Top Ten Pitfalls to Avoid in Chinese Outsourcing - #2 Rushing The Process

#2 - Rushing The Process

Unfortunately, at OPSA we keep forgetting this one. Either that or we get so excited about a project we overlook that it will be a time line project with lots of hurdles.

The best projects are:
- From a company we already work with
- From a company with experience outsourcing outside the US
- An established product with few anticipated design changes, predictable demand, and not a key item for a company

The most difficult projects are:
- From a company with no outsourcing experience
- A new product still in development that has a firm launch date in the near future

You can see the problem here - we need to add new customers to continue growing, but new customers present the most risk. Also, new customers usually want to start with a new product to them, or the company is new and all their products are fairly new.

Rushing the process is the most common mistake made with new projects. Customers sometimes go into the process without a plan and don't understand all the steps needed to be successful. Also, they fail to anticipate that there will be delays. We do help customers plan, and working with a company like OPSA helps avoid most delays and problems, but it's still a complex process to begin outsourcing in China (that goodness, or there wouldn't be a need for us).

So, make outsourcing a strategic decision and plan accordingly. Pick an established product you can afford to learn on and gain experience. Once you do, you can begin working on development projects. Most importantly, try not to pick a new product with a firm launch deadline that is coming up soon. Of course, OPSA can help with all of this.

MITA Presentation - Recommendations II

I covered the first three recommendations for responding to cost increases from China in an earlier post. Here are the remaining four.

First, you can choose to add more value in China. We have customers that are responding by moving up the value chain from component sourcing to having sub-assemblies made in China. This allows for additional labor savings and improves leverage if current suppliers can also perform some assembly.

The next option is to make design or BOM changes to find cost savings. Customers are now motivated to test whether locally available materials in China can be substituted for their currently specified materials. We are helping by stepping up our efforts to help our factories with global sourcing initiatives. We often can find electrical components less expensively in other countries and export them to our factory partners in China.

Getting input from Chinese suppliers on what design changes can have significant cost impact is a great strategy. Something you think has little impact on cost may be a large driver due to special set-up requirements or other issues. Ask and learn.

Finally, finding ways to save on logistics costs is an opportunity for most importers. As a program grows we often find customers paying much more for freight than they hoped because their planning is not good. Being more intentional with order planning really helps avoid the very costly express shipments and rush orders.

We'll get back to trends in Chinese outsourcing next.

Random Thoughts from The OPSA Office

I'm in the OPSA office in Loretto, MN for a few days this week. Doug Peterson from our HK office is in town and we have some meetings set-up for him. Here are some random thoughts impacting me today:

1. It's great to spend time in the office. I get reconnected with everyone's projects and also get a feel for our progress as a company. Even though I do about the same things I do when I'm in my Green Bay office, time here has added benefits. It is a 5.5 hour drive, but worth it every six weeks or so.

2. Isn't summer awesome? The weather the last several weeks has been so great.

3. I'm concerned about further strengthening of the RMB and the impact on us. I read an article this week where an economist feels the RMB should strengthen another 30% to help fix the USA's current account deficit. That would not be good for OPSA or the US economy (more inflation), at least in the short-term.

4. I'm really excited about the new technologies we are specializing in and offering, and the one new product we are developing (the first OPSA product!).

5. Doug tells us the renovation and de-cluttering of the OSPHK office is underway. Can't wait to see the progress. I likely will be there this fall and in December.

Enjoy the summer days!

MITA Presentation - Recommendations

Whoa, where did the month go. A few business trips, a few days off with the family, and "bang" you haven't blogged in 12 days. I'll be more consistent going forward.

The last section of my MITA presentation was on what companies can do in the face of rising manufacturing costs in China.

In the presentation I went from most extreme option to least. Radical partnering is partnering with a competitor. I used the example of several US airlines now considering sharing planes to reduce costs.

