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There is no doubt that methods of finding suppliers are shifting.  Thomas Global Register (online), recently closed its doors and will discontinue publishing IEN, a magazine it has published since the Great Depression Era.  While the company cites the global economic downturn as the primary driving force behind this, Jason Busch, of Spendmatters, reports a different potential cause: declining revenues over the last few years.  If this is the case, and Thomas Global's value offering has not kept pace with the shifting supplier directory market, then where is the supplier directory market going?  

In another Spendmatters post, Jason, segmented the supplier directory market into 4 categories, based on the value offering and business models of the supplier directory firms that offer different approaches to the market of small and mid-size companies who tend to source manufacturers (as opposed to large companies which rely on sourcing offices and large sourcing companies abroad).  According to the Spendmatters' segmentation:

1) Group 1 features companies which have applied offline paradigms to the internet.  Examples include ThomasNet, and smaller, niche focused sites like Surplus Record.  These sites brought their supplier listings online and provided support to help their listed manufacturers and service providers improve visibility and accessibility.  

2) Group 2 includes companies like Alibaba.com and Global Sources, supplier directory providers who seek to bring the world's manufacturers to your computer screen--a more global or worldly approach.  They have a similar model to the first group, and tend to offer value in the breadth of their directory with respect to manufacturing listings by category and country.  As Jason points out, these tend to be the sites frequented by small and mid-size companies, product inventors and entrepreneurs in the early stages. 

3) Group 3 includes companies that are repositioning their supplier networks, which were geared more towards facilitating transactions, into supplier networks which will facilitate sourcing new suppliers and issuing RFQs.  These companies include Ariba and Ketera.

4) The 4th group of companies include commerce driven models, like MFG.com.  Where companies like Alibaba and Global Sources present a wider, more global listing, MFG.com seeks to supply a service focusing more on depth.  MFG.com allows industrial buyers and engineers to source potential suppliers, transfer relevant, and IP sensitive product documentation in a secure format, and proceed through the RFQ and negotiation process.  

Because of our work with new product development, start-ups, and entrepreneurs, we often get addressed with questions regarding the 2nd group segmented out by Jason, or the alibaba.com's, and Global Sources, of the internet.  I probably caution those new to working with manufacturers overseas that there is A LOT more to seeing a nice website and emailing a potential factory overseas, just as much as Dan Harris, of ChinaLawBlog, gets X phone calls a week from some poor sap who wired money to a supposed factory overseas and hasn't heard a peep from them since.  

It's also not uncommon I hear someone with reasonable business experience and intelligence regale folks with a story about some horrific China-related quality incident or fraudulence that happened to someone else, but when it really comes down to vetting who they're working with and what's going on at the factory they are depending on, no one at their organization has visited the factory in a looooonng time.  If you think this sounds absurd, see the end of Dan's post on How Not to Get (China) Internet Scammed here, and note that the same sort of cognitive dissonance, or believing that there is no way they could be involved with the same sort of low-level quality or fraudulent factory over the internet as the scam tale which they laughed about, can also be seen in 60 year-old midwesterners paying lots of money to order 22 year old, mail-order brides from Russia, only to find out that Olga isn't really coming to Illinois.   

As I've mentioned several times in other posts, companies like Panjiva are working to provide greater transparency into the suppliers you may be working with overseas and what they may be up to. Information is power and when considering the ever-important topic of risk management, it is useful to know which suppliers are getting busier and which are on their way out of business all together. This is certainly not a substitute to having eyes and ears on the ground at the factory you're working with, but with respect to ferreting out potentially bad suppliers found via the internet, a 3rd party source of information like Panjiva can be useful.  While the internet has opened up quite a bit in the way of locating and communicating with manufacturing sources over the last decade, I would wager that the number of scams is probably still on its way up.  I think there is still quite an opportunity in helping online supplier directories provide better quality information, and help in managing the sourcing process, alongside the names and contact information of manufacturers.  The question is, when you can you really start substituting good information communicated online, for paying to have experienced personnel on site at the factory?  We're not there yet, by any means.  

