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Lessons learned ten years ago by companies as they set up purchasing operations in other low-cost regions, such as Brazil and Mexico, travel only so far. Finding high-quality suppliers and negotiating agreements with them is a problem that companies face in any new locale, for example, but the greater geographic distance between suppliers in China and headquarters makes the job tougher for companies based in North and South America. Another challenge is coming to terms with the widespread use of sourcing agents, which can be a boon or a bane, depending on what individual companies need.

Then too there are issues—such as sorting out logistics, securing reliable broadband connections, and cultural and language differences—that companies rarely face at home. Those that do establish successful sourcing operations in China concentrate on a few fundamentals. They make changes at the home office to address the organizational inertia that can slow down the introduction of a purchasing program in China.

They attend to the details, monitoring suppliers as closely as possible.

Setting the stage

Such companies also learn to build local capabilities by staffing teams carefully and using third parties to support them in important tasks, such as quality assurance and logistics. In these ways, companies lay a foundation they can use to relocate bigger and more crucial pieces of their supply chain operations. They gain cost and operational advantages that competitors can't match and capabilities that competitors can't easily replicate.

Manufacturing accounted for 60 percent of China's GDP growth over the past decade. Multinationals set up operations there, and domestic companies expanded to make goods for export and to sell products and services to multinationals doing business in the country. But that was just the start of the boom. Even though Ford Motor and General Motors have considerably beefed up their supply lines from China during the past few years, for example, those goods constitute only a fraction of the components used in their vehicles.

Both say that they expect to increase their purchases of Chinese-made parts vastly. Companies in other sectors are also racing up the Chinese sourcing curve. Other retailers, including Best Buy, Carrefour, and Tesco, have equally ambitious plans. The potential is impressive, but so are the difficulties, ranging from intellectual-property infringements and customs delays to poor communication between headquarters and suppliers.

But these hurdles, while daunting, can be overcome.

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Our work with companies that source goods in China suggests that three important issues should be addressed at the outset; other problems can be resolved later. One of the biggest barriers to a Chinese sourcing program is resistance from middle managers at home, who often have a limited perspective. If their performance is measured on inventory turns, for example, they 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, who are evaluated on their ability to economize, warn that using far-flung suppliers will push up costs.

Procurement managers wave the yellow flag about the quality of goods, while product designers, manufacturing chiefs, and plant managers all have objections of their own. And they are right, from their specific points of view. Inventory and logistics costs will rise. Adjustments will be needed to deal with the new risks of managing suppliers in China. But companies that succeed there have demonstrated that the benefits of lower-cost purchasing almost always outweigh the increase in operational costs and risks. Even after accounting for them, one retailer recorded overall savings of more than 20 percent in its sourcing operation.

Managers at such companies see the bigger picture. They commit the time needed to make the case for change, sell it internally, and transform organizational structures, incentives, and performance measures. And as we have seen in our own work, there is also clear direction from the top. Without unambiguous support from senior executives, programs languish when procurement departments or operational managers try to implement them.

Executives can overcome resistance to change by making a persuasive case for it. Some sponsor efforts to develop total-cost-of-ownership models that show whether the benefits of sourcing in China outweigh the additional logistics costs, lower inventory turns, and risks to quality exhibit. At one high-tech company, for instance, managers from functions such as logistics and procurement worked with the CFO to create such a model.

This exercise not only encouraged them to buy into the final assessment but also helped middle managers identify cross-functional sourcing issues, including how to get the logistics, inventory, and marketing teams working together to manage longer supply chains. In addition, executives must find ways to minimize the pain of process changes and to make them acceptable quickly. One manufacturer began by using its existing processes to select, approve, negotiate with, and manage vendors instead of setting up a special Chinese initiative staffed by employees whose powers usurped the authority of sourcing and product managers.

Processes and sourcing roles changed only after the company became comfortable working with Chinese suppliers. This manufacturer believes that the experiment helped its managers design a better sourcing program by allowing them to learn gradually about new approaches to purchasing, logistics, selecting vendors, and negotiations. As a short-term measure, companies might redesign their performance incentives in order to encourage purchasing managers to buy goods from China. One retailer introduced "incubation" incentives to motivate its buyers, rewarding them with bonuses for the volume of products they sourced there.

To source goods directly from China, a company must learn a set of basic capabilities. These include ensuring quality and control evaluating a supplier's ability to meet requirements, for example , testing preproduction prototypes or samples, and assessing packing procedures. Logistics activities such as satisfying customs regulations and arranging shipments are important as well.

During the transition phase, a company might work with China-based agents—trading intermediaries that buy and ship goods—until it had identified and trained the internal talent needed to deal directly with Chinese suppliers. The first of the intermediaries to go will be those that merely buy and sell, because they offer the least added value. Naturally, these agents are likely to pull out all the stops to keep their treasured positions by arguing that they understand local business practices better than overseas managers can.

