Global Sourcing and Supply Management Excellence in China

The meaning of “Long” in the Chinese language is “dragon”. The dragon is the national symbol of China and people identify with the dragon itself and the features of the dragon. These features comprise grace, strength, power, growth, beauty, prosperity and success. According to a Chinese myth, the Chinese citizens are dependants of the “Long” (Chinese: Long de Chuan Ren). The same features are also existent in company transactions and industries, especially between relationships of business partners, e.g. supplier-customer relationships. As part of his experience in China, the research and his doctoral thesis at the Gloucesterhsire University, Dr. Marc Helmold developed recommendations on how to exploit cost benefits from Chinese manufacturers in many industries in supply management (SM). During 5 years of research and more than 3 years in China, an in-depth literature review; interviews with leaders of the automotive, railway, transportation and machinery industry; and a case study approach served as methods for obtaining the results and recommendations.

What is a supply network and why are they so important for companies and business managers? Supply networks allow us to look at the big picture; giving us a better understanding of the flow of materials and information (Dust, Process and cost potentials through Total Supplier Management. A study of the degree of implementation and the contribution of supplier management to safeguarding competitiveness and corporate success. 11/2009, pp 1–35, 2009). Often organisations focus only on their organisation, that means what they produce or provide and not what the end customer receives. Looking at a supply network enables firms to look at the overall movement of materials and information from start to end customer, allowing organisations to see the value in creating partnerships. The value in working together to ensure the best possible value is provided to the end-customer.

A performance indicator or key performance indicator (KPI) is a type of performance assessment and evaluation. KPIs evaluate the success of an organisation or of a particular activity in which it engages. Often success is simply the repeated, periodic achievement of some levels of operational goal (e.g. zero defects, 10/10 customer satisfaction, etc.), and sometimes success is defined in terms of making progress towards strategic goals. Accordingly, choosing the right KPIs relies upon a good understanding of what is important to the organisation. “What is important” often depends on the department measuring the performance – e.g. the KPIs useful to finance will really differ from the KPIs assigned to sales. Since there is a need to understand well what is important, various techniques to assess the present state of the business, and its key activities, are associated with the selection of performance indicators. These assessments often lead to the identification of potential improvements, so performance indicators are routinely associated with “performance improvement” initiatives.

Supply management is going through a significant paradigm shift as described in the previous chapters. Factors such as internationalisation, shorter product life cycles, risk management, increasing cost pressures and concentration on core competencies trigger this change. In short the reasons for the paradigm shift can be summarised as follows:

In contrast to the traditional paradigm, the objectives of so-called keiretsu supplier networks and lean production are based on a reduction of throughput times and the elimination of non-value-adding activities. These activities are waste or so-called MUDA (Japanese = 無駄). The figure shows the two concepts, the traditional and the lean one. Both concepts are directed towards customers. Nevertheless the lean concept’s foundation is based on the optimal reaction capability and not based on inventories. Inventories increase the cost of capital and have negative impacts on the shareholder value, whereas short cycle times lead to small inventories. Lean manufacturing or lean production, often simply “lean”, is a systematic method for the elimination of waste (“MUDA”) within a manufacturing system. Lean also takes into account waste created through overburden (“MURI”) and waste created through unevenness in workloads (“MURA”). Working from the perspective of the client who consumes a product or service, “value” is any action or process that a customer would be willing to pay for.

In present-day, uncertain, dynamic and turbulent markets, supply chain vulnerability has become an issue of significance for many companies (Helmold M, Establishing a best-practice model of supplier relationship management (SRM) in multinational companies in the European transportation industry. Wissenschaftlicher Verlag, Berlin, 2013). As value and supply chains are constantly becoming more complex as a result of global sourcing and the continued trend towards leaner and more efficient organisations, supply chain risk increases (Dust R, Process and cost potentials through Total Supplier Management. A study of the degree of implementation and the contribution of supplier management to safeguarding competitiveness and corporate success. 11/2009, pp 1–35, 2009). The challenge to enterprises today is to prevent, manage and mitigate that risk through creating more resilient supply chains (Emmett S, Crocker B Excellence in supplier management. How to better manage contracts with suppliers and add value. Best practices in supplier relationship and supplier development. Cambridge Academic, Cambridge, 2009). Supply managers aim at achieving the ideals of fully integrated efficient and effective supply chains, capable of creating and sustaining competitive advantage (Helmold M, Establishing a best-practice model of supplier relationship management (SRM) in multinational companies in the European transportation industry. Wissenschaftlicher Verlag, Berlin, 2013). To this end they must balance downward and operational cost pressures and the need for efficiency and improvement, with effective means to manage the demands of market-driven service requirements and the known risks of routine supply chain failures. Better management and control of internal processes together with more open information flows within and between organisations can do much to help.

The way in which a purchasing department is structured is directly dependent on the way in which the company operates. Having a purchasing organisation structured in the wrong manner can lead to higher costs for materials and inconsistencies for the production of finished goods, which can lead to degradation in customer satisfaction. Supply management department organisational structures often reflect the organisational structure of the business. The figure below illustrates a standard organisation divided into functions such as bids, non-product-related, product-related, project purchasing and the China sourcing office.

The TCO methodology must be the key principle in any supply management organisation. TCO compiles all involved cost from the supplier selection until the end of the after sales service. TCO includes all direct and indirect costs, which are related to the supply of goods. Emmett and Crocker define total cost elements as a costing philosophy or concept, which includes all values and benefits for the customer, which are related to the supply (Emmett S, Crocker B, Excellence in supplier management. How to better manage contracts with suppliers and add value. Best practices in supplier relationship and supplier development. Cambridge Academic, Cambridge, 2009). Hofbauer et al. (Lieferantenmanagement. Die wertorientierte Gestaltung der Lieferbeziehung, 2nd edn. Oldenbourg Verlag, Munich, 2012) emphasises that the TCO principle is a key in supply management. Figure 8.1 shows the total cost including the elements. The elements are based on a real comparison:

As emphasised by various supply experts in industry and academia, supply management and all China activities must be part of the corporate and centralised strategy. China offices such as those of Deutsche Bahn, Bombardier and Volkswagen are part of the strategic supply management process. However, many companies have not yet executed the paradigm shift from a traditional towards a modern supply school, thus losing the competitive advantage. Chinese suppliers are still often seen as immature and low cost, where this is not true anymore. China is a mature and developed country with a highly innovative supply base. Articles and interviews disclose that best-in-class or excellent companies integrate supply management and the management of Chinese supply networks into their own corporate strategy and corporate management. One company from the automotive industry has integrated the philosophy of a collaborative supply management and the supplier relationship management into its mission. Excellent companies have set up a programme jointly with suppliers which strives for supply management or procurement to excellence (P2E).