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Tag Archives: procurement

Recent stories in the Western press describe impending doom for Chinese manufacturing, relating the Chinese demise to Japan in the 1990’s.  But to real China-watchers and experts, this is a naïve view.  It assumes that the Chinese government will sit back and do nothing to correct the trends and that the Chinese economy will stagnate.

While Chinese manufacturing is not known for innovation, it really is just a matter of time.  With 700,000 graduating engineers per year, China is quickly becoming the world’s powerhouse in manufacturing engineering and in continuous improvement.  The next phase is innovation and optimization. 

To address innovation, the Chinese government advocates student exchange programs and invites thousands of visiting US professors into its universities to infuse creativity into the education systems. Over time, this will reignite the creative innovation spark that the Chinese displayed over thousands of years, inventing printing, gun powder, deep water bridges, massive sailing ships and irrigation to name a few.  While US politicians tell us not to worry because China cannot innovate, the Chinese are busy proving them wrong.

To address optimization, China has started on the journey to automation.  Automation and the adoption of software systems will dramatically increase productivity at the factory level and will drive continuous improvement and optimization.  Although this is a long road to travel, it is nonetheless the road Chinese manufacturers are on.

It’s time to wake up and smell the green tea.

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Mike Daisey, a journalist and feature writer, delivered a radio show about Chinese factory workers on NPR “This American Life” in January.  I listened to the show one Sunday morning with a friend and kept thinking how odd it was that the things he was saying about his interviews with workers outside of Foxconn, just didn’t ring true.  I remarked to my friend throughout the broadcast that his examples weren’t true, or were odd. For example, he claimed he talked to several young girls who told him they were 12 and 13.  If they were underage workers at the Apple factory, why on earth would they say so and risk losing their jobs in one of the best factories in China?  In another example he talked about guards at the factory gates toting guns.  I have never seen anything like this in the factories I have visited.

Well, it turns out that Mike Daisey lied and embellished his story for NPR and for his off-Broadway monologue called “The Agony and Ecstasy of Steve Jobs”.  Only a few parts of his story were true…enough to make it sound real.  NPR has broadcast a retraction and the world press has skewered Mike for lying.

It’s not that those of us with China experience don’t believe there is room for improvement.  Chinese factories in general have a long way to go to improve working conditions and address human rights issues.  Conditions are not consistently up to world standards yet.  But the Foxconn factories are some of the best places to work.  Apple, HP, Dell and other companies have taken pains to monitor the production environments to make them humane and safe.

What bothers me most about Mike Daisey’s lies is that he has incited people to believe more fiction about China.  It’s time we dig deeper and question stories like this in the Western press and demand that our news companies verify all facts prior to printing or broadcasting.

On Nov. 8, 2011, the Senate Armed Services Committee held a hearing on counterfeit parts in the defense supply chain, including electronic parts used to manufacture weapons and other defense department equipment. Investigators found that counterfeit or suspect electronic parts were installed or delivered to the military for several weapons systems, including military aircraft such as the Air Force’s C-17 and the Marine Corps’ CH-46 helicopter, as well as the Army’s Theatre High-Altitude Area Defense (THAAD) missile system. Legislation is being proposed to require defense contractors to certify all parts for authenticity.  This will place a tremendous burden on defense supply chains in terms of authentication process verification

But of course, counterfeiting is not limited to defense goods.  Any electronic gadget or equipment is likely to include some counterfeit parts, and the counterfeiters are getting better and better at it. It is so difficult to tell counterfeit from legitimate parts, that industrial buyers are often fooled.  Even the price of counterfeits may be equivalent or close to legitimate parts, thus eluding suspicion about parts origins.  This is a problem of such magnitude, that we are just beginning to unravel the stories.  Counterfeit parts may cause your iPOD to fail early or not work properly at all.  But think about the real danger in counterfeit parts in machinery, automobiles and aircraft.

The only way to control counterfeiting is to maintain control over your entire worldwide supply chain.  This means verifying and monitoring all parts suppliers, distributors, subcontractors and manufacturers.  Take nothing for granted. Know your supply chains from start to finish. Verify and monitor every step of the way.