I saw an article in Business Week last week about Sony bringing in Executive Deputy President Yutaka Nakagawa, a proven cost-cutter, to reduce Sony's supply chain costs.  Over the next two years, the company is aiming to halve the number of its parts and materials manufacturers and reduce purchasing costs by 20% this fiscal year.  Sony is hoping to achieve lower costs by buying larger volumes from fewer suppliers.  If the cuts can return the company from what is expected to be its second consecutive year of losses, newly created working capital can be dedicated towards new innovation and product launches.  However, as the Businessweek article points out, if the cuts result in being single sourced when/if demand spikes or quality defects arise, Sony could find itself in a precarious position.  

This reminds me of an article in Purchasing.com, found via Sourcing Innovation, explaining that Cost Reduction Efforts Require More Focus than Sacrifice.  The article's gist harks back to some of my rantings on the importance of strategy in sourcing and long term success.  The article cites a recent survey of private companies by PricewaterhouseCoopers which notes that companies are focusing on reducing costs in discretionary spending such as travel and entertainment, as well as streamlining operations, workforce reductions, and employee compensation.  In many ways, these might be regarded as short-term cost reductions that help financial statements quickly, and in the sphere of public companies, make Wall Street step back from the ledge and decide to live.  The article goes on to point out:

Another piece of research from the Corporate Executive Board, supports this thinking, saying companies need to focus more on reducing cost of goods sold and less on SG&A. "While most CFOs are quick to cut overhead (SG&A) to achieve cost-reduction goals, the companies that are able to maintain cost reductions over the long term spend more on SG&A as a leveraged way to help the business drive operational efficiency and reduce cost of goods sold," the CEB report says. In fact, it says on average, the better cost-cutting companies report cost of goods sold being about 49% of sales vs. 62.8% for average companies. However, the best cost-cutters have slightly higher SG&A.

You see, when you cut travel, you cut the ability for your people to make, and maintain, relationships. When you cut entertainment, which is typically a very small budget to begin with, you increase stress, which decreases productivity. When you streamline operations, things start to slip through the cracks. Then when you cut workforce, you cut capability, key processes get skipped entirely, critical sourcing events just don't happen, and you keep sourcing off of expensive ever-green contracts and spot-buying at high prices. When you cut training, your staff's skills get even more outdated and your cost reduction efforts miss the mark. And when you cut compensation, your best employees feel unappreciated and trampled on, stop giving 100%, and start looking for their next job.

As the article says, you have much better opportunities, including:

    * transaction processing
    * supplier management
    * health care benefits
    * IT assets (hardware and software)
    * logistics 

Investing in your people to implement good cost controls and look for ways to achieve operational efficiencies, rather than simply going after the quick and easy slashing of fixed costs, results in your people finding ways to lower the cost of goods for the long term.  This is one major method that smart companies use to destroy the competition over the long haul.

Related blog posts:

• Developing Mass Market Products: The "Good Enough" Revolution
• To Manufacture in China or the United States: Get Beyond Cost to Strategic Sourcing and Manufacturing of Products
• Swimming Naked in the Supply Chain: Getting to Know Factories and Sourcing

When to source manufacturing offshore in a country like China, India, or Mexico?  When to keep manufacturing at home in the U.S.?  Don't start with cost:  start with strategy.

Lowering costs has been the most common and highly publicized impetus for companies to source and establish manufacturing operations offshore in a low-cost country like China.  But there are myriad reasons why a company might expand operations to an offshore country, or on the flipside, choose to maintain manufacturing at home.  Many of them have nothing to do with cost, but can be far more significant to a company's health than the cost of goods.

