Creating Value with an Outsourced International Purchasing Office in China

Case Study
Creating Value with an Outsourced
International Purchasing Office in China
Dragon Sourcing - 龙源
Your Tailored Sourcing Approach to China

© 2007 Dragon Sourcing. All rights reserved.
2
Agenda
1. Context
2. Sourcing Process
3. Governance Model
4. Results and conclusions

3
Context
AB Foods:
• ABF is a global Manufacturer of food products, headquartered in London UK, with over 250
manufacturing locations around the world.
• ABF employs 85,000 people worldwide and has an annual turnover of £6.8 bn(13.6 bn USD)
• Within it’s portfolio of products are well known brand such as Twinings teas, Ovaltine, Tone spices,
Mazola oils, and Ryvita.
• AB Foods has recently launched a structured strategic sourcing programme to buy direct from
suppliers in China with the assistance of Dragon Sourcing.

4
Agenda
1. Context
2. Sourcing Process
3. Governance Model

5
Dragon Sourcing service offering covers the end-to-end sourcing process
Feasibility Analysis
Supplier Selection
and Contracting
Procurement Operations
• Analyse spend category in detail
– Specifications and quality requirements
– Volumes
– Deadlines
• Analyse supply market and identify potential suppliers
• Pre-qualify potential suppliers through an RFI process
• Manage RFP process with pre-qualified suppliers
• Analyse supplier responses and calculate fully delivered
price (logistics, import duties, ADT,..)
• Develop Business case and implementation plan
• Shortlist suppliers based on
RFI/RFP process
• Audit shortlisted suppliers
• Select 2-3 suppliers for sample
development process
• Manage sample development
process
• Conduct final negotiations and
select suppliers
• Finalise Contract
• Manage P/O and agree payment
terms and details (L/Cs,..)
• Check in process production quality
• Conduct pre-shipment QC
• Arrange logistics
• Manage supplier performance
• Monitor new sourcing opportunities
Keyactivities

6
Supplier Selection
and Contracting
– Volumes
– Deadlines
RFI/RFP process
development process
process
select suppliers
Keyactivities

7
The first step is to develop a comprehensive understanding of the need and of
the functional requirements
19 kg (±0.5 kg)Weight
Short: 190mm - Long: 190 mmCentral Block
Short: 510 mm - Long: 540 mmFork access
1000mm x 1200 mm x 150 mmSize
€XXXXXXCurrent annual spend in EURO
€ 48.00Current DDP price in EURO
6.5% (China – UK)Customs Duty
3923900000HS Code
480 pcs/ 40’HCPackaging
Dynamic Load capacity: 1000 kg (±5%)
Static Load capacity: 4000 kg (±5%)
Rack Load capacity: 1000 kg (±5%)
Rack Loading Deflection: 60 mm max
Description
50 % Virgin HDPE - 50 % Recycled HDPEMaterial
1520 pcsQuantity
Product PicturePlastic PalletProduct Name

8
Product
Demand
Quantity
Quantity/4
0'HC
Sample
charge
(US$/pcs)
FOB price
(US$/pcs)
FOB port
FOB - CIF
transporta
tion
charges
estimates
CIF Price
(US$/pcs)
Import tax
duty
CIF - DDP
transporta
tion
charges
estimates
DDP Price
(US$/pcs)
savings
plastic pallet 1520pcs
Quotations for plastic pallets
with recyclable raw material
加回料塑料托盘报价
Material
Proportions (%)
回料比例
Quotations for plastic pallets without recyclable
raw material (Virgin)
不加回料塑料托盘报价
Heavy duty HD PE plastic pallet quotation
Type of pallet
Plastic pallets 1000x1200x150 mm（annex1)
塑料托盘 1000x1200x150 mm (附件1)
Plastic pallets 1165x1165x150mm (annex2)
塑料托盘 1165x1165x150 mm (附件2)
Request for information
To 收件人: Ms. Vi vi an Xu
Email 电子邮件: vivian.xu@dragonsourcing.com
Tel number 电话: 021 - 6141 3958
Fax number 传真: 021 - 6141 3966
Company Name
公司名称
Contact Person
联系人
Title
职位
Email
电子邮件地址
Tel
电话
Fax
传真
Mobile phone
手机
What date was your company
founded?
贵司是在哪一年成立的？
Ownership (State Owned/
Priviate/Foreign Investement)
企业性质 (国有/民营/外资)
Registration capital (RMB)
注册资本 (人民币)
What is the workfloor size (m²)?
贵司工厂面积有多少平方米？
How many employees do you have?
贵司员工总数有多少？
What kind of certification do you
have (ISO, Environment friendly,
etc)
有何质量管理证书？(例如 ISO,环境
Do you have good English
speaker and writer in your
factory? (Y/N)
贵司是否有可用英语进行书面及口语
交流的人员？(是/否)
Are you capable to produce HD
Polyethylene plastic pallets like
showed in annex and that respect all
DRAGON SOURCING 龙源有限公司上海代表处
INTEND TO RESPOND
答复意向
Then, an RFI/RFP process is administered to filter out most capable
suppliers
Business
information
Logo on the
pallet
Product and price
information
Logistics
informatio
n
Contact detail
information