Going to other countries was the second option. If setting up a factory I suggested looking at Vietnam and other options, but for sourcing from established factories I presented several reasons and opinions from others that China is still the best option.

The third option is looking further west in China. I suggested this is difficult today, but will get much easier very quickly as the Chinese government implements its 5-year plan to bring prosperity to the rural west and as rebuilding after the earthquake improves infrastructure and brings new management talent west.

I'll cover the other options in another post soon.

MITA Presentation - Trend or Fad

The second part of the MITA presentation mentioned in my July 1 post examined whether each of the main cost increase factors was a trend or fad. That the RMB is up 20% against the USD since July 2005 when it was uncoupled from the USD is not news. What's interesting is what will happen going forward.

The two articles in the slide below were in different papers in Hong Kong on the same day. One writer argued that to contain inflation the RMB should be allowed to rise faster. The other author said it should be controlled and the value reduced to protect factory employment.

The conclusions I reached in the section are on the last slide in this post. They were meant to stimulate discussion and give the attendees something to consider and discuss when they returned to their companies. It worked well with these objectives.

As you can see, I am calling transportation costs a fad as I believe we will see energy technology improve quickly and oil prices drop drastically in the next few years. Labor costs is a reversible trend if production moves West in China or to other countries.

Raw materials can be lowered by switching to alternatives, but it's still a trend that they are up. The RMB will continue to strengthen, but at a much slower rate going forward.

Next time I'll go through the things I suggest companies can do to address the rising costs. This was the big finish to the presentation.

Top Ten Pitfalls to Avoid in Chinese Outsourcing - #3 Lack of a Relationship

#3 - Lack of a Relationship

Guanxi is the Chinese concept of social capital. I believe it literally means "relationships". Having guanxi can build opportunities, reduce frustration and mitigate risks when doing any kind of business in China. Without it you are just a customer or supplier.

Here's a case study. A tooling shop we worked with in Hangzhou had to close down and did so with very little notice. Because we were close to the situation and had good relationships within the company we found out early about the problems and were able to get tooling out of the plant before the closure. Several customers of this factory that did not work through us or have good relationships were stuck when their in-progress tools were stuck in the plant at the time of closure.

Here's another case study. A company in the US that we never did business with but talked about it, had promotional umbrellas made in China for schools. They kept their supplier relationships at arms length and used intimidation and threats when discussing pricing, delivery, quality, etc. They demonstrated the "I'm the customer and what I say goes" mentality some purchasing people use. Eventually their suppliers stopped answering their e-mail and ignored purchase orders. The company came to us to save the situation, but we declined because it wasn't a good fit for us. I believe they went out of business because they could not secure sources for their custom umbrellas.

Here's a quick list of things to do to build up gaunxi. Most are rather obvious.
- Do the right thing and be honest, dependable and consistent
- Be open with information that can be shared
- Have a long-term perspective
- Communicate often and consistently
- GO THERE - building guanxi requires some in-person time
- Have multi-level relationships with your customers and suppliers
- Be aware of cultural norms and issues in China

It's not hard to build relationships and earn guanxi in China. It does take time and a sincere interest in others and in doing the right thing.

Madison International Trade Association Event

Back in May I was asked to be a speaker at a Madison International Trade Association (MITA) event on rising prices for goods from China. The event was last week and I will be sharing information from it here in our OPSA blog.

I am a MITA member, even though I'm 2.5 hours away in Green Bay, and it is an outstanding group. I met some very interesting people that day and hope to follow-up with several of them.

The first section of my presentation was on whether producer prices in China are rising faster than producer prices in the US, and obviously they are as the chart below indicates.

The chart compares the Producer Price Index in the US (excluding energy and food) to the manufactured goods PPI in China.

Next I summarized the reasons for this situation. I've discussed most or all of the factors in previous posts, but I'll use slides from the presentation to give additional details on them in future posts throughout July. I will also continue on the Top Ten Pitfalls to Avoid in Chinese Outsourcing series.