|
Articles
& Cases - Cases
A
Whole China Sourcing Process Case
ABC
Company is an European auto parts manufacturing company. They are
supplying their parts to aftermarket as well as to Tier 1 suppliers. The
feature of their products is low volume and high mix. They have a good
market share in aftermarket and OE market.
China
Threat
In
2000, Mr. Smith, managing director for ABC Company begun to feel the
cost pressure from their aftermarket customers as well as from OE customers. He
noticed that their distributors were reducing orders and were selling auto
parts from China at much lower prices. Their competitors were also selling
auto parts from China at much lower prices. In the beginning, he did not
care much about the situation as they had a strong brand in aftermarket
and they could provide hundreds of models to their customers within 24
hours. He believed that Chinese auto parts supplier could not compete with
him.
However,
he changed his mind in 2004 when he found that his company had lost a
significant market share due to Chinese low cost products. He decided to treat the threat seriously.
Plan
He flied to China to visit an auto parts show. He was surprised to find
that there were over 10 Chinese factories present producing similar
products and their prices were much lower than his. During the visit,
he also met a Chinese consultant Mr. Zhang who specialized in helping
foreign companies source auto parts in China.
He
told Mr. Zhang his preliminary idea: he had two ways to lower costs
- one was sourcing finished products from Chinese suppliers; another one
was sourcing semi-products from China. He had some
problems in producing some very low volume products as cost was very high
and it was difficult to manage. He planned to source those products from
Chinese suppliers. Mr. Zhang thought that this was not feasible
because volume was too low and it would be difficult to find a suitable
supplier who was interested in those products. Mr. Smith could not source
major products to Chinese suppliers as ABC Company was not a trading
company and they were producing those products by themselves. So the only
option was source semi-products from China.
Mr.
Zhang and Mr. Smith analyzed their semi-products. The
semi-products were machined parts, castings, plastic injection moldings,
and etc. There were about 100 models and quantities varied from several
thousands to one hundred thousand. There were two semi products that took up a big portion in product cost and volumes were
relatively high. Those two products were best products for sourcing from China to
achieve a quick cost savings. Mr. Smith and Mr. Zhang agreed that the
first step was source those two products from China. Mr. Smith hired
Mr. Zhang to implement the plan.
Identification
of Chinese suppliers
Mr.
Zhang first studied the industry status in China for those two parts. China exported a lot of them to Europe, USA and other
countries. Chinese products were very competitive. There were more than one
hundred suppliers available. The two parts have some special
technical requirements in automotive industry and German standards were
required. Based on the technical requirements, Mr. Zhang further narrowed
down the suppliers to 20. Then He consulted some Chinese experts in this
area and checked some industry reports. He further narrowed down the
number of suppliers to 10.
He called the 10 companies and asked them to
provide company information and to quote. Only 3 of them could provide all
the models and they had automotive
experience and TS 16949 certified.
Price
In
order to compare prices, the 3 companies were required to quote FOB prices
in USD. All the 3 companies had export experience to Europe so they quoted
the prices very quickly. After several rounds of clarifications on
technical details, Mr. Zhang believed that the prices were correct and
suitable to the requirements. There were no big difference between the
prices among the three factories. Then he forwarded
the prices to
Mr. Smith. He was happy as he expected a 30% cost savings
in those parts.
Samples
Samples
from the three factories were couriered to ABC Company. Mr. Smith was a
little surprised that Chinese companies asked him to bear courier cost.
But he was happy that all the samples passed their testing.
Site
Visit
Mr. Zhang
visited the 3 factories. Two factories looked very good in terms of
facility, quality control, and general management. So he recommended the
two factories as the final candidates. Mr. Smith was happy with the
results and informed Mr. Zhang that he was ready to place an order to one
of the suppliers. One supplier showed more interests in this opportunity. So Mr. Zhang
suggest that first order be placed to this supplier and the other supplier
be standby supplier.
