these vendors have?

59. Don’t be overwhelmed at this – it will be pretty obvious once the information starts to come in who is credible and who is not as well as who has the best manufacturing infrastructure.

60. You may find that 50% of the companies you reach out to are not able to populate a list of equipment or present you with an overview presentation.

61. Products – who easily pointed you towards either a close enough or exact match to what you are looking to source?

62. Communication – which businesses have been the easiest to communicate with?

63. In China, the best part of most businesses is their export department. If your experience working w/ them in the first stages is bad, you are not going to have a good experience if you advance them to the next stage.

64. In almost every case, at this stage, the list will pretty obviously narrow down to between 3-5 potential vendors.

65. Occasionally in highly competitive “me-too” industries, this number may double; however, most companies are surprised at how asking the right questions initially serves to help them discern who is a good candidate and who is not.

66. And this is when you will make one of the most important determinations in this process:

69. Equipment: age, maintenance, country of origin, capabilities.

70. Facilities: independent power grid, clean, well-organized, assembly capabilities, work-flow.

71. Quality Control: job boards, inspection tables, SPC, ISO.

72. Engineering: what CAD / FEA capabilities do they have in-house?

73. Tooling: can they modify (dial-in) new tools themselves, or do they have to send out?

74. Inventory: how much, what kind, where is it going (region) and who is going to (customer)?

75. Capacity: shift schedule, current capacity, seasonal bottlenecks, ability to respond to opportunity.

76. Midnight Manufacturing: are products being manufactured under license?

77. Labor: acceptable working conditions?

78. You will leave with a very precise understanding of what they are actually capable of manufacturing.

79. At this point, more than likely you will be down to 1-3 potential vendors.

80. It is then, and only then, that I would have them quote on anything.

83. Guanxi is all about relationships: who has it, who doesn’t, what you can get if you do, what you won’t get if you don’t.

84. It matters when you need to …

85. Get that last 5% price concession out of the vendor.

86. Have them pull labor away from one customer’s job to finish your rush job.

87. Extend terms when you need to modify cash flow.

88. Hold them accountable to an agreement.

89. You get it in two ways: face-to-face meetings and the length of time you do business together.

90. Consequently, since the latter is entirely new and thereby of little help in the short-term, the face-to-face meeting is important.

91. For a growing organization w/ limited managerial bandwidth, it is common to split this into two parts:

92. Part 1 – visit via BAS.

93. Part 2 – visit via manager / business point of contact.

96. Spec creep – the gradual & deliberate testing of what you will accept.

97. Preventing this from happening requires a combination of:

98. Proper documentation (material specs, drawings, 3D model, etc.).

99. Translated prints, material specs, inspection sheets, etc.

100. Ideally, job boards w/ “go” / “no-go” samples attached.

101. Approved first article that you retain ownership of.

102. Random first article tests for new (repeat) orders of existing SKUs.

105. “Is all this work really worth it?” and …

106. “Why do the Chinese do this?”

107. Yes – it is worth it; but,

108. No – it is not worth it if you do not put the up-front work into vetting and developing a vendor.

109. Why do the Chinese do this?

110. A cultural & historical drive to please, in particular those in positions of authority.

111. Admitting you do not know how to do something or are not clear about something is a loss of face.

112. Cutting corners was a matter of survival.

113. Testing limits allowed them to eek out a living in the midst of famines and political turmoil.

114. But the best and most practical way to avoid these problems is this …

115. Learn when to ask leading versus specific questions.

116. Bad question: do you have a 350T injection molding machine?

118. It’s Your Brand Before It’s Their Product Blaming the Wrong People Most Americans remember the lead-paint problem Mattel experienced with their Hot Wheels toys made in China. But, most Americans had tuned out of the story by the time the Mattel CEO issued a formal apology to China. Why? Not just because Mattel needs China – although that is certainly the case. Mattel apologized because they had missed two of the most basic quality control issues that can happen with a cast metal car which effect consumers. First, the wheels can come off and become a choking hazard. Second, the paint can have lead in it. Before any of Mattel’s vendors made a Hot Wheel, Mattel knew what the most common quality problems were, and they were not checking to make sure their Chinese vendors did not push the envelope. Mattel did not cause the problem, but Mattel forgot that before a Hot Wheel was their Chinese vendor’s product, it was Mattel’s brand. If they had remembered that, they would have been much more aggressive about pre-empting these sort of quality problems.

119. Common pitfalls

121. The desire to please and the drive to grow their business can be a bad combination when you need someone capable today of meeting your expectations.

122. Quality Problems

123. You have a lot of control over this, but it requires a little more up-front time and cost.

124. It also requires internal processes for how vendors are managed and audited.

125. Intellectual Property

126. Very much an ongoing problem in China.

127. Midnight manufacturing can be at your expense (they make your licensed product for someone they are not supposed to), or to your benefit (they offer to make you something they should not, or they sell you something that is covered by a pre-existing license).

128. Tooling Ownership

129. Supply contracts need to specify who owns tooling in event you terminate business relationship with them.

130. Again, this is why the up-front vetting is so important – these problems can be minimized by due-diligence.

131. This is always difficult to execute on, and requires a willingness to litigate.

134. Good: an approved first article.

135. Better: an approved first article + product specs w/ quality documentation.

136. Best: an approved first article + product specs w/ quality documentation + on-site job boards.

137. Building the Relationship … the “guanxi”.

138. Good: meeting at an exhibition.

139. Better: meeting at an exhibition + 1 solid face-2-face.

140. Best: meeting at an exhibition + 1 solid face-2-face + production visit(s).

141. Inspection

142. Good: they ship you a first article prior to production run first time only.

143. Better: they ship you a first article prior to production run first time only + every production run.

144. Best: they ship you a first article prior to production run first time only + every production run + 3rd party.

145. Supply Contract

146. Good: a relationship.

147. Better: a relationship + a supply contract in English.

148. Best: a relationship + a supply contract in English + a supply contract in Mandarin.

150. Contact Information Contact the Author Benjamin A. Shobert Phone: 317-777-2926 Skype: ben_shobert Email: bshobert@gmail.com Ben is a member of the National Committee on US-China Relations and holds an advisory board seat at Indiana University’s Research Center on Chinese Politics and Business. He is a columnist for the Asia Times on US-China trade and economic policy matters, with a particular focus on how relations between the two countries are being impacted post the 2008 financial crisis. Ben has successfully managed supply chain projects in China across a number of industries, ranging from consumer goods to more complex engineered products. Regardless of whether the program must meet the needs of an American SME or a Fortune 500 company, Ben brings a practical focus to making your China supply chain as cost-effective and responsive as possible. He holds his MBA from Duke University in Raleigh, North Carolina.