They also claim to do the heavy lifting so foreign companies don't have to spend time trawling for suppliers, negotiating deals, and establishing infrastructure and organizations to manage supply. Ultimately, they will contend, they can "do a better job for you than you can do for yourself here. In our experience, foreign companies can actually learn to do quite well for themselves, whatever the agents' persuasive claims to the contrary. The real issue is how to decide when to use third parties. But though they should generally be used as sparingly as possible and according to strict criteria, there are reasons to take advantage of the specialized services that some of them offer: Moreover, a steady flow of agents through a procurement office can promote market-led innovation and provide useful information about changes in the supplier base.

In this case, however, it can turn to an array of specialist third-party providers that help it identify reliable suppliers, provide quality assurance and control, and perform logistics tasks. Combining in-house activity with the use of third parties permits a company with lower levels of direct sourcing to set up its own office in China and start reducing its reliance on intermediaries while capturing significant savings.

Companies that set up their own procurement operations should focus on building their leadership teams. Four important posts must be filled: The ideal candidate for each role will have a knowledge of the company, the industry, and China—and be fluent in Mandarin. As many companies have discovered, the perfect candidate rarely exists. All buyers who would like to get involved in this new business in China are subject to a series of problems.

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The geographical distance, the foreign culture and language as well as the lack of market knowledge all play an important role. Proceeding in a systematic way and carrying out thorough preparations reduce risks and help to ensure success in the Chinese procurement market. The objective of this thesis is the creation of a guide to industrial procurement in China.

It is aimed at purchasing employees in German production companies who have not yet had experience of dealing with or in China and who would like to start. The guide is to give an initial general orientation towards that which purchasers expect and how they can best carry out their sourcing project. The reader is given insight into the Chinese procurement market. Problem areas and hurdles regarding procurement in China are observed; practical tips are given to get round such problems.

Due to the size of the subject matter, it is not concerned with developing a complete compendium of industrial procurement in China. Some questions which have been discussed in other publications will inevitably remain open. The reader who is interested in further information is directed to the literature list as an aid. The focus of Chapter 3 is the initial contact with possible Chinese suppliers. The different possibilities of establishing contact are shown, dealing in particular with the Chinese trade fair market and the behaviour of German buyers at Chinese fairs.

For German companies which have already gained buying experience in China the quality of the products supplied is a great problem. Thus, Chapter 4, after describing the quality consciousness of the Chinese, presents practical measures for quality control with regard to procurement in China. Chapter 5 deals with transport logistics. It describes the different types of logistics service providers and the potential carriers for inland and export logistics with their opportunities and risks. At the end of the chapter, a checklist gives assistance in choosing a logistics service provider.

Some basic values which still determine the course of negotiations today can be found in the roots of Chinese culture. The reader is also given practical tips for successful negotiations in China. This section presents a short overview of the most important geographical and economic data on China. China has since become the sixth biggest economy in the world. In the same time frame, its export trade volume rose almost six-fold from million to 1. This gives it 3rd place among the trading nations, behind the USA and Germany.

In contrast, on the international welfare scale China is in the last third. GDP per capita passed the dollar threshold for the first time in If one takes into account the different levels of prices in the countries, GDP per capita based on purchasing power can be calculated at approximately dollars.

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From a German point of view, the Chinese procurement market has increased considerably in significance in the last fifteen years. This is shown by the very dynamic growth in the German imports from China, which more than quadrupled from 8 billion in to In the mid term, it is assumed that by bilateral trade will have doubled. The growing significance of the Asian supply market is also shown in a study carried out by the University of Applied Sciences in Berlin. The Chinese procurement market is observed by international companies from many different perspectives: Chinese universities currently supply the job market with approximately 3 million highly qualified engineers and natural scientists annually.

The average monthly salary for a young academic is currently at approx. Due to these aspects, in particular the unrivalled low wage costs, China is developing into one of the most lucrative procurement markets. The cost gap is not only unlikely to close within the next 20 years but in some cases may actually increase. Mainly there are 2 reasons for this: First, the growth of wages in China will be limited because of the enormous reservoir of under- and unemployed people.

China still has more than million people living in the countryside. They are expected to exert very strong downward pressure on wages for low-skilled positions over the next few decades. Although there will be more pressure on higher-skilled positions, the supply of candidates for such positions is also very large. Second, the current differential in labour rates is so great that the gap between them will remain substantial for the foreseeable future, even if there are double digit differences in the rates at which they grow see Fig.

In fact, the gap in real wages will actually increase in absolute value, at least for the next few years, because the bases are so widely different. If wages increase at an annual rate of 8 percent in China, while in the United States and Germany they increase at annual rates of 2. In half a million manufacturing sites, it produces approx. Traditionally, Guangdong is a home to light industry, which makes up more than half of industrial output. The most important products are electrical devices such as televisions, audio equipment, copy machines, telephones and other consumer products such as textiles, cigarette lighters, watches, toys and shoes [14].

It is not surprising that numerous western retail companies have settled in the region Wal-Mart, Metro, Otto, Carrefour, Ikea. Increasing numbers of companies are now following the retail companies, for the focus of production in the region is shifting increasingly towards the high-tech fields of electronics and telecommunications. The supply industry in also growing strongly since the density of factories has attracted an increasing number of competitive suppliers.

