n today’s dynamic global business landscape, especially with China being a pivotal manufacturing and sourcing hub, effectively assessing suppliers is crucial for businesses aiming to maintain a competitive edge. We’ll explore the key aspects that managers need to focus on when evaluating their Chinese suppliers, and present a real – life case study to showcase how conducting a thorough supplier assessment can be a game – changer, especially in challenging times like the post – pandemic era.
Businesses operating in or sourcing from China must have a comprehensive understanding of their suppliers. This includes not only their production capabilities and cost – effectiveness but also their ethical practices, technological adaptability, and long – term viability. While internal teams can conduct some evaluations, external expertise can bring in an unbiased perspective. However, the willingness of suppliers to cooperate fully during the assessment process is a determining factor for its success.
In any supply chain, a harmonious and productive relationship between suppliers and buyers is the cornerstone of smooth business operations. In cross – border scenarios involving China, where cultural, regulatory, and logistical differences exist, the ability to manage supplier relationships effectively becomes even more important. Whether it’s a large corporation with complex supply chain networks or a small – to – medium – sized enterprise (SME) relying on a few key suppliers, managers need to ensure seamless communication and robust risk management.
In this article, we’ll provide an in – depth look at the areas that should be on every manager’s radar when reviewing Chinese suppliers.
Avenues for Supplier Assessment
Historically, large – scale buyers often carried out routine quality and financial audits of their suppliers. But for many SMEs that source finished products or standardized semi – finished components from China, this isn’t always the norm.
SMEs often face limitations in terms of influence and financial resources. As a result, they frequently rely on suppliers’ self – evaluations or information gathered during business trips. However, since the outbreak of the COVID – 19 pandemic, travel restrictions have made the latter option increasingly difficult.
Nonetheless, we’ll outline strategies for supplier assessment that can be executed by local teams in a cost – efficient manner. These strategies can help businesses gain a better understanding of their suppliers, including aspects like their business connections, pricing competitiveness, existence of any exclusive contracts, and operational stability.
The process of supplier assessment can follow either the routine or the ad – hoc approach.
The Routine Approach
The routine approach is applicable when the initial business agreements with suppliers stipulate regular reviews. This is commonly the case when the end – customer has specific requirements that need to be adhered to throughout the supply chain. For example, in the electronics industry, where strict quality and safety standards are set by end – customers, regular supplier reviews are a must. Also, large – volume contracts between buyers and suppliers often warrant routine assessments to ensure consistent quality and timely deliveries. However, there are also low – volume business scenarios where specific product characteristics or business needs may call for regular reviews, even without end – customer – imposed requirements.
The Ad – Hoc Approach
On the other hand, ad – hoc supplier assessments are triggered by certain events. A change in business requirements, such as a sudden increase in order volume or a shift in product specifications, can be a reason. Irregularities like inconsistent product quality, missed delivery deadlines, or discrepancies in the quantity of goods delivered also necessitate an immediate review.
For instance, if a clothing brand sourcing from China finds that the colorfastness of the delivered garments does not meet the agreed – upon standards, an ad – hoc assessment of the supplier’s production process, quality control measures, and raw material sourcing becomes essential. Similarly, during the pandemic, many disruptions in the supply chain, such as shortages of raw materials or transportation bottlenecks, provided valid reasons for businesses to conduct ad – hoc reviews of their Chinese suppliers.
Financial changes in the business relationship also demand special attention. If a buyer decides to make a co – investment in a supplier’s new production facility or modify the payment terms to support the supplier’s cash flow, financial and operational due diligence is required. When a buyer has concerns about a supplier’s financial stability but lacks access to detailed financial statements, an independent assessment by professionals can help maintain a certain level of trust. But of course, the supplier’s cooperation and openness to having its financial records audited are essential for an accurate assessment.
In some cases, communication breakdowns can lead to uncertainties about future business prospects. Simple fact – checking and collection of objective data can help resolve these issues and restore confidence in the supplier – buyer relationship.
What to Evaluate?
Supplier assessments can cover multiple dimensions, which can be broadly categorized into operational, procedural, and administrative evaluations.