9
During the tender process, the suppliers’ willingness to collaborate and to
provide complete and accurate information is also assessed
Supplier 2: Ningbo Changqi
– Recycled HDPE at 50 %
– Fork Access
• Short: 255 mm (required: 350 mm)
• Long: 270 mm (required: 365 mm)
– Central Block
Suppliers 4: Aceally
– Virgin HDPE
– Fork Access
– Central Block
Supplier 3: Foshan Bright-June
– Virgin HDPE
– Fork Access
– Central Block
1 Shandong 13-Sep 27-Sep € 20.00 € 32.27 —
2 Zhejiang 12-Sep 27-Sep € 21.11 € 33.38 19-Oct
3 Guangdong 13-Sep 27-Sep € 21.25 € 33.52 19-Oct
4 Fujian 12-Sep 27-Sep € 22.98 € 35.25 19-Oct
5 Zhejiang 10-Sep 27-Sep € 25.68 € 37.95 —
6 Beijing 14-Sep 27-Sep € 39.72 € 51.99 —
Sample sent
Company Information
FOB priceSupplier Region RFI/RFQ sent RFI/RFQ replied
RFI/RFQ follow up
DDP price

10
Loading amount
40Ft in pcs
FOB-CIF
South
Hampton 40Ft
FOB-DDP
Zaandma 40Ft
cost
1 Shandong € 20.00 325 € 3,360.64 € 3,988.27 € 30.34 € 1.97 € 32.27
2 Zhejiang € 21.11 325 € 3,360.64 € 3,988.27 € 31.45 € 2.04 € 33.38
3 Guangdong € 21.25 325 € 3,360.64 € 3,988.27 € 31.59 € 2.05 € 33.52
4 Fujian € 22.98 325 € 3,360.64 € 3,988.27 € 33.32 € 2.17 € 35.25
5 Zhejiang € 25.68 325 € 3,360.64 € 3,988.27 € 36.02 € 2.34 € 37.95
6 Beijing € 39.72 325 € 3,360.64 € 3,988.27 € 50.06 € 3.25 € 51.99
Current € 48.00
Import Duty
Europe(6.5%)
DDP PriceSupplier Region
Logistics Cost Estimation
FOB Price CIF PRICE
Then all relevant information is collected to calculate DDP prices
Shanghai
SHANGHAI
Gansu
Jiangxi
Zhejiang
BEIJING
Jiangsu
Guangxi
Hunan
Hubei
Ningxia
Shaanxi
Anhui
Fujian
Neimongu
Shanxi
Shandong
Sichuan
Yunan
Guizhou
Henan
Jilin
Liaoning
Hebei
Guangdong
Gansu
Heilongjiang
FOB Price (supplier) Freight forwarding, customs & duties
DDP Price
3
5
4
2
6
1

11
Price Comparison
€ 0.00)
€ 10.00)
€ 20.00)
€ 30.00)
€ 40.00)
€ 50.00)
€ 60.00)
supplier1 supplier2 supplier3 supplier4 supplier5 supplier6
Logistic Costs from FOB China to UK
FOB Price
Finally a Go/No Go decision to proceed is given based on the savings potential
vs. the risk associated with changing suppliers
Current DDP price
€ 48/pcs
€ 32.27
€ 51.99
€ 33.38 € 33.52 € 35.25
€ 37.95

12
Supplier Selection
and Contracting
– Volumes
– Deadlines
RFI/RFP process
• Audit short listed suppliers
development process
process
select suppliers
Keyactivities

13
Short-listed suppliers are audited to assess long-term partnership opportunities
Audit
questionnaire
Audit report
Audit
summary
Objectives
• Meet top management and sales management teams
• Present order details
• Refine supplier offer understanding
• Understand organization
• Validate manufacturing capabilities
• Visit factory and check work conditions
Topics
• General Management
• Order management
• Shipping / packaging
• Planning process
• Goods flow
• Procurement
• Purchasing
• Production
• Quality…

