I rediscovered a very good paper about a specific China industrial sourcing strategy: Knowledge-Based Sourcing. The paper was published by Booz & Co a few years ago but is still very relevant for China industrial sourcing.[Update: Booz & Co is now called Strategy&]
The paper describes how buyers will get the most our of their Chinese supplier base when they commit themselves to understanding most aspects of their suppliers as opposed to a traditional arm length RFQ based business relationship.
We are strong proponents of this sourcing strategy for China, since the first day of procurAsia. And we have successfully applied it to all our projects.
It is really good to find this article by a famous management consultancy describing the main aspects of this approach we have implemented for so many years now. Here is the essence of Booz & Co’s article.
Why Knowledge Based Sourcing?
. . . the myth that bids from Chinese suppliers can be fully understood by smart analysts in a back room a continent away still persists in some quarters.
Many U.S. and European manufacturers still send RFPs to Chinese suppliers without ever setting foot on the mainland.
There is a clear pattern of rising costs in China these last few years.
As a result of these pressures, companies will find it increasingly necessary to pursue a dual strategy of using the Chinese platform for making more sophisticated product components for export and simultaneously seeking to penetrate the domestic market.
This means that there are serious advantages in leveraging the current evolution of China’s industry toward more advanced production and higher value added products.
[Buyers] should consider adopting the new approach to working with LCC suppliers that we call knowledge-based sourcing, which significantly increases companies’ insight into their supply bases.
While knowledge-based sourcing is an approach that exists for awhile,
. . .the ability to adopt and use a knowledge-based sourcing approach takes on particular urgency in view of the rising currency and cost structure in China.
Companies that want to hold their margins and maintain access to that fast-growing economy must increase the efficiency of their Chinese.
Is it the right China industrial sourcing strategy for me?
knowledge-based sourcing is not the right sourcing strategy for all buyers. Deciding whether or not it is the right thing to do depends on two main factors:
The first deciding factor is the supplier base maturity in China. Some industries in China are ready, some others are certainly up to it.
One of the earliest industries that set up shop in China was electronics. Chinese electronics suppliers are in fact world class and auto suppliers are rapidly moving in this direction.
The second deciding factor is how strategic China is or should become for the buying company.
Companies that consider China to be a new location for developing global competitive advantage across operations—for example, in product development as well as in marketing, sales, and aftermarket services—experience the role of the supply base in one way;
Companies that are sourcing limited, low-value-added, semi-processed materials or components experience it in a substantially different way.
This second factor is similar to the framework that we presented a few weeks ago: Levels of China Sourcing.
What does Knowledge Based Sourcing mean?
When companies decide that a knowledge-based sourcing approach in China is right for them, they must invest in developing strong relationships with potential and existing suppliers.
Knowledge-based sourcing is more resource intensive at the outset, but its ability to drive down costs and improve quality over the long run repays that investment many times over.
Three aspects are essential to implement a knowledge-based sourcing strategy in China:
1 Know your suppliers inside out.
As General Motors . . . discovered, knowledge-based sourcing places a high premium on identifying the right supplier and building an enduring relationship.
There are no shortcuts in this kind of relationship building.
Visit suppliers and see their technical capabilities and capacity with your own eyes.
This includes their machinery and equipment, their process technologies, the number and qualifications of their employees, and the like.
A bid is no guarantee of a supplier’s willingness and ability to meet current volume and quality requirements or its future competitiveness.
2 Develop strong relationships with fewer suppliers.
Identify a few suppliers that are willing to commit to a long-term relationship and to jointly creating a competitive advantage.
To avoid fragmentation of the supply base, stop bidding out each part and dropping suppliers anytime another company offers a better deal.
The dangers include . . . shifts in the supplier’s strategy or customer base, and deteriorating performance.
These problems could go unnoticed until crucial shipments are missed, costs mysteriously escalate, or quality suddenly nose-dives.
3 Work jointly with your suppliers on continuous improvement.
Focus on developing suppliers’ capabilities and advancing their competitiveness over time. Set ambitious but realistic targets for better performance in cost, quality, delivery, or innovation, and work with your suppliers, not against them, in achieving those goals.
Successful continuous improvement requires agreed-on objectives, transparency of current and anticipated costs and processes, and the sharing of improvement ideas.
Large customers often have internal knowledge about advanced concepts such as lean manufacturing that many low-cost suppliers have not yet developed.
All these quotes from the article by Booz & Co are a good description of what we consider the most effective China industrial sourcing strategy. We believe that this is required to successfully source industrial parts and equipment from China.
We have built all our practices and methods along these lines.