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China has become North America's preferred overseas destination for low-cost sourcing. It seems like the perfect strategy, right? The North American company gets what it needs at lower costs, and the Chinese manufacturer/distributor gets the business it needs. Everyone is happy.
But there are clear signs in the business world that the honeymoon is over. This is because the most significant part of Supplier Relationship Management (SRMÃ¢"žÂ¢)--the actual Relationship--has either not been fully developed or has been insufficiently nourished in order to thrive.
The Honeymoon is Over.
Much like the perfect couple you know who surprise you when you learn they are in counseling, there's trouble in paradise. For an organization to be successful today, it must source well, communicate well, and forge a strong supplier relationship while focusing on building a strong global supply chain.
Consider these three recent situations, which I learned about first-hand from executives who do major sourcing from China.
Example 1: Goals and Incentives Gone Awry
The newest sourcing manager for a North American company met with his new boss on the tenth floor of their Shanghai headquarters. During the meeting, he learned that the other sourcing managers have been busily taking the company's spending on sourcing in China from zero to the multi-million mark. His boss explained the new employee's objectives and bonus criteria. He'll receive a big bonus if sourcing from China doubles in a year. The goal is all about how much could be sourced. But what if the sourcing does not result in the reduction of total delivered cost? What if the sourcing results in poor quality products? What if the sourcing leads to bad customer service?
The sourcing manager didn't need to think about that, however. His incentive was based on sourcing as much as possible. Quality and customer service went out the company's tenth floor window that day.
Example 2: The Illusion that Communication Has Occurred
Out of frustration, a vice president of supply chain for a firm headquartered in North America worked through the entire weekend on a detailed schedule of the exact SKUs and quantities he needed for the next 12 shipments from the company's distributor in China. Shipments up until then had been way off the mark, but the vice president believed his exact instructions would solve the problem. On Monday morning, he emailed these detailed shipping instructions to his contact in China.
Sixteen weeks later, in came the first of the 12 containers. The VP went to the warehouse as the container was being unloaded and was shocked to see little resemblance between his email instructions and the shipment. The second and third containers were also not to his specifications. Perplexed and aggravated that all of his work had been for naught, the vice president called the distributor in China. He asked the supplier why his detailed directions were not being followed, and was surprised to learn that the distributor doesn't bother with email, and probably never saw the detailed instructions.
Quality communications are not defined by what you say or write--but by what the person you are communicating with hears or reads. An effective global supply chain requires quality communications, and the definition of "quality communications" varies from culture to culture.
Example 3: Long Distance Relationships are Tough
The head of global sourcing was nervous. Her company had only one source for a key component that was coming in from China. Supplier A had done a good job, but from time to time had trouble meeting schedule. The head of global sourcing contacted her agent in China and requested that alternative sources be identified, so as to minimize her risk with Supplier A.
After a long negotiation and qualification process, two alternative suppliers (Suppliers B and C) were identified. Each was given about 25% of the volume. This increased costs but gave the head of global sourcing a sense of security. When volumes increased, the company hired a China-based consulting firm to do an assessment of the three suppliers. After some digging, the consultant found that A, B and C were all owned by the same firm.
How do we expect to source well if we do not have a relationship with the firm with whom we are sourcing? The fact is, the more distant the supplier, the more important the relationship becomes, but in practice, the more distant the supplier the weaker the relationship. This must be addressed to source well. These examples and the problems they represent call for a tailored SRMÃ¢"žÂ¢ approach for low cost sourcing.
A little background on SRM: It was first developed for the automotive industry in the 1990s, with the main goal being to streamline the processes between an enterprise and its suppliers. SRM creates a common frame of reference to enable effective communication between an enterprise and suppliers, who may use different business practices and terminology.
As a result, SRM increases the efficiency of processes associated with acquiring goods and services, managing inventory, and processing materials.
In the North American business arena, SRM is perceived as a software approach. But when crossing the ocean, that can no longer be the case. There is some technology that is useful for facilitating communication between suppliers and companies, but true SRM is a one-to-one process. SRM is simply not about a company lining up all their suppliers and forcing them through the implementation of software.
Due to rising operations costs among companies, countries like China have obviously become the preferred destination for low-cost sourcing. But the real key to success here is often overlooked--a tailored SRM approach for low cost sourcing. The key word in SRM is Relationship with a big "R" and software cannot be more than a very small part of this approach.
It is not about how much you source, but how well you source. One way of understanding this and how SRM can achieve superior sourcing is through the analogy of a marriage. Three elements make it up: a quality partner, another quality partner, and a quality marriage. Allow us to assume for this discussion that we have quality partners, and that they represent two companies and their quality supply chains.
We have a global buyer (Partner 1). He or she buys product from a quality supplier in China (Partner 2). Just because our partners, who are both quality people, are married, it does not mean they will have a quality marriage without hard work. The buyer and supplier will not have a quality relationship and supply chain without hard work, either.
The key to this bond is the process of Supplier Relationship Management (SRM). Successful SRM does not refer to what the supplier does within their link of the supply chain, and it does not relate to what the buyer does in their link of the supply chain. Instead, it looks at the "touch points" between the supplier and buyer.
Some of these touch points include transportation execution, supply chain structure, forecasting and communications of future demand, packaging and labeling requirements, inventory levels and lead times, risk management, and much more.
If you relate to the real-life accounts described above, it's time to start emphasizing the relationship you have with your overseas supplier. Customer satisfaction, low-cost operations, product quality and many other factors that keep your business going are counting on it.
SRM Survey in the Works
Tompkins Associates is currently surveying top North American companies on their SRM techniques. To participate and receive the free report outlining key drivers of pain and solutions that make sense, complete this survey before July 18, 2008.
Once the data is in later this summer, we will report on the findings. We expect the survey results to reveal some hidden truths and a list of best practices to keep companies from losing the sourcing game in China.
In the meantime, if you relate to the real-life accounts I described above, it's time to start emphasizing the relationship you have with your overseas supplier. Customer satisfaction, low-cost operations, product quality and many other factors that keep your business going are counting on it.
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