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Articles
& Cases - Cases
To
Source or Not to Source
ABC
Company is an European auto parts distributor. It has 30 shops around the
country and its annual sales exceed 30 million Euros. All the products
they deal in are local brands or British brands. But they do not have their
own brand.
In
2000, Mr. Smith, managing director for ABC Company noticed that their
competitors sold same parts at much lower prices. After investigation, he found that their competitors were sourcing parts from China and labeled
them with their own brands. Mr. Smith hired his Chinese friend Mr. Zhang
to check Chinese suppliers and prices.
Mr.
Zhang identified 5 leading Chinese suppliers for the main products and got
prices within two weeks. After getting the prices, Mr. Smith knew that
even their competitors were selling at lower prices but the margins should
still be better. Besides, Mr. Zhang also told Mr. Smith that
three famous British companies were also sourcing those products from
Chinese companies. ABC Company were purchasing a lot of products from
those three British companies. It appeared to Mr. Smith that he should set
up his own brand and source parts from China. So he held a meeting with
his purchasing director and sales director.
After
the meeting, Mr. Smith felt that it was difficult to make a decision as
his managers listed a lot of disadvantages in sourcing products from
China. He summarized them as follows:
1.
Brand:
We do not have our own brand. To source from China, we must set up our own brand. But it is unknown whether customers will accept the brand or
not. Also it takes a lot of money to develop a brand.
2.
Chinese product image:
Chinese product image in local customers is still low end product. There
are also some news about bad quality Chinese products. The sales prospect
is unknown. The sales director does not like Chinese products.
3.
Conflict with existing suppliers:
We have exclusive sales agreement with the three British companies.
Marketing our own brand products may hurt the relations with them. Sales of
the products from the three British companies takes up a big portion in
our total sales. It is important to keep the relations with the
companies.
4.
Cash flow:
Based on Mr. Zhang's information, Chinese companies usually require
payment after shipment and can not give 30 days net terms as European
suppliers. This means a higher level of cash is required.
5.
Delivery time and stocks:
Based on Mr. Zhang's information, it takes about 80 days for the products
to reach our warehouse after order confirmation. This means that we will
lack flexibility to the change of market demand. Also this means we have
to have higher level of stocks that may erode the cost savings.
6.
Quality:
We are not sure about Chinese
product quality. There are a lot of stories about poor quality Chinese
products. It appears that it is difficult to control the quality of
Chinese products.
7.
Human resources:
We do not have a person who understand China and has enough experience
dealing with Chinese suppliers. The purchasing director does not like the
idea of sourcing parts from China.
After
listing the disadvantages, he wrote an email to Mr. Zhang to ask his
opinion. Mr. Zhang told Mr. Smith that he did not know much about Mr.
Smith's customers, suppliers or market situation. But he asked Mr. Smith
to pay attention to the following facts:
1.
The 3 British companies are sourcing parts from China. The products you are
selling are actually made in China.
2. Your competitors are sourcing parts from China.
3. Chinese companies are more and more stronger in quality and price.
Mr.
Smith decided to visit an auto parts show in China before he made a decision.
Seeing is believing.
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