In this guest post, Procurement Leaders invites Xchanging's Yang Cao to explain how small and medium enterprises (SMEs) approach sourcing from China, and what considerations need to be factored into low-cost country sourcing strategies.
SMEs, in terms of procurement capability, are often at a disadvantage when compared to big multinationals. They don't have the same scale necessary to garner mass savings or, when needs must, to set up factories wherever required. SMEs, more or less, have to follow the market and more and more, the market is looking to China.
Low-cost country sourcing (LCCS) isn't new. Tier-1 sportswear companies like Nike have been sourcing from Asia since the 1960s, but for a lot of SMEs it's unmarked territory. Because of that, and a host of other factors - the language barrier, cultural differences, currency and exchange rates and the huge distance separating buyer from supplier, LCCS can be rather daunting.
Why SMEs are sourcing from China
China is the perfect starter-country for companies testing the waters of low-cost country sourcing. Big business paved the way more than 40 years ago and now, because of that, China has a very mature and stable supply chain making it a relatively low risk choice for companies new to LCCS. There are a number of factors that make China a good sourcing fit for the risk averse SMEs, but for the purposes of this blog I'd like to highlight what I consider to be the most important.
- Skilled labour - The Chinese labour force is highly skilled. China can produce extremely complex products from toys to electronics to automotives and machinery. For complex technical and industrial products, there is simply no equivalent low-cost competition. Beyond the high complexity level of China's output, one of the reasons that keep SMEs coming back is the speed at which goods can be produced. For many products, China can produce them better and faster than any other low-cost country.
- Raw materials and sub-suppliers - China has a large sub-supplier market meaning, many low-cost countries actually source their materials from China. If a UK-based hardware company decided to outsource its manufacturing to India, more than likely that Indian factory would be sourcing parts, screws for example, from China. China also produces cotton and many other raw materials required for manufacturing. Being able to source everything locally reduces both cost and delivery times and it reduces the number of countries, and therefore the level of complexity, of low-cost country sourcing.
- Mature supply chain - China has the trained labour, the sub-suppliers and, after years of experience working with international companies, it has the necessary understanding of the export market. China has the infrastructure and the logistics in place to efficiently support the global manufacturing market. China has the years of experience to be able to ensure quality throughout the entire supply chain from sub-suppliers, materials, transport, manufacturing and so on. That, more than anything, is why China has become the benchmark for low-cost country sourcing.
How SMEs should source from China
For SMEs sourcing from China, there are a few key tasks that must be undertaken to reduce risk, increase the potential benefits and guide the process. Obviously, due diligence is required as is an entry/exit strategy but more important than that, the SME must first fully and truly understand its own product and acquire local knowledge.
- Know Your Product - Before a company can source from a low-cost country it needs to first understand its own product. What are the main components? Is it labour intensive? Does it need high-skilled workers? Does it require long lead times? Every low-cost country has different strengths depending on the requirements. For SMEs, companies who are new to LCCS or for complicated products that require a lot of downstream suppliers, China is the best country to work in. Any organisation thinking of low-cost country sourcing must know exactly what they are looking for in terms of these categories.
- Know The Market - China is a completely different supply market. It has a different language, different currency, different geography, different politics and different culture. In order to enjoy the benefits that sourcing from China offers, SMEs must take the time to understand the market. Procurement teams need a local understanding and knowledge of how the Chinese supply chain operates, that includes having someone on the team who speaks the language. If a company doesn't have that ability in-house, then they need to work with a partner company who does. Jumping into the market blind is really difficult and mistakes can be huge.
Growing consumption and increased consumer demands are driving a more international approach to sourcing. SMEs are going further and further afield in the hunt for the lowest cost suppliers. Due to its maturity and stability, a lot of companies are using China as a foundation when low-cost country sourcing and then, depending on how big the business is, looking at other countries from there. For small or medium-sized companies China is the perfect place to start.
Yang Cao is managing director - China, Xchanging Procurement.
This contributed article has been written by a guest writer at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publishing of this content.