The Lunar New Year started on Feb 3 and lasts about 2 weeks.  This is the time that Asian families across the world gather to celebrate family and good fortune.  This year is the Chinese Zodiac Year of the Rabbit or The Year of the Cat in Vietnam.  The Rabbit or Hare is the 4th animal in the 12-year cycle.

Happy New Year wishes are expressed as:  “gung hau fat choy” (Cantonese) or “gong xi fa cai” (Mandarin) which generally means “Congratulations, may you be prosperous”

The Year of the Rabbit is expected to be a placid year and very much welcomed and needed after the ferocious year of the Tiger.

Here’s the prediction from the Chinese Cultural Center in San Francisco: Good taste and refinement will shine on everything and people will acknowledge that persuasion is better than force. A congenial time in which diplomacy, international relations and politics will be given a front seat again. We will act with discretion and make reasonable concessions without too much difficulty.

If you have manufacturing sites in China, you should expect delays in shipping as most of the factory workers return home for the long holiday.  During Chinese New Year, there may be no one left in the factory to answer the phone or check email. 

Be vigilant in checking the quality of products made just before and just after the New Year.  Before the start of the holiday, factories rush to complete all orders and ship everything possible.  Quality may be overlooked in anticipation of the holiday.  Just after the New Year, a significant number of new migrant workers (30% to 40%) start jobs or change jobs in factory towns and there may be a significant learning curve, causing quality deterioration.

I visited a toy factory in Guangdong Province, China on Friday.  This factory manufactures plastic toys and represents other manufacturers that produce radio-controlled toys and dolls.  It was quite amazing to see so many plastic toys in one place.

I noticed though, that the Chinese staff was less enthusiastic than usual about selling to me.  I wondered about this, but didn’t say anything.

Then I saw an article in the South China Morning Post about toy manufacturers at the Canton Fair, the largest trade show in the world, going on now in Guangzhou.  The article reported that toy manufacturers were rejecting large orders and those that were more than 3 months out, for fear of RMB currency adjustments.  Apparently, toy manufacturers typically operate on a 2-3% margin and fluctuations in currency can result in losses.  Western toy buyers, however, are still demanding lower prices.  This double-whammy is causing toy manufacturers to reject orders or cautiously proceed.

I am not sure if this is good or bad.  I do know that the low-end toys are sold at low-end retailers such as Wal-Mart where the shoppers cannot afford to pay more.  If there is a shortage of cheap plastic toys, will family lifestyles be affected?  Will this begin to happen with other products?  Is this a vicious cycle?

Currency adjustments to the RMB not only affect the price of imports into the US but they will also affect the razor thin margins that Chinese manufacturers earn.  We must proceed with caution and gently allow the RMB to adjust.  Otherwise, we may be faced with whiplash economic peril in the East and in the West.

Since my book, 42 Rules for Sourcing and Manufacturing in China, was published, it has done very well on www.amazon.com .  It continues to be a top seller in the US, UK, France and Germany.  My publisher also sent out a press release to TV and radio stations and over time, I have been interviewed on several radio stations.  I was also interviewed for CCTV (China’s CNN).

But when NPR called me, I was truly honored and thrilled.  I have listened to and been a fan of and member of NPR for years.  I respect NPR’s approach to programming and enjoy the feature clips.  So the opportunity to be interviewed was fantastic.  The link to the audio story is here http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=130258250&m=130260491   

Adam Davidson, and NPR reporter called me early on Thursday morning and asked me several questions about the cost differential on Chinese-made products if the RMB was allowed to freely float against the dollar.  One of the examples I used was of the industrial springs I have written about in this blog on May 26, 2009.  That was the anecdote he chose for the story.

The story aired on Friday, Oct 1, 2010 on the Morning Edition show.  My 15 seconds of fame!

I taught a 2-day workshop on Sourcing and Manufacturing in China on Sept 16-17.  This is the second time I have taught this workshop, but the first time in the US.  The last workshop was in Shanghai in April.

This time it was in Atlanta and the students were all Americans.  This was a great group of people who were anxious to learn and discuss the possibilities of doing business in China.  I was impressed with them.

More importantly, I keep learning, too.  I have started to examine the ways Chinese culture affects the Chinese manufacturing environment.   Of course, 5000 years of Chinese culture is behind everything that’s said, behind every dinner that’s hosted, behind every ride, every cola offered to you, every small gift, behind every business deal.