14
Collected information is shared with customer through detailed audit reports
GENERAL INFORMATION
SUPPLIER NAME
Ningbo Changqi Fluorine Plastic
Products Co., Ltd
City Ningbo
Province Zhejiang
Zip code 315029
Contact person Lola Guan
Job title Purchasing Manager
Email Lola-changqi@hotmail.com
Phone number 86-0574-56131221
Fax number 86-0574-87580015
Website www.changqi.cn
BUSINESS INFORMATION
Found Year 1993
Ownership foreign investment
Capital in million RMB 27.3
Work floor size (m²) 50,000
Number of employees 500
Revenue/Turnover (in million RMB) 2007 100
% Sales exports to western markets 90%
Main export markets US & Japan
Actual annual production of plastic pallets 45,000 pcs
QUALITY & ENVIRONMENT CERTIFICATION
ISO 9001:2000 YES
ISO 14000 YES
Others JIS, UL, CSA
FACTORY PICTURE
　
COMPLIANCE WITH LOCAL LAW
Children labor 　 YES
Working hours 　 YES
Health & Safety 　 YES
Environmental issues YES

15
Audit outcome is summarized in a rated profile of each supplier
M 1 Management 77%
4.1 Quality system and environment 80%
4.2 Quality assurance and improvement process 90%
2.1 Logistics: General 68%
2.2 Logistics: Order management 64%
2.3 Logistics: Expedition / Packaging 80%
2.4 Logistics: Planning Process 64%
2.5 Logistics: Goods flow 75%
2.6 Logistics: Procurement 80%
2.7 Purchasing 77%
T 3.1 Production and Work preparation 77%
3.2 Development - general 75%
C 5 F&A 70%
Average score 75%
Q
L
DS Scoring
Description
Please check
the relevant
box
91 - 100 % Excellent
81 - 90 % Good
61 - 80 % Satisfactory
51 - 60 % Inadequate
- 50 % Poor
Ningbo Changqi Fluorine Plastic Products Co., ltd
Audit 23rd of November 2007
77%
80%
90%
68%
64%
80%
64%
75%
80%
77% 77% 75%
70%
75%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 4.1 4.2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 3.1 3.2 5 Average
score
(%)

16
A closer look on collected samples shows slight feature differences among
different suppliers
Supplier Name Province Recycled
Stat. Load
(kg)
Dyn.
Load
(kg)
Fork Access Central Block
Price €
FOB
Picture
1 Shandong YES – 30% 1000 4000
Short: 220 mm
Front: 270 mm
Short: 180 mm
Front: 180 mm
20.00
2 Zhejiang YES – 50% 1000 4000
Short: 255 mm
Front: 270 mm
Short: 190 mm
Front: 190 mm
21.11
3 Guangdong NO 1000 4000
Short: 260 mm
Front: 260 mm
Short: 190 mm
Front: 190 mm
21.25
4 Fujian NO 1000 4000
Short: 260 mm
Front: 260 mm
Short: 190 mm
Front: 190 mm
22.98
5 Zhejiang YES – 10% 1000 4000 n/a n/a 25.68 n/a
6 Beijing NO 1000 4000
Short: 268 mm
Front: 268 mm
Short: 141 mm
Front: 181 mm
39.72

17
The final supplier selection relies on the short-listed suppliers’ offers, audits
and sample quality
Suppliers’ quotation
Samples
Audit summary
Supplier
Name
Supplier 1
Supplier 2
Supplier 3
Supplier 4
Supplier 5
Loading
amount 40Ft
in pcs
FOB-CIF South
Hampton 40Ft cost
FOB-DDP
Zaandma 40Ft
cost
1 Shandong € 20.00 325 € 3,360.64 € 3,988.27 € 30.34 € 1.97 € 32.27
2 Zhejiang € 21.11 325 € 3,360.64 € 3,988.27 € 31.45 € 2.04 € 33.38
3 Guangdong € 21.25 325 € 3,360.64 € 3,988.27 € 31.59 € 2.05 € 33.52
4 Fujian € 22.98 325 € 3,360.64 € 3,988.27 € 33.32 € 2.17 € 35.25
5 Zhejiang € 25.68 325 € 3,360.64 € 3,988.27 € 36.02 € 2.34 € 37.95
6 Hebei € 39.72 325 € 3,360.64 € 3,988.27 € 50.06 € 3.25 € 51.99
Current € 48.00
Import Duty
Europe(6.5%)
DDP PriceSupplier Region
Logistics Cost Estimation
FOB Price CIF PRICE
Supplier 2: Ningbo Changqi
– Recycled HDPE at 50 %
– Fork Access
– Central Block
Suppliers 4: Aceally
– Virgin HDPE
– Fork Access
– Central Block
Supplier 3: Foshan Bright-June
– Virgin HDPE
– Fork Access
– Central Block