For many consumer product industries, seeking the cost-savings is a given.  To be competitive on the retail shelf, offshore manufacturing operations in low cost country sources is necessary.  But the strategic planning for sourcing and manufacturing often does not go beyond this perspective of thinking, a practice which often lands companies in trouble by sacrificing the most valuable aspects of their organization, or results in them missing a chance to maximize the value of their supply chain.  

First, consider a company's competitive advantage.  What aspects of the company are most important to the company's competitive position in the market?  Innovation and launch of new products?  Delivery of a consistent, high-quality customer experience with the company's products and services?  Lowest prices on the market?  There are many ways a company can differentiate itself and flourish in the market.  The question is--how will sourcing an offshore supplier in a country like China detract from or augment this competitive niche? 

Business case studies have shown that companies which have sought offshore suppliers to lower costs, at the expense of other important aspects of their company (such expenses were not clearly understood at the time), have ended up losing market share and value.  For example, companies which are leaders in innovation and technology often become so because they have nurtured a culture of strong, horizontal communication within.  Ideas, knowledge, and relationships are built across functional boudaries (meaning engineers eat lunch with marketing folk) which all contribute to the cross pollination of ideas  and the development of new, innovative products.  However, when a VP of operations decides to begin contracting out manufacturing an ocean away, without paying specific attention to developing the proper communication channels, the core strength of the company is sacrificed over time in the pursuit of short-term cost reductions.

A way in which the above technology company may have gone about this in a better way?  Keeping manufacturing operations at home may or may not have been the answer.  But they clearly could have prepared for their move offshore more effectively.  They could have sourced lower cost manufacturing suppliers and developed close partnerships to foster open dialogue.  Perhaps the company makes sure its design team goes over to visit their suppliers several times per year to visit manufacturing facilities, and vice versa.  A company seeking to optimize its supply chain in this fashion, by attaining a lower cost of goods, IN ADDITION to investing the resources to support its competitive advantages with outsourced service providers, can truly maximize value.  Apple computer could be considered a company that has done this very effectively.  Apple knows where to spend and where to save.  For more insight into how Apple does this on a product basis, check out Manufacturing the Ipod Shuffle: How Apple Produces Great Products at Great Prices.

As Dan Harris of ChinaLawBlog points out in his post Manufacturing in China.  Because There Are 1.3 Billion People There, gaining access to China's consumer market is now becoming a significant reason cited by companies for expansion of operations in China.  Following customers to support them in foreign countries might be another reason.  The fact is, there are numerous ways to drive value beyond lower cost goods.

Why keep manufacturing at home?  Some companies may find it more valuable in the long term to keep manufacturing operations at home, despite the opportunities for cost reduction elsewhere.  These companies know that paying more in the short-term to maintain whatever edge their domestic operations gives them, offers greater rewards in the long-term.  An example of this may be a fashion oriented company that creates new product lines several times annually, and has difficulty accurately forecasting which items will sell.  Thus, they may find that the cost of holding inventory for long periods of time and not being able to respond quickly to market trends is more expensive over the long haul than manufacturing their products domestically and gaining very short lead times.  An analysis of the supply chain at the product level may motivate a company like this to choose a hybrid model in which some of its products are manufactured abroad and some at home.  A fashion company like Zara, which can go from product concept to market in 18 days, is a great example of this.  It starts with strategy.

The bottomline is that companies, particularly smaller companies, that are now sourcing contract manufacturers in places like China, India, Vietnam, and elsewhere because of cost pressures, should consider how else manufacturing in these areas will impact their business.  They have the opportunity to advance to a higher level of strategic planning.  In a country like China, they may gain greater access to materials suppliers, they may be able to take advantage of low cost engineering and design talent, they may find an opportunity to sell into China as well.  If their competitive advantage rests upon delivering high quality product, or innovating products on the cutting-edge, they would do well to ensure that they source suppliers that can support these functions and invest the necessary level of resources to optimize them.  Some may find that not outsourcing, and staying at home, serves their purposes better in the long run.  Companies may find that smaller minimum quantities and faster turnaround are the key drivers in their business.  The point is to assess the strategic sourcing circumstances, make an educated decision, and execute it accordingly.