One of the most important things I teach my students about is the disparity between East and West cultures regarding contracts.  In the Western world, we rely on contracts to spell out the terms and conditions, expectations and approach for doing business together.  If the contract is violated; we file a law suit and go to court. 

In China, the contract should be seen as no more than a way of communicating the end-state of production.  After the contract is signed, you may be the only person to ever look at it again.  If there is a problem with production or the agreed-to terms in the contract, you are likely to be told, “this is not the way we do it in China.”  The business relationship you have with your Chinese supplier is based on “guanxi” – personal relationships – not on written legal contracts.

If you were to take your supplier or manufacturer to court (and generally, I advise against this because it is a waste of time and money), you are unlikely to get a favorable judgment.   This is because Chinese laws are immature with little precedent history.  Everything is subject to interpretation by a Chinese judge.  In the rare case you might get a favorable judgment, it is probably not enforceable.  Your Chinese manufacturer will simply go out of business.

Industrial Springs

Industrial Springs

I recently met with a Silicon Valley entrepreneur who has designed and developed a unique consumer electronics product for trade shows and other events.  He was picking my brain about manufacturing in China, locating sources and how to improve the production yield and quality.  In an attempt to keep his production costs low, he solicited assembly quotes from manufacturers in the US to compare them to the China price.  As you can imagine, the US assembly price was 2-3 times higher than in China.

He also broke down the components of the product to determine if there was any way he could source at least some of the components in the US.   No, there weren’t any prices even remotely favorable in the US.  One example he gave me broke any records I have seen to date. 

His assembled product requires 9 small industrial springs that have no function other than to keep the inside components from rattling and the knobs and keys in place on the device. We’ve probably all seen these tiny springs under our keyboard keys or in flashlights, etc.  Here is what he found:

–          Los Angeles industrial spring manufacturer:   65-80 cents per spring

–          Shenzhen, China (multiple vendors) spring manufacturer:  1.2 – 2.5 cents per spring

This is a whopping approximate 95% savings by sourcing in China.  Over the 35,000 units x 9 springs, that is a production parts savings about $23,000…just for little tiny holder springs.   I typically see savings in the range of 40%-60%, but rarely this high.  I am astounded and appalled that US manufacturers are completely asleep at the wheel. 

It makes more sense to source these springs in China for this product anyway.  The product will ultimately be assembled there and may be sold at the giant Chinese trade shows.  Still it is a striking example of the manufacturing power of China at a cheap China price.

 

Lately I have been reading a lot of stories in the press about how to squeeze every last drop of blood out of every supplier because, we are after all, in a recession.  During these economic times, companies are asking suppliers to take price cuts with no concessions just because they need to cut costs.

This is an unproductive approach.  I understand the need to cut costs, but this must be done in the spirit of a trade.  To preserve the long-term relationship with your supplier, you must focus on keeping the economic balance between both parties.  This can be done through trading for something of value. 

If you want your current suppliers to cut costs, then offer a free-to-you concession such as endorsing them to your colleagues in other divisions or other companies.  Or how about sponsoring them for a speaker’s slot at the next NAPM Round Table?  These things are free to you, but can be quite valuable to your vendor. 

Focus on trading for something that’s valuable to your vendor and will ease the pain of a price concession.  Let’s help each other through these tough times.

These are trying economic times! I have several friends who have recently been layed off. Many of my manufacturing clients are looking for ways to cut costs and bring their supply and demand into equilibrium. Cost cutting is the mantra in manufacturing and will be for the next 12-18 months.

So where are the opportunities to save and cut? One area with loads of potential is in the procurement of parts for production. If you are interested in sourcing parts in low cost countries such as China, here are some things to look for:
– high volume usage, repetitive orders
– high-touch assembly
– parts with well-defined specifications, drawings and few engineering changes
– parts with predictability in forecasting (remember, it takes longer to get products shipped from China and reaction time to changes in forecast is longer)

If you analyze your procurement buys and come up with possibilities for direct sourcing in China, get some help from consultants who have experience in this area. Their expertise will pay off in the end.

Don’t get left behind your competitors. This economic environment is the perfect time to get started.

Rosemary Coates
Blue Silk Consulting