18
Supplier Selection
and Contracting
– Volumes
– Deadlines
RFI/RFP process
development process
process
select suppliers
Keyactivities

19
Overall methodology & 7-step process
Quality is regularly monitored during production and at pre-shipment
• Dragon Sourcing teams are trained to follow a
7-step process to execute Quality inspections
• Sampling and criteria requirements are detailed
in a specific document for customer approval
• On-site data are recorded in a specifically
designed Excel table
• Inspections are documented in a report
submitted to customer
• Action plans are defined in order to improve
product quality
Sampling & Criterias
Excel recording tool
Checkitem #
Box #
Marking Inner carton Mug Quantity Mug heigth
Mug upper
diameter
Mug lower
diameter
Wall
thickness
Mug weigth Material type Quality
1 OK OK 48 104.3 64.9 3.6 326 OK OK
2 OK OK 48 103.4 64.5 4.2 346 OK OK
3 OK OK 48 104 64.6 3.9 344 OK OK
4 OK OK 48 104.6 64.8 3.8 317 OK OK
5 OK OK 48 104.3 57 3.6 308 OK OK
6 OK OK 48 104.8 61 3.8 317 OK OK
7 OK OK 48 103.7 64.5 3.9 328 OK OK
8 OK NO 48 103.8 62 3.9 345 OK OK
9 OK OK 48 103.3 64.1 3.1 322 OK OK
10 OK OK 48 103.2 63.4 3.7 325 OK OK
11 OK OK 48 104.4 64.8 3.9 317 OK OK
12 OK OK 48 102.3 64.2 3.2 316 OK OK
13 OK OK 48 105.4 63 4 316 MO OK
14 OK OK 45 105.6 65 4 322 OK OK
15 OK OK 48 106.3 65.6 4.1 357 OK OK
16 OK OK 48 103.4 65.5 3.9 311 NO OK
17 OK NO 48 104.7 64.1 3.8 300 OK OK
18 OK OK 48 104 60 3.8 342 OK OK

20
QC Reports provide detailed information concerning production quality

21
Following the failed QC Audit
Solutions were proposed and issue was resolved working closely with the client
• Shipment was stopped pending input of the client
• Key Reasons for QC failure were evaluated
– Antiskid inserts were missing on some pallets
– Antiskid inserts were not correctly inserted on
some pallets
• A Solution was proposed
– Because this is a minor problems DS suggested
that the Supplier provide extra Antiskid inserts at
no cost so they could be easily fixed if they fall
out or are found missing a later time
• Client Agreed with the Solution and the containers
were released for Shipment

22
Supplier performance is closely monitored and new potential suppliers regularly
audited in order to manage the supplier for continuous improvement
Supplier performance management Alternative sourcing opportunities monitoring
Overall performance
Q1 Q2 Q3 Q4
　　
Potential
Supplier
1
Potential
Supplier
2
Potential
Supplier
3
Current
Supplier
Price
Prod. 1 26.4 23.8 24.9 24.6
Prod. 2 36.1 33.8 34.9 33.7
Prod. 3 13.4 15.1 12.2 12.8
Prod. 4 40.2 38.1 41.3 38.4
Region Jiangsu Zhejiang Shanghai Shanghai
Turnover (M€) 6 14 8 19
Staff 350 700 430 880
Capabilities 100/day 120/day 75/day 140/day
Sample quality N/A Good N/A Good
Cooperation Good Good Average Good
Potential supplier assessment
Potential Supplier 1 Potential Supplier 2 Potential Supplier 3 Current Supplier
Competitivity Capabilities Motivation

23
Agenda
1. Context
2. Sourcing Process
3. Governance Model

24
The China sourcing programme is managed via a series of frequent
conference call meetings
Dragon SourcingClient procurement unit
Business Model
• Dragon Sourcing is a service provider
assisting customer in sourcing and
procurement activities
• Customer places Purchase Orders directly
with selected suppliers and suppliers
invoice directly Customer
• Customer pays DS a fixed monthly mgmt
fee + evaluates every quarter Dragon
Sourcing performance
Communication
• Steering Committees weekly (conference
call) to review overall progress on all
categories
• Categories follow-up meetings on an ad-
hoc basis to review category issues
• Meeting minutes record main decisions,
planned actions and project status
DS CEO
DS Account Manager
President
Sourcing Director
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Logistics
Buying Analyst
Buying Analyst
Vietnam
Buying Analyst
Buying Analyst
Buying Analyst China

