A strategic sourcing process aims to build supply channels at the lowest total cost. It is different from conventional procurement, where the focus is solely on getting the lowest purchase price.
The total cost of the product depends on several factors such as labour cost, raw materials, tooling, order volume, production complexity and logistics. An evaluation of the cost factors is a necessary aspect of strategically planning and implementing your sourcing process.
Advantages of strategic sourcing in China
Nowadays, all companies are resorting to sourcing operations to reduce the production costs of their products. Therefore, most of the business companies of western countries are now focusing their attention to conduct most of their procurement activities in low-cost countries like China.
Product sourcing in China can offer several benefits. Direct sourcing from China enables any business firm to reduce the prices of all their products and services. Various reasons like lower production costs, enhanced production capability, cheaper labour, superior infrastructure, etc. can be the reasons for most companies to go for China procurement at large quantity. China has become a popular destination for sourcing among various marketers because of the following reasons:
1. Cheaper labour charges
Labour costs are quite cheap in China, unlike all other developed countries. Therefore, if any company tries to conduct any sourcing from China, then they can be highly benefited due to the country's cheap labour cost.
Therefore, any company must establish a positive business relationship with the various factories of China because the wages are much lower there.
Also, China is offering an added dimension to this emerging market sourcing scenario. Now, there will be no need for any business firms to provide additional training to their employees while providing them access to computers because the production operation is now being outsourced. It can help to reduce the expenses of companies considerably.
Identifying suppliers that offer maximum value as opposed to the lowest price saves you money in the long run. Making decisions aligned to your business strategy can give you a competitive edge.
2. Lower production costs
The cost of various raw materials is much lower in the market of China. There will be no overhead charges that will be supplemented with the steep cost of training and high turnover.
If the companies of western countries prefer to manufacture domestically, then it will be too expensive based on their cost structure. China offers the affordability that attracts business firms to go for it.
By analyzing total spend, you can make informed decisions on supply, quality, and customer support. You will have the information you need to mitigate risks in these areas and maintain a good reputation on Amazon.
3. Enhanced skillset
The Chinese workforce is aware of the various latest technologies and also, more importantly, they know how to implement these technologies in their operations. Due to this reason, these companies can always attain much higher productivity levels.
The production capabilities of the Chinese workforce are beyond doubt. They can implement the latest machines in their work approach and that can enable them to produce much better-quality products that they manufacture.
Profiling suppliers based on benchmarks and estimating cost savings for each increase the possibility of identifying the best supplier for your requirements.
4. Superior infrastructure
If you look at the various infrastructure facilities of China, then you will find them much superior, and their transportation system is quite fast in comparison to most other Asian countries. This can help in largely reducing the supply duration.
The finished goods can reach the hands of suppliers within a very short period. Because of the superior infrastructure of China, the strategic buy in bulk from China has become very popular among the marketers of the world.
5. Proactive suppliers
You will find that China product manufacturers are quite proactive, and that is an additional advantage for companies that are looking forward to outsourcing their entire production activities. Whenever there will be any manufacturing problem, these suppliers will immediately contact marketers.
Monitoring the strategic sourcing process enables you to pinpoint areas of improvement and work on them. If you identify a dip in supplier performance, you can take the necessary action to avoid any impact to your business.
Knowledgeable importers with concrete goals and instructions keep suppliers on their toes to get the best out of them. Establishing clear expectations from the start and rewarding suppliers with bigger orders for satisfactory work creates a foundation of mutual trust and respect. Strategic sourcing requires relevant skilled personnel and capital investment.
6. Favorable political climate
Also, the political climate of China is quite favorable to various procurement activities of different companies. You will not find any government regulations regarding trade and tariffs.
Therefore, if sourcing operations are properly conducted then companies can be highly benefited from them. Now, China is the emerging sourcing destination due to all the above reasons. So, if you are interested to boost your marketing campaign for your company then go for sourcing in China.
Challenges in strategic sourcing from China
There is not everything hunky-dory about strategic resourcing. There are a few challenges too.
1. Dealing with unknown territories
For most people of western countries, China is a big puzzle as culturally and geographically it is a completely different country that can offer a big risk.
2. Barriers in language and communication
Only a handful of people in China are familiar with English language and hence the communication with Chinese companies is very difficult.
3. Limitations for quality control
China has a bad reputation for cheap quality products, though things have changed a lot. However, the perception remains.
