Top Ten Pitfalls to Avoid in Chinese Outsourcing - #1 Lack of a Plan / Strategy

#1 - Lack of a Plan / Strategy

This is what I call the "pitfall maker". It is the root of all the previous pitfalls. Starting with a plan for outsourcing is the number one action companies can take to avoid problems and realize the many benefits of Chinese outsourcing.

A plan should include objectives, time lines and evaluation points, progression of projects (which comes first or how will this be determined), contingency planning for key risks, and quality assurance plans.

Although OPSA is not a consulting firm, we do help our customers with their plans. It's in everyone's best interest to have a plan, follow it, and modify it as appropriate.

I hope the "pitfalls" series has been helpful. Feel free to contact me if I can expand on any of the points.

Top Ten Pitfalls to Avoid in Chinese Outsourcing - #4 Lack of Control

#4 Lack of Control

If you know that China is pretty much on the opposite side of the earth from the US, you can begin to understand that it's difficult to have control over what happens there. Add in the significant cultural, political and language differences and it's clear control is difficult to achieve.

The things you normally want to control - product quality, intellectual property, production time lines, cost changes, and maybe compliance with non-production policies (child labor, etc.) are still controllable with some help and a different outlook.

Here are my suggestions for gaining and maintaining control of your suppliers in China:

1. Have a champion in your organization responsible for your Chinese outsourcing efforts. We often see companies that treat their Asian suppliers the same way they treat US suppliers and it results in less than superior results. Put someone clearly in charge and make them responsible for making the project work. Then give them support to get educated and put in place the right processes and procedures.

2. Negotiate and agree on processes and procedures with your suppliers up front. You can't think of everything that may happen, but you can agree on quality criteria and other things up front. The more of this you do, the greater your chances of not having problems.

3. In order to do #2 well you need to build a relationship with the supplier. This necessitates either going to China to meet in person or having someone be your stand-in presences in China. In person audits are important.

4. Start small and gain experience. I've mentioned this one before.

5. Have contingency plans. If you have other options it won't seem like the sky is falling when things need to be brought back into control.

6. Communicate often and clearly. An obvious one, but one that still gets missed and is a main cause of misunderstandings.

Top Ten Pitfalls to Avoid in Chinese Outsourcing - #5 Not Identifying All Risks

#5 Not Identifying All Risks

Traffic in Shenzhen is not one of the risks to which I refer. I am referring to the big risks to your outsourcing objectives. Here are the main ones:

1. Exchange Rate Risk - As the RMB appreciates against the US Dollar your savings is eroded. Actually, this can be a catch-all category for all cost increases in China that are not global. Right now labor, raw materials, and general inflation are all increasing faster in China than in the US.

2. Political Risk - There is the risk of conflict over Tibet, the Straight of Taiwan, or other issues. There is also the risk that the Chinese government will take some action that otherwise affects the outsourcing viability of your products.

3. Environmental Risks - Boy, we saw this with the earthquake didn't we. There is also the risk of pollution impacting your business, although that would take significantly longer than an earthquake. There is risk in the availability of water. I would also include the loss of electricity impacting your production in this category. The Chinese natural environment is not in good condition, so there are significant risks here.

4. Quality - This is the big one. There is a big risk that you will open that first container and there will be some major problem with your product.

5. Intellectual Property Theft - Another huge one in China. The Chinese just don't respect the value or claims to intellectual property. This is changing, but slowly.

So, what do you do about all these risks? Well, you don't miss-out on all the opportunities in China because of them. Rather, you take actions to reduce your risk and prepare contingencies in case bad things happen.

1. Get Educated - Learn about each risk and assess your level.

2. Prepare Contingencies - We encourage our customers to have plans in place for what they would do if they lost their Chinese suppliers for a significant period of time. Inventory can be a hedge against delays and quality problems. Having alternative suppliers in the US in mind is also a very good contingency step. There are others.

3. Get Help - Obviously having a firm like OPS America on your side in China greatly reduces many of the risks. There are also firms that just do quality inspections. Finally, there are resources in China supported by the US Government, like the US Commercial Service, that can help with risks.

4. Start Small and Gain Experience - I will write more soon about our clients that try to use a new product development project as their first foray into Chinese outsourcing. It's not a good idea. Much better is to start with non-critical items and learn. Then you can move to your key items and more complex projects as you gain experience.