Challenges of sourcing in China - report

Related tags China Supply chain management Logistics

A new report suggests that while the benefits of sourcing in China
outweigh the additional logistics costs, western companies must
still be prepared to deal with significant procurement and sourcing
issues if they are to prosper.

Manufacturing has accounted for 60 per cent of China's GDP growth over the past decade. The low cost of production, coupled with favourable economic policies and preferential tax rates are among the drivers behind this manufacturing success.

As a result, many manufacturers, including food and beverage makers, are seeking to reduce supply chain costs through sourcing in China. But if they are to succeed, theymust deal with the problems that this entails.

As a recent report from analyst McKinsey​ points out, it can be hard to get the many pieces of a procurement operation in China right. Finding high-quality suppliers is a ubiquitous problem, but the greater geographic distance between suppliers in China and headquarters makes the job tougher. It is this above all that makes sourcing in China so complicated.

Indeed, this unfamilarity with the size of the country can be one of the biggest barriers to a Chinese sourcing programme. Firms might worry that distant and uncertain supply lines will require them to hold larger inventories, thereby driving up costs and reducing turns. Similarly, logistics managers will warn that using far-flung suppliers will push up costs.

Inventory and logistics costs in China will undoubtedly rise, and adjustments will be needed to deal with the new risks of managing suppliers in China. But the authors of the report believe that companies that succeed will be the ones that have demonstrated that the benefits of lower-cost purchasing almost always outweigh the increase in operational costs and risks.

Many companies starting up in China will use sourcing agents. Certain agents are skilled at handling delicate materials or complex product categories, or have exclusive rights to particular factories.

Indeed, a PricewaterhouseCoopers report on Responsible Supply Chain Management in China​ suggests that western firms should utilise experienced personnelwho are well trained andknowledgeable of local businesspractices and regulations.

Firmsthat have built their expertisethrough association with a widerange of clients and with resourcesplaced in all major Chinesebusiness centers, says the analyst, should have thecapability to provide this highlyspecialised service.

But McKinsey suggests that if a company sources more than $100 million a year in goods from China, it makes economic sense to have a unit there that can go directly to suppliers, because the cost of running a direct-procurement operation is a third or less of what agents charge.

Many companies that source products in China are choosing to establish operations in the country to further cut costs, and Israeli-based soy proteins specialist solbar is a case in point. At the start of the year, the company began building a soy processing plant at Ningbo Free Trade Zone, southeast of Shanghai, in order to cope with growing demand.

Although setting up business in China has been challenging, construction is going according to plan. The company claims that the Ningbo authorities have had a 'highly professional' approach and have done much to help progress. The project is on time and still expected to be up and running by December 2004/January 2005.

Indeed, China is increasingly becoming an attractive sourcing destination. Shenzen andShanghai are lading the way, and following China's accession to the World Trade Organisation (WTO), mainland authorities have been aggressive in opening distribution centers for foreign companiesahead of the timetables set by thetrade body.

Many western companies aresetting up sourcing centres close totheir newly-established production facilities in China. Major firms such as Coca-Cola and Nestlé already have significant operations in China, with sales of over $1billion in the China packaged food market. And Wal-Mart has already setup a fully functional purchasing centre in Shenzen.

Related topics Processing & packaging

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