Guideline for the Development of Chinese Suppliers

Diplomarbeit von Matthias Vodicka

Abstract:

Nowadays companies all over the world face global competition. Because the bought-in part cost of engineering goods represents a big share of the overall production cost of engineering goods, procurement developed to be a major leverage to save cost in the recent years. As part of it, the supplier management is increasingly considered to be an important business function. Further, the development of supply bases in low-cost-countries (LCC), as China is, over the past years rapidly gained significance, since it is one of the remaining levers to reduce costs. After years of mass production of mostly simple products, today Industrialized-Country (IC) companies from the mechanical engineering industry strive for the sourcing of bought-in parts from Chinese suppliers.

The scope of this thesis is to examine the existing methods, especially the Balanced Scorecard (BSC), and other concepts of supplier development and supplier improvement for their application with Chinese suppliers. Based on the strengths and weaknesses of these approaches a new procedure is developed. Therefore the first step is the examination of the supplier development process theoretically and practically. The theoretic view is based on literature research while the source for the examination of the practical problems of German buyers as well as of Chinese suppliers is a questionnaire based interview study among involved companies.

Generally occurring threats of the buyer supplier relationship should be analyzed and weighed upon their relevancy especially for the Chinese supply market. Taking these issues into account, the existing procedures for supplier development and improvement are optimized for their application to Chinese companies. Finally the thesis closes with a general risk examination and the development of an applicable FMEA (Failure Modes and Effects Analysis) based methodology for the assessment of purchasing risk especially in China.

IC companies penetrating the Chinese market with the target to source locally have to develop a supply base first. The supplier development identifies the required suppliers, assesses them upon their capabilities and establishes a co-operation. A successful supply needs supplier improvement, since fundamental capabilities are lacking frequently. Further, risks weigh heavier due to the high investments required in advance. Considering mainly small and medium sized enterprises in investment goods industry, the regular problems in China are enlarged by low purchasing volumes and specialized products. These companies face Chinese suppliers with lacking commitment to quality and delivery in time, which represent fundamental problems. Further barriers to supplier improvement emerge from the differing culture and the supplier’s strategic orientation. Therefore, a new approach considering the local issues and risks is suggested in order to enhance the benefits from the executed efforts.

The supplier development as process of developing a new supply base has to be analyzed showing the general occurring issues and prospects of buyer’s supplier development effort, and be weighed upon its relevancy in China. The supplier improvement with preliminary steps, as it is a key process of the supplier development in China, has to be emphasized and analyzed upon its applicability with Chinese suppliers. From that, the elementary steps to undertake and the main deficits for China have to be identified. Based on the found requirements in China and the deficits of common methods a new approach has to be designed.

This approach is based on the Balanced Scorecard (BSC) and has to be applicable to improve the relationship, between the IC buyer and the Chinese supplier, itself. Aligning the companies’ differing strategies, the BSC shows a possible way to improvement, resulting in both parties’ benefits. Within this relationship improvement, the supplier’s deficient capabilities have to be focused, since they are responsible for the major risks for both companies; thereagainst, the buyer’s efforts have to regard the Chinese culture and needs, in order to be successful with his undertaking. Expected results of BSC-based relationship improvement are mutual trust, commitment and enhanced communication, leading to a fast improvement and a prosperous relationship for both companies.

Table of Contents:

Table of Contents:

Text Sample:

Chapter 4.2.3, Case-study SpecialMech: SpecialMech is an assembly site, which started its business in China five years ago. It sources all components to assemble them to finalized products. These investment goods are made-to-order for industry and require „German Quality” at low costs. Starting similarly to ChemTech five years ago, it confirms the experience of receiving poor quality from its suppliers in the beginning of the company’s procurement activities. Since all parts are being purchased, this company needed to become involved strongly into supplier development and improvement. It sources mainly from medium-sized suppliers (from 51 up to 250 employees), including standardized and customer-specific parts. In the near future it is de-sired to implement the sourcing of modules.

With its strategy SpecialMech tries to create a long-term relationship with stable fulfillment of requirements. It experienced a rapid increase of quality, when suppliers understood the improvement to have direct impact on profit (stable growing orders, efficiency). Close co-operation and stimulation of understanding of the buyer’s requirements emerged to be important factors leading to a successful relationship. A support team has the aim to improve the suppliers. In the case of small supplier companies (<50 employees) it is required to find out a reasonable way of how to solve issues and to explain the benefits, since it would be counterproductive if the feeling of being dictated emerged in the supplier’s employees (supposed the supplier is not dependent on the buyer).

By investing HR-capacities and a lot of time in supplier management SpecialMech created the today’s supplier management system: In the beginning of each relationship an explanation is given to the supplier, why improvement and the cooperation are beneficial. It is attempted to give the supplier an understanding of the WHY quality is required and HOW it can be attained. Engineering teams conduct site visits, are involved in finishing processes and educate and work together with suppliers’ employees, whilst keeping close contact to procurement managers. Site visits include feedback from the sales, as well as from the operating employees, who are responsible for the end-product. Costs and benefits are shared indirectly with the suppliers: Basing on successful improvement and stable relationship the orders grow on the supplier’s side and SpecialMech can increase its savings by lowering supply from Germany.

Although SpecialMech is satisfied with its suppliers’ ambitions to improve processes and to fulfill requirements, it has still issues with product-quality. The independent suppliers are not easy to change – it often is a slow and not lasting process: barriers can be low motivation to learn (from a foreign company) and often changing employees. Cooperation and commitment is felt to depend on the size of the supplying company: the smaller the order is for the supplier the more it leads to lacking delivery reliability as the order is prioritized lower. In this case monitoring concepts like the monthly assessment of quality and delivery reliability and concepts measuring the yearly improvement are not useful, since no pressure can be exerted on the supplier.