Is this your factory?

An article by Andrew Reich from ChinaSuccessStories (h/t Dan Harris of Chinalawblog) highlights five straightforward but oft missed steps in assuring the quality of product from your China manufacturer.  Dan Harris, added a sixth point, and Global Sourcing Specialists is chiming in to add a seventh key to quality when when working with chinese factories: Source a quality manufacturer

First, it should be noted that these steps need to be taken together.  Accomplishing one or a few of them will not suffice to assure your product quality, and will likely only delude you into a false a security about what is coming off the production line and potentially making its way into the hands of your customers. 

ChinaSuccessStories's first five points:

1. Detailed documents: The number one key to quality when working with factories in China is documentation. Having bi-lingual, detailed, factory agreed upon checklists in place that document an item’s specifications and the criteria for inspecting the product before shipment, is essential to controlling product quality. One can not say for sure, but I would be willing to bet that the factories responsible for products recently recalled for lead paint did not have bi-lingual documentation on hand from their customer stating the type of paints that could and could not be used. Sure, this type of documentation takes time and hard work to create, but putting such processes in place is the first and most important step in avoiding quality issues. QC Checklists should describe in detail:

   a)     Item Packaging

   b)    Item Defect Classification (what is considered an defect and at what 
           severity)

   c)    Item Size and Other Specifications

   d)    Item Functionality and How it is Checked

2. Factory Presence:  Having a presence at the factory ensures that both factory staff and management really know who you are. Either through a 3rd party QC company or your own staff, ensure that you are being represented at the factory in person on a regular basis, and that the factory clearly connects your presence there with your production. Success in China is all about relationship (Guanxi), and dealing with quality is no different. Work towards a state where the factory has a personal commitment to you and your products.
3. Inspection:  Perform regular product inspections (either with your staff or a via 3rd party), not only on the final product shipment, but also during production (otherwise knows as DUPRO). Ensure these inspections are consistent and based on clear inspection criteria. Always review the inspection results with factory management and their own QC team.
4. Keep Approved Samples:  Some say that a picture is worth a thousand words. I say that a sample is worth a thousand headaches! Items often get revised and modified several times in the sourcing process, and then again after production begins. Keeping an approved sample in your office, and also one in the factory that can be used to verify the production product by the QC team, is essential in seeing eye to eye with your Chinese suppliers.

5. Take Responsibility:  Nothing will alienate your Chinese suppliers more than a mistake on your side for which you take no responsibility, and blame their misunderstanding. I’ve seen hard-headed buyers make this mistake more than once, to the demise of their hard earned factory relationships. So, make sure you have all the facts before you start to blame. Recognize when it’s possible that a mistake or production issue may have been caused by your own fault, or your own team’s mis-communication. Take responsibility when this happens, even if it means a financial loss. If you are working with the factory on a long term basis, the credibility you will gain will outweigh what you have given up.

   The message here is don’t take anything for granted. You and your suppliers most likely come from two vastly different cultures, have different values, and see quality differently. By making sure quality standards and procedures are in place and clear to all parties you will definitely avoid costly production issues.

Dan Harris' 6th Point: Legal Contracts

Our 7th Point:  Sourcing of Quality China Manufacturers

Really, this point might be placed first, only because the sourcing process takes place before any of these other steps are taken, AND, if you work with the wrong China factory, or any factory for that matter, these other steps may be very difficult to accomplish and/or ineffective.  It's similar to following all of the cooking instructions with great meticulousness to bake a world-class cake, and then baking your cake in the Easy Bake Oven.

Thus, to ensure supplier sourcing sets the other 6 steps up for success, one would do well to locate several potential sources, receive manufacturing and cost feedback from each of them, and select one or two that seem best able to support the project's and company's needs based on qualifications, engineering and QC support, product lines, and customer service.  Assessing a supplier for these qualities will likely, and should, involve auditing the factory production line, as well as meeting with management and key personnel.  Do this--and the rest will be much easier.

