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This is part one of a two post mini-series about the 5 issues you must know about the China direct sourcing strategy.
Managing your supply chain in China buying directly from your factory has many advantages and potentially can improve your bottom line significantly. But it may also present some challenges that might lead to errors and loss of profit.
For some companies dealing with the manufacturer directly with no third party taking part in the supply chain is not a must. An example could be a company that develops and markets an advanced electronic medical device.
That company also supplies to its customer’s kits of many kinds of disposable hygienic accessories like pads and sponges together with the medical device.
Do you really need the China direct sourcing strategy?
It is possible that the company we are talking about does not have the resources to implement the China direct sourcing strategy for all its products because it does not have enough people needed to follow up the manufacturing and the assembly of the kits.
The company is not really making any profit on the kits. Actually, it is supplying the kits to its customers as a good service. They do not wish to spend any resources on the kits sourcing and production and therefore buy the kits from a trading company specializing in this kind of product range.
Good trading companies are a great business partner because they are very service oriented, they usually understand their customer very well, are able to communicate with the customer very effectively and they cover a broader product range that won’t make sense for a manufacturing facility to cover.
So if you are looking for a solution for products that are not your core business or if the China direct sourcing strategy is not a part of your overall game plan, then a trading company could be a solution you want to look at.
For other companies working through a trading company is not an option. Sometimes, not being able to communicate freely and directly with the manufacturer of the product is making it impossible to run an efficient supply chain.
When that same company, that develops the advanced medical device, is looking into outsourcing the manufacturing of that device, they have a few issues on their mind that make working through a trading company very difficult.
While patents, trademarks, and NDAs are a must, they are not enough. The best way to keep a secret is not to tell it to anyone, or at least only to the people you absolutely have to.
If the IP is mainly in a software installed on a chip that is embedded on one of the device boards, technically, protecting the IP is easier, although it might not make financial or operational sense.
But what if the IP is in the production process or the configuration of the equipment needed to manufacture the device? That can make protecting the IP a bit more challenging.
The only people that absolutely must know these things (other than the buyer’s staff) are the production team in the factory. If your direct supplier is a trading company, you might have to reveal the IP to the trading company and this is something you need to think whether you are willing to do or not.
Control over production process
When you are dealing with complex products, making sure the production process is controlled on a regular basis is very important. Your engineering and QA teams must train and in many cases negotiate with the manufacturing facility the protocols of the manufacturing processes.
Many times changes to the manufacturing process increase cost, and if you are not able to discuss this issue with the manufacturing facility openly, it will be very difficult to reach an agreement you and the facility will be able to accept, regarding the final manufacturing process, the additional cost and, how the two of you share that additional cost.
Additional margin vs. additional risk
Naturally, one obvious advantage of the China direct sourcing strategy is the additional margin you gain as there is no third party standing between you and the factory.
But the reason some people are willing to pay third parties is the value that they bring. And they do.
If you plan to manage your business in China by yourself you must be prepared to deal with the gaps created by the areas where you might not have the skill, knowledge, experience or resources needed to bring the business transaction to a successful end. If you don’t have all those skills, knowledge, experience and resources in-house, you will be exposed to additional risk. That doesn’t necessarily mean the risk will materials to losses every time, but the risk is there and you probably want to gradually gain those skills, knowledge, experience and resources or at least access to people who have them.
This is the end of part one.
But there are a few more things you must know before you decide which strategy you are going to use.
I will talk about them in part two.
If you want to know more about different strategies you can use doing business in China,
please feel free to contact us.
We would love to talk to you about your projects in China.