4. Transportation and logistics
Since it is a far east Asian country and hence transportation of logistics may take a longer route.
Solutions for tackling sourcing barriers
However, all these concerns can be addressed by following these approaches:
1. Background research
Before dealing with any Chinese companies, you must do enough supplier verification to know their background. Take help from the local embassy if required.
2. In-person visit
Make a trip before you finalize a deal with any company so that you can ensure that you may not become a victim of any fraud or scam.
3. Sourcing partner
You must hire a local procurement agent in China who can communicate with the Chinese company on your behalf and ensure the proper quality of products. This will also help to have better clarity in communication and avoid any confusion when you are dealing with any of your Chinese suppliers.
Steps to create value through strategic sourcing
Companies that are interested to engage in their value creation via strategic sourcing should conform to the following steps:
1. A critical assessment of expenses
The initial step of any strategic procurement process will start with a critical assessment. During this stage, the company's team responsible for sourcing must scrutinize the policies of procurement of their company.
In simple words, they must analyze all the spending of the company. After that, the team must formulate their spend analysis. This will help business companies to acquire better control on their cost while revenues are coming.
2. Assessing supply markets
If the companies have sufficient knowledge about the markets of procurement destinations, then a full proof assessment about the supply markets is possible. Most of the time, companies have difficulty addressing this problem.
Here the role of any sourcing team will come into play. By taking the guidance of this procurement team, companies can always get a much better picture of the existing market resources.
If they prefer to listen to the solutions offered by this team, then the business companies can get the full advantages of low-cost country sourcing.
3. Assessment of cost structures
Every company must conduct a complete analysis of the cost to decide the costs of various procured goods. Depending on such cost analysis, companies can formulate their overall business strategy. By taking the help of any procurement agency, the organization can reduce its cost of production while lowering the cost of all its products.
4. Choosing business partners
Doing an analysis of the supplying markets can help the companies to connect with various raw material suppliers, their manufacturers, and distributors. By identifying possible partnerships can lead to the procurement policies formulation.
5. Product strategy
Companies must apply the strategies to develop their existing products into a certain brand name after realizing their potential opportunities. Strategic sourcing companies can make various organizations aware of the current political and economic scenario of their procurement destination.
Thus, in this way, any company can channelize all their production activities in the proper direction.
6. Negotiations with suppliers
Before the sourcing plan gets implemented companies must sign contracts and agreements with the supplier parties. Here during this process, price determination and logistics assessment must be included.
7. Implementation
No plan can work without effective implementation. The new strategy must be properly implemented in such a manner that companies can accumulate maximum profits. Also, after the execution, companies must conduct a periodical review to enhance their present action plan.
Flow of strategic sourcing process
Strategic sourcing follows a definite path, consisting of the following steps:
1. Creating the business plan
What does your business want to achieve? What are your prospective markets? How will you position your brand? Defining goals, markets and brand positioning gives a clear direction to your sourcing strategy.
2. Selecting the supplier
Based on your business plan, identify the type of suppliers to work with. Create supplier selection benchmarks and send out requests for quotes. You need to contact Chinese factories in proper way to get their active response and support.
3. Negotiating with suppliers
The focus of negotiations will be on getting a lower cost. Based on the willingness of suppliers, determine the savings estimate for each. Keep expectations reasonable as driving costs too low inevitably leads to a decline in product quality.
4. Scheduling logistics
Set a delivery schedule and decide on the best logistical arrangement for your business. Compare the rates and services of logistics providers.
5. Monitoring performance
Strategic sourcing aims for continuous improvement. Examine your supplier's performance to identify what you can do to maintain a flexible and efficient sourcing process that adapts to a changing market environment.
What does an efficient digital sourcing process look like?
A digital procurement process should give you total control over all stages of the purchasing process. You should have all the information you need within a single system (ideally, a portal) and maintain it to make informed decisions quickly. An efficient digital sourcing process offers benefits such as:
- Streamlining and shortening the procurement lifecycle at all stages
- Reducing or eliminating paperwork and boosting productivity
- Making communication transparent
- Establishing guidelines and maintaining compliance
- Making all transactions available for optimal reporting
It makes the sourcing process flow smooth, with predictable steps and a consistent experience.
Conclusion
Companies can be tremendously benefited from these strategic sourcing activities. They can lower their cost of production because of preferring any low-cost country sourcing activities. It is necessary to consult professional Chinese sourcing company while initiating procurement activities for your company.
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