25
During these meetings, projects’ status and issues are discussed
Project
No.
Project request
date
Customer
project
leader
Job title Organization
Product
category
Current
estimated
annual
spend
Current
supplier
contract
ending
date
status
Target
completion
request date
Completion
date
definition
Priority
1 Bouillon Cubes J H
2 Plastic Pallets C L
3 Bread Baskets C L
4 Vitamin C K M
5 Bread Bags C L
6 Animal Feed
sacks
S G
7 Nitrates and
Phosphates
Polypropylene
M Q TBD
Project Overview & Follow up
4/6/2007
Project
Number
Project
request date
Customer
Project Leader
Job title
Organi-
sation
Product category
Current
estimated
annual spend
Current
Supply
Contract
ending date
Status
Target
completion
request date
Completion date
definition
Priority
1 10-Jul-06 A B Buying Manager Not For Resale Paper cup Sampling 18-Sep-06 1st Shipment High
2 11-Jul-06 A B Sourcing Manager Not For Resale Shelving systems RFP To be defined 1st Shipment High
3 21-Jul-06 A B Buying Manager US
Paper cup, Garbage bag,
cup
Supply Market
Survey
6-Sep-06
e-auction for supplier
selection
High
4 10-Jul-06 C D
European Sourcing
Manager
Private Label
Corrugated packaging for
detergents & household
cleaning
RFP To be defined Business Case
To be
defined
5 12-Jul-06 C D Sourcing Manager Not For Resale Roll container
Supply market
survey
To be defined To be defined
To be
defined
8 24-Jul-06 A B
European Sourcing
Manager
Not For Resale Tissue Paper
Supply market
survey
To be defined To be defined
To be
defined
10 25-Mar-06 A B Buying Manager Not For Resale Plastic produce bag 1-Feb-07 RFP 15-Dec-06 1st Shipment
To be
defined
11 25-Aug-06 C D Buying Manager To be defined Pet Food Supply market surveyTo be defined To be defined
To be
defined

26
Collaborative workflows facilitate clear communication and quick decision making
Customer Supplier
Dragon
Sourcing
Supplier database
RFP design
RFP
analysis
Analysis report
Suppliers audits
Decision to
realize project
Final sample
RecommendationRFP answers
Final selection
Delivery
Production
Quality Control
Supplier performance
Payment management
Market monitoring
Reporting
Project information
(specs., samples,
quantity, price)
Feasibility analysis
Supplier selection
and contracting
Customer Supplier
Dragon
Sourcing
RFP launch
Customer Supplier
Dragon
Sourcing
Negotiation
Contracting
Sample development

27
Agenda
1. Context
2. Sourcing Process
3. Governance Model

28
Spend Categories

Bouillon Cubes

Plastic Pallets

Bread Baskets

Vitamin C

Bread Bags

Animal Feed sacks

Nitrates and Phosphates Polypropylene

Sugar Sacks Carton packaging

Bread Tins

Twinings Projects

Transportation and Warehousing

1 Ton Woven PP and 25 Kg Paper Sugar
Sacks

Beet Slicing Knives & Fraisers

IT System Telecom Services

Multilayered

Paper Sacks

Non-Dairy Creamer

Soy Proteins

Buckets
Etc….
The sourcing programme has covered a high variety of items

29
Savings range from 5 to 30% depending on the product and the “as-is” sourcing
situation
Generated savings per product(%)
28%
6%
9%
5%
12%
5%
0%
5%
10%
15%
20%
25%
30%
Plastic
Pallets
Animal Feed
sacks
(AB Agri UK)
Animal Feed
sacks
(AB Agri
China)
Polypropylene
sugar Sacks
Carton
packaging
Bread Tins
(%)

30
In addition to savings, the Client benefits from a range of other benefits from our
“Sourcing on Demand” service
• Reduced sourcing risks in terms of:
– CSR
– Capacity/availability/delivery reliability
– Quality
• Total Supply Chain transparency
– Sourcing process (RFI, RFP, Audits, QCs,…)
– Knowledge about the suppliers (regular visits by client)
– Assurance that product is really made to the spec
• Pro-active market intelligence about category opportunities and innovative products in China
• Flexibility to increase/reduce sourcing capacity on Demand
• Window to other Asian countries (e.g.: Vietnam, Malaysia,…)

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