I attended Stanford University's third annual conference on socially and environmentally responsible (SER) supply chains last Thursday, May 21.  The conference has doubled in size every year since 2006 and promises to be larger next year.  A full day of presentations and panels from executives at leading companies such as Cisco, Intel, Safeway, Disney, HP, Verite, and more made for a multitude of perspectives and approaches to the topic of sustainability in supply chains. 

A few general observations from the conference:

• The realm of social and environmental responsibility in supply chains is still very nascent.  It seems each company, industry, and the business world as a whole is still establishing definitions for what it means to be socially and environmentally responsible.  This dialogue, of course, is very important and will likely set the stage for a future platform to act from. 
• It seems greater success can be had when companies address issues of social and environmental responsibility in their supply chains from an industry approach.  This leads to a greater probability of standardization and leverage in the supply chain, which in turn, based upon presenters' comments, seems to foster faster and more widespread change in the supply chain as a whole.  Some critical factors for success gleaned from many of the presentations, despite the industry of a given company, are the following:
  • The involvement and commitment of top, C-level, management
  • The combination of efforts across companies within a given company
  • Honest and free communication within companies and with competitors (a very scary and challenging proposition for many companies)
  • A sharing of best practices and communication amongst shared suppliers within the industry (meaning--get your suppliers to talk and share with each other to benefit everyone as a whole)
  • Outside and independent verification to create transparency and accountability

A few other interesting takeaways:

• Cooperation amongst several companies within an industry to acheive industrywide social and environmental responsibility seemed to be easier to accomplish in B2B industries, and industries that did not generally "face" consumers or receive consumer and/or watchdog scrutiny.  Those companies that had more of a B2C orientation viewed supply chain SER as more of a competitive differentiator, and thus were less inclined to share information and resources with others. 
• I expect the conference will double in size and notoriety next year.  This is an issue the business world has only begun to explore.  I found myself wanting more nitty gritty dialogue from the conference, but as companies move down the path from the general questions of definition and the surface levels of implementation, I am sure the dialogue and topic will become much more comprehensive, heated, and fruitful.

 By Ashton Udall

We're preparing to sit down with a new potential client and the management of the factory which we've sourced for their project tomorrow afternoon.  Every time we work on a sourcing project, we're faced with the question of how close do we bring the vendors to the customers.  Many outsourcing service providers fear they'll be left out in the cold in a situation like this.  But we've found it to be very helpful, in fact, necessary to always allow our customers the opportunity to meet the manufacturer that will be producing their products.  The value to us in keeping everyone arms length from each other is smaller than one might think (the value essentially being mitigating the risk of being cut out of the process prematurely), and it costs us, and raises risk levels, in several ways.

• Honesty and straight-dealing: It may be impossible to quantify the value, but bringing everyone into the communication loop may be one of the most important aspects of all parties knowing each other.  It sets a tone.  Communication and information can flow more freely.  Less time and energy is spent on Prisoner's Dilemma thinking--trying to figure out how to come out ahead of the other guy in all situations, and more time is spent collaborating to figure out how to resolve problems and innovate. 

I recently had an interesting conversation with a former senior exec of sourcing and manufacturing at Nike and Disney about transparency in their supply chains and working with vendors to improve their labor and environmental practices.  At a time when these companies faced serious risk in consumer backlash because of the exposure of poor working conditions at factories, Nike, for example, took a hard look at their manufacturing base and changed course to focus on working more intimately with fewer suppliers.  According to this gentleman, everyone opened their books, saw what each other was making, understood that everyone needed to make money for the system to work, and collaborated on resolving issues that challenged any party in the supply chain, because they could all be honest about the causes and effects of what was taking place.  Nike is now known to be well out in front of the 8 ball when it comes to dealing with corporate social responsibility issues in its supply chain.  Issues do and will continue to come up for them, but they are in a much better place to resolve these problems at factories.  The same cannot be said for many other companies out there. 