Operational Evaluation
An operational evaluation typically involves on – site visits to all relevant production facilities. Businesses should verify the accuracy of the supplier’s claims. This includes checking the actual size of the production area, the range of production capabilities, the condition and functionality of machinery, the management of raw material and finished goods inventory, the availability and use of inspection equipment, and the skills and number of personnel at each production stage.
For example, in a furniture manufacturing supplier, the quality of wood – cutting machines, the storage conditions of raw wood to prevent warping, and the expertise of workers in finishing the furniture can all be crucial factors. Additionally, the layout and management of the shipping area are important. How products are protected from environmental factors during storage in the shipping area and the time products spend in an unfinished or pre – packed state can reflect the supplier’s commitment to quality.
Official documents such as production certificates, factory floor plans, and detailed work instructions at different production stations are also important parts of the operational review. Conducting an inventory count is a more time – consuming but necessary operation, which can be carried out separately or in combination with other evaluations.
Procedural Evaluation
Procedural evaluation requires a high level of cooperation from the supplier. Industries with a high degree of vertical integration, like the aerospace industry, are more likely to undergo in – depth reviews of management procedures, such as product design processes, quality control procedures, and risk mitigation strategies.
Customers should check if the supplier has established standard project management procedures in place, along with an internal reporting system for key project milestones. A reliable risk – flagging mechanism during the product development process is essential. For example, in the development of new aircraft components, any potential risks that could lead to product failure or delays need to be identified and addressed promptly. Advanced suppliers often have Failure Mode and Effects Analysis (FMEA) systems in place for both production and R&D. However, buyers should ensure that these FMEA systems are genuinely effective and not just created to meet customer demands.
Beyond these more complex procedures, simpler business processes can also be examined. For instance, the supplier’s procurement process for raw materials can reveal a lot about its management. Whether the supplier places bulk orders based on long – term forecasts or orders according to immediate demand can indicate its financial acumen and ability to manage inventory. The availability of production manuals, worker training instructions, and compliance with relevant technical standards are also important aspects to consider. And when visiting a supplier unannounced, relevant official certificates like product safety certifications and environmental compliance certificates should be readily available.
Administrative Evaluation
Administrative evaluation can be partially conducted remotely. Basic elements that buyers should look into include the supplier’s business license, registered business scope, and registered capital. Understanding the supplier’s legal history, including any past lawsuits or regulatory violations, is also important.
The supplier’s ownership structure, both the publicly disclosed and any potential hidden stakeholders, can provide insights into its position within the industry and its financial sources. A more in – depth investigation can focus on the supplier’s relationships with the buyer’s competitors or major customers in other product segments. While obtaining such information can be challenging, professional suppliers are usually willing to disclose non – confidential business relationships and provide customer references to support their claims.
Pricing is another area of interest, although it’s often confidential. Professional consultants can assist in understanding market price trends and the supplier’s pricing competitiveness compared to its peers.
Case Study
A European sports equipment brand, “ActivePro”, had been sourcing sports shoes from a Chinese supplier, “Sunshine Footwear”, for three years. Initially, the partnership was smooth, with timely deliveries and satisfactory product quality. However, in the fourth year, ActivePro noticed a series of issues. There were occasional delays in delivery, and some batches of shoes had quality problems, such as loose stitching and uneven sole thickness.
ActivePro decided to conduct an ad – hoc supplier assessment. The operational review revealed that Sunshine Footwear had expanded its production scale without upgrading its quality control equipment and personnel training. The inspection equipment was outdated, and the number of quality control staff had not increased proportionally to the production volume.
In the procedural review, it was found that although Sunshine Footwear had a project management system on paper, it lacked an effective risk – flagging mechanism. For example, when there were shortages of a key raw material, the production team did not report the potential impact on delivery timelines and product quality in a timely manner.
The administrative review showed that Sunshine Footwear had taken on a new investor, which had led to some changes in its financial and management priorities. This had affected its focus on product quality and delivery schedules.
Based on the assessment findings, ActivePro worked with Sunshine Footwear to develop a plan. This included upgrading quality control equipment, providing additional training for staff, and improving the internal communication and risk – reporting mechanisms. After six months of implementation, the quality of the delivered sports shoes improved significantly, and delivery delays were reduced. This case study highlights the importance of conducting regular and timely supplier assessments to ensure the long – term success of business partnerships.