Payment terms
After
Mr. Smith decided to place the order, Mr. Zhang negotiated with the
Chinese supplier again and got a 5% discount. Mr. Smith was unhappy with
the payment terms - 30% down payment and 70% before shipment because in
Europe he usually had net 30 days terms from their suppliers. It was the
first time that the Chinese supplier did business with ABC Company. They
required 100% payment before shipment. But for the second order, the
Chinese supplier promised to give better terms - 30% down payment and 70%
after shipment. Mr. Zhang understood that this was usual practice to
Chinese suppliers and explained this to Mr. Smith. Mr. Smith agreed to the
terms. This means that he had to make 100% payment before he received the
products. At that time his company had a lot of cash so it would not be a big
problem. But this was a drawback to him in sourcing parts from China. He asked
Mr. Zhang to negotiate better payment terms in next order.
Delivery
time
Besides
payment terms, Mr. Smith had another concern about delivery time. The
Chinese company could ship the products on board within 45 days after order
confirmation. Considering 30 days on ocean and 7 days for customs
clearance and inland transportation, the total lead time for the parts to
reach factory was 82 days. In the past, their local supplier's lead time
was only 40 days. To meet the changing market demand, Mr. Smith had to
maintain higher level of inventories of these products. He thought if he
planned the inventory well it would be ok for this longer lead time.
These parts are very heavy and not suitable for airfreight. So in case of
emergency, it was difficult to improve the lead time. His plan was to use
local supplier in case of emergency.
About
sea transportation, the Chinese supplier was used to FOB term. So Mr.
Smith picked a local logistics provider who could collect the goods at
China port and send them directly to the factory.
Production
After
the order was placed, further details on packing were finalized. Mr. Zhang
kept a close contact with the factory on the production progress. 20 days
before the planned production complete date, the supplier asked ABC
Company to book a shipping space. The logistics company can not confirm a
shipping space without full packing details such as number of pallets,
dimensions and gross weight. But they promised to keep a space for the
order in the planned on board date.
Inspection
before shipment
When
the production finished, Mr. Zhang went to inspect the products before
shipment. He found that there were some typos in markings. It was
corrected right away. Also some minor dimensions on the products were not
conformed to the specifications. Mr. Zhang reported the problem to Mr.
Smith. He required some samples to assess the problem. The samples were
couriered to Mr. Smith. Their engineers tested the parts and approved
them. The factory also analyzed the problem and found the reasons. They
sent a corrective action plan to Mr. Smith. He was
satisfied with the factory's quick action.
Shipping
Space
When
the products were ready for shipment, the logistics company told the
Chinese supplier that there was no shipping space in two weeks. The
reason was Chinese Spring Festival was coming and Chinese companies were
exporting more products than in usual time to Europe. This was unexpected.
Although Mr. Zhang and the factory discussed with the logistics company's
agent in China many times, they could not change the situation. Finally
the products were shipped on board two weeks later.
Unloading
in Factory
The
container arrived ABC Company. But there was another problem. The company
did not have a platform for container unloading. So they could not use a
forklift and had to use manual hydraulic fork. Then they found that the
pallet size was not suitable for the fork. They had to use a rope and
forklift to haul the pallets out of the container. Two workers hurt their
hands due to this. It took 3 workers a half day to unload the container.
The logistics manager for ABC Company complained this to Mr. Smith.
Incoming
Inspection
Initial
inspection of the products proved that the quality conformed to the
samples. The engineers also conducted a life testing on the parts. They
were surprised to find that the Chinese products had a longer life
than the products made in Europe. The engineers inside ABC Company begun
to change their attitude to Chinese products. This gave Mr. Smith
more confidence in his China sourcing plan.
After
the parts were used in actual production, the quality of the Chinese
products were further confirmed.
Second
order
Mr.
Smith was satisfied with the first order. So he placed the second order.
The Chinese supplier offered better payment terms and actual lead time was
improved. All the problems happened in the first order were avoided. Mr.
Smith asked Mr. Zhang to look at other products.
Another
China Visit
Mr.
Smith visited China again. He visited the Chinese suppliers as well as 5
other Chinese factories identified by Mr. Zhang for the new plan. He also visited the same auto parts
show he visited last year. The trip was exhausting - 5 factories and one
parts show in one week. But Mr. Smith was excited as he gained first hand
experience about Chinese companies and his Chinese competitors. Now He
knew how to compete with Chinese companies in European market. He even
began to think that maybe he should set up a factory in China to supply
Chinese market.
|