The resulting growth in the range of electronic components and assemblies, plastic and metal parts, and pressure die-cast components on offer is also attracting an increasing number of European and American Small and Medium-sized Enterprises SME to the region, which are buying parts for their own manufacturing processes. Exactly as in the Pearl River Delta, the region has a highly developed private sector and is home to more than private companies. The YRD Region also has numerous companies from the steel industry e. Boasteel Shanghai , machine building and the automotive industry e.

Shanghai Volkswagen, Shanghai General Motors and more than international supply companies.

Getting sourcing right in China | McKinsey

Other pillars of the region are the textile and chemical industries e. There is a large number of industrial supply companies e. Shanghai offers an international atmosphere, a high quality of life and a somewhat western lifestyle. Beijing as the capital of China possesses superior advantages since business and politics are still closely connected. Beijing thus plays an important role for foreign entrepreneurs in establishing and maintaining social relations with party functionaries and representatives of state institutions and ministries.

However, high-tech companies have also located in the region in the last 20 years. Experts are of the opinion that the region could become the dominant economic force of the whole of north-eastern Asia by It already dominates the steel, automotive, chemical and raw materials industries.

The production of software, mobile telephones and electrical household appliances is centred mainly around Beijing and Tianjin.

China Sourcing Strategies, Tips - Mike Bellamy, Global Sources Summit

For western buyers who would like to procure components for production at home, the Bohai Region offers only a very limited supply market. Heavy industry has been built up here intensively since The whole north-eastern lowlands lives from the iron and steel industry, automotive factories and chemical works. Closures and redundancies in the outdated steel works and coal mines has lead to mass unemployment and mass protests in the last few years.

A quarter of all Chinese unemployed live in the north-eastern provinces.

Global Sourcing. Procurement in China

In Liaoning alone in the last few years three million workers have been laid off and firms closed. Many cities in the region arose because of state companies. The private sector is only gaining ground slowly. Since , the Chinese government has increasingly supported the structural change of this region. Volkswagen 1 billion Euro, BMW million Euro and foreign know-how are also helping considerably to create new jobs. In the course of the reform process a small but increasing number of local suppliers are setting up procurement bases near production centers. In contrast to the booming coastal regions the Chinese heartland is defined by its slight economic power, weak foreign orientation and its reform deficit.

Only a few well-qualified state-owned companies can be found. Economic development is to be boosted by state support and foreign investment. Everywhere in western China large construction projects for highways, railroads, canals, dams, pipelines and electricity cables can be seen. With high levels of investment the government in Beijing is trying to ensure that the west can compensate its greatest disadvantage as soon as possible.

In addition to the new infrastructure, the low wage costs — when compared to the coastal regions — and the attractive tax benefits represent further essential incentives for foreign investment. The authors Ming Zeng and Peter J. After competing for decades with global leaders selling products on their home turf, some Chinese companies decided to concentrate on developing and selling products not just in the domestic market but also overseas. These national champions have tested the waters confidently, because they have successfully kept their multinational rivals at bay at home.

But overseas, they do not challenge their larger opponents head on. Instead, they scout for segments that the market leaders have vacated or are not interested in serving because profit margins or volumes are low. They use their experience in adapting technologies and features to meet the price points of cost-conscious buyers to develop products for those segments. Not surprisingly, low manufacturing costs allow these national champions to turn a profit where their rivals cannot.

Haier exemplifies this strategy. By the early s, the company had battled Whirlpool, Electrolux, Siemens, and Matsushita to become the leader in China's market for household appliances. The company manufactures types of refrigerators, air conditioners, dishwashers, and ovens. When it entered the U. For five years, it focused on selling only compact refrigerators — units smaller than litres — which could be used as mini-bars in hotel rooms or students could squeeze into dorm rooms. The incumbent leaders had dismissed these market segments as peripheral, but they proved to be quite profitable for Haier, which last year had about half of the mini-fridge market.

The company's second strategy foray was equally cautious: Like Haier, many Chinese companies can deliver such products in both low-tech and high-tech industries. This allows them to surprise their rivals, who are more worried about disruptive technologies and breakthrough innovations. The national champions produce very large unit quantities. Exports are carried out practically along the way; at the same time they have already gained a large share of the world market. Since these companies are represented on the world market and most operate sales offices abroad, there are no major procurement problems for European buyers.

No direct investment in China is necessary. Despite the lure of the domestic market, some Chinese companies set their sights squarely on the external market when the government opened the economy. These dedicated exporters were probably motivated by the prospect of reaping global economies of scale or the knowledge that competition in their businesses was inherently global.

Getting sourcing right in China

Some of them attacked the overseas market from the start; others, which were subcontractors to big international players, had to think small at first to ensure that they did not jeopardise their supplier relationships. As they develop expertise with crucial technologies, they migrate to specialised, high-value segments. They are not shy about striking partnerships or acquiring rivals to move up the value chain. Over the next five years, CIMC captured half the world market for refrigerated containers.