• Understanding the manufacturing process: When sourcing a new manufacturer for a product, particularly when a new product is being developed, it's always helpful when a client has toured the manufacturing facility where the product is going to be made.  Understanding the engineering of the production plan, seeing the machines that are used, how materials are stored, how quality control is accomplished, all offer a client the opportunity to better understand why certain issues are coming up and what can be done to resolve them.  This is particularly helpful in the product design and new product development process, when the ability of a manufacturer to include certain product features, use specific materials, or provide these things at a specific cost, is challenged by what is actually feasible in the manufacturing and sourcing process.  An understanding of the manufacturing process and capabilities allows all parties involved to quickly move beyond trying to understand why something is an issue, to resolving the issue. 

• Knowing the key players: In any organization, you will find that there are some people that really move things forward, and some that don't.  Whether this is because they wield formal authority or soft power in the organization, they get up and get to work earlier than the next guy, or they aren't afraid to pick up the phone and talk to people, you want to know who are the people that really drive progress and solutions for your project in the organization.  When the S hits the fan--you want to be able to reach these people.

Not all customers have the opportunity to travel to the factory location, particularly if it's overseas.  It's our job to be the feet on the street, whether in China, Vietnam, Mexico, the Midwest, or southern California.  But, we encourage customers to come see the manufacturing plant and meet key players in the contract manufacturing organization if they have the opportunity and motivation.  Organizations relying on keeping people, and parties in the process, at arms length when designing or developing new products, sourcing new manufacturers, and managing the supply chain as a whole, do so because they lack the ability to provide strong value in other capacities.  There are many ways to add value to the sourcing process.  This is one simple way to make a big impact.

As the phrase goes, "when the tide goes out, you find out who has been swimming naked" many businesses are painfully finding out whether their offshore manufacturing sources are without bathing suits.  Some companies have turned much greater attention to the managing of their costs and risks in the supply chain in recent years, and a few have found competitive advantage in doing so.  Now, it's becoming a necessary means of survival. 

Panjiva, a company which data mines US Customs data along with other sources to develop insight into manufacturing and trade trends, notes in this blog post that "From January 2009 to February 2009, in just a single month, the number of global manufacturers shipping to the U.S. dropped 10%, from ~131K to ~118K."  Furthermore, Panjiva reports that:

• Along similar lines, the percentage of significant global manufacturers on Panjiva’s Watch List has grown to 29%.
• The percentage of significant U.S. buyers doing business with Watch List manufacturers now stands at 40%.

Many SMEs do not have the resources to build risk models to assess risk in the supply base and to create and implement expensive risk management plans.  However, even without sophisticated quantitative methods, the principles can be applied.  Thinking through various events that can occur, the likelihood of these events, and the impact they can have, can be a useful exercise for an SME to undertake.  In good times, many won't delve too deeply into creating contingency plans.  Of course, in challenging times, it's the companies that did set this up who eat the market share of those who are too busy scrambling to save the company.

Given the economic environment, a few risk infused events that are more likely to occur on the supply side might be price increases, MOQ increases, or quality fade--stemming out of a situation in which a supplier, or even a 2nd tier supplier, is hitting the skids business-wise and needs to find a way to get more cash with the customers and orders they still have.  They may be looking at monthly survival. 

A lower probability event that may have a high impact may be your supplier going under and completely disappearing.  Worst case scenario: they disappear with your money.  Or, perhaps they don't respond to your emails and phone calls next time you are ready to place an order.  This won't give you much time to source another supplier, develop their manufacturing processes to meet your specifications, and pick up where the last one left off.

How can we create a decisive advantage in managing these risk factors?  Create greater visibility in your supply chain and expand your portfolio of options.  Visibility is  information--thus extract more information from your suppliers and about your suppliers.  The easiest way greater transparency can be had is with a more open, trusting dialogue.  These kinds of things are much easier to do face-to-face, particularly in countries like China.  But use third party information to help create a comprehensive picture.  Consider having factory and company financial audits performed.  Information from local banks used by your suppliers, government agencies, and other sources can give you an idea of the financial status of your factory.  Another useful source is the company Panjiva, mentioned above.  Panjiva offers reports on the importation data for thousands of suppliers that allow one to learn about fluctuations in a suppliers shipments to the U.S., their other product lines, and other customers.  In this case, knowledge is power and with it, you obtain a much better view into your suppliers current situation and their impetus for trying to renegotiate terms. 

Also, are you single sourced on key products and components?  Source second and third suppliers for your products.  Alternative sourcing options gives you leverage with knowledge of general pricing and terms available in the market, as well allows you a stronger negotiating position by not feeling entirely dependent on one supplier.  

Summer's around the corner...if you don't already have a bathing suit, now is the time to start shopping.

Did you hear?  The world economy is facing tough times.  No--not another blog post or news story about the economy throwing up all over...everything.  Obviously, businesses across the globe are facing challenges on both the demand and supply sides.  Below, I've put together four suggestions for actions you can take now, to make sure your business does not get burned on the supply side, particularly if you have manufacturing sources offshore. 

Good practices for the short-term in a recessionary world economy:

• Do a cost audit of your current supplier(s) and consider new suppliers.  Prices negotiated 6 months ago may be uncompetitive now.  Manufacturers are hungrier.  Some, if not many, of their costs of production have dropped.  Many of these cost reductions are driven by falling world demand (which we hope, and I believe, is a short-term phenomenon).  Cost saving opportunities and their causes will vary from supplier to supplier, so reviewing price at your existing factories as well as looking at new sources, may yield an opportunity for short-term cost savings that could help your bottom line now.  When demand picks up, it will be on your supplier(s) to raise the issue of rising costs with you.  But, there is always a lag time between increasing costs and rising prices, so don't fail to capitlize on current conditions.

• Monitor the financial health of your sources.  Factories, both domestic and offshore, are facing very tough times and many are closing shop.  Generally, when this is happening, their isn't much incentive for factory owners/managers to let their customers know, "hey, we may not be around in a few months".  While "credit checks" in low-cost country sources (LCCS) are generally not typical of what we might consider a credit check in the U.S. (i.e. running a credit check through Dunn & Bradstreet),  informational audits that can be performed through 3rd party information gathering, and can aid your assessment of your supplier(s) financial health and risk.  There are companies that perform these services in popular LCCS' like China, India, Mexico, etc., and you can generally get an idea of a factory's current credit situation and perhaps some current financial information.  This could give you the heads up you need to start securing second and third sources of supply, in case your primary source suddenly stops responding to your emails and phone calls, and their website disappears.  Performing these kinds of audits are not too expensive, $US500 to a few thousand dollars, and may save you your business in the long run.

• Continue monitoring your quality control, and if you haven't been doing so very well thus far, START NOW!  Don't become a quality disaster/recall headline or a product liability defendant.  When times get tough, suppliers look for ways to lower costs and maintain margins.  Many may feel inclined to let the quality of materials or workmanship slip to save a few cents on your next order.  If there is ever a time to continue your quality control program or implement a quality control program, it is when companies supporting you are potentially hurting. 

• Don't treat your suppliers as the enemy.  An honest conversation may open up new opportunities for mutual gain.  When times get tough, people often begin looking for easy scapegoats and targets.  It may be tempting to push unreasonable demands and threaten even your best suppliers.  None of the recommendations above are intended as a suggestion to get absurdly tough on the vendors supporting you.  Be diligent, negotiate well, and expect results. Approach the need for businesses to survive during these challenging times from the perspective of "how can we work together to mutually survive and eventually flourish?"  Gaining transparency in the supply chain ("transparency"-- basically sharing information) is a best practice in good and bad economic conditions.  Being forthright and reasonable with your suppliers will not only earn you their respect and appreciation, but may open opportunities for new ways to reduce costs, improve efficiency and/or quality, and present new business opportunities.  This is such an easy, but often overlooked method of dealing with supply chain challenges, and it might begin with a simple and honest conversation. 

I thought this recent post on Richard Brubaker's All Roads Lead to China was timely given my last post on the fish-switching.  Rich's story is short and sweet:

This evening while hosting a dinner party, one of my guests noticed something funny about his beer (a Corona).  simply put, he said “this isn’t beer”.

After a few people took their skeptical sips, we hauled out the rest of the bottles in the refrigerator to make the side by side comparison.

Which, as you will notice, showed us that we had in fact a bad batch of beer on our hands.

1) The color of the real (bottle on left) vs. the fake  (bottles on right) show distinct color differences
2) Look at the different levels on the fake ones
3) Bottle caps on real bottle curve in where the bottle cap ridges point out

so, for those of you tipping back a bottle of Corona, be careful.  I cannot say that there was melamin in the beer, but lord only knows what was really in that bottle.

You can't pop a bottle open in a store for a QC swig, but fortunately, you can walk through a factory and QC your goods prior to shipping them.  Simple enough...

Well, not really...

I'm currently on another sourcing trip in China.  I'm headed to Vietnam in a week.  My first week in China has been very busy and has provided a lot of food for thought on the manufacturing shake-up that is taking place in China right now.  Is it really a shake-up?  Yes and no.  It's not as if all hell's breaking loose over here.  But, almost every supplier I have met with has groaned about increasing material, energy, and labor costs, as well as the impact of the currency exchange rates.   Many of these things are not unique to China.  Nevertheless, it's never fun to report increases in costs to your customers--and they certainly don't enjoy it.   

One of the tough spots Chinese suppliers find themselves in, is it's not atypical for foreign businesses sourcing in China to consistently apply pressure to lower costs.  Hence the erosion of quality in materials and product--or the practice of quality fade by suppliers to preserve their margins.  In addition to constant cost pressure from many customers, there is often pressure to improve working conditions for laborers and decrease negative impacts on the environment. 

What foreign buyers often miss or conveniently ignore, is the fact that improving labor and environmental conditions costs money.  The burden of these improvements are typically placed on the supplier.  Finally, China has enacted labor laws that should improve the average factory worker's security.  Thus, as we are seeing now, costs are beginning to rise, and the most inefficient, energy intensive, high-labor, low value operations are either shutting down or moving elsewhere.  This is really neither good or bad.  It is good, because, like many have asked for, working conditions will begin to improve in China. 

But what will many businesses do?  Many will begin to look elsewhere for lower cost labor.  Currently, there is no "next-China" on the horizon.  Some are looking at inland China, but many are also eyeballing Vietnam, India, Eastern bloc Europe, and Africa.  Many of these destinations may make sense currently and will likely become more prominent in the future.  But China is far from being dislocated as the epicenter of manufacturing soon.  Remember, it's not just your factory that you will move, but all of the supporting supply chain that must be found anew in your next destination.  This will not be easy, as demonstrated by the extreme case of...Madagascar.

The most exotic destination I've heard of a company moving to, to date, is Madagascar.  That's right--the exclusive home of the Dwarf Lemur and the Aye-Aye.  One of my supplier's other customers has actually set up a source in Madagascar to assemble product.   Contrary to intuition regarding a supply chain like this, the company claims they are saving money.  While I find it hard to believe, I know very little about their situation.  I do know that supply chain flexibility and responsiveness must not be critical to the business model.  Keep in mind that Madagascar has little to none in the way of a manufacturing base.  This means that the company must continue to source an overwhelming number of items from China and ship them to Madagascar.  They cannot even get shipping cartons in Madagascar, so they must ship the shipping cartons from China. 

Wonders never cease...