June 2010 | Commentary | Viewpoint

Strengthening Your China Operations

Tags: Supply Chain Management, China

Jonathan Allen are managing partners, 5 Horizons Group, 313-269-3662

The consumer goods industry has been hurt by the economic chill on both sides of the Pacific. In the United States, declining sales, inventory cutbacks, and limited credit are affecting demand. In China, the decline in exports has caused significant instability, widespread factory closures, and growing unrest among a labor force that has lost millions of jobs over the past year.

U.S. businesses are fighting to keep sales moving forward, while holding operating costs to a minimum. In pursuit of minimizing costs, however, companies doing business with China expose themselves to potential supply chain breakdowns, leading to strained supplier relations, production delays, inconsistent or reduced quality, and freight overpayment.

Reducing costs and maintaining a viable China operation are not mutually exclusive, and companies should view the economic turbulence as an opportunity to revisit their operations. The following five strategies can help companies keep their China operations strong:

1. Revisit product costs. Ask Chinese suppliers to provide bill of materials documents, and check them for opportunities to improve costs. Be careful not to approach suppliers as adversaries, however. These discussions require a partnership mentality. You want to improve transparency so you can find room for improvement.

2. Modify payment terms. If product pricing is non-negotiable, pursue better terms. Many U.S./China relationships begin using payment upfront or a letter of credit (L/C). L/Cs are costly and cumbersome, so many companies in established partnerships move to terms that include a deposit upon issuing the purchase order, then a balance payment when production is completed. This helps free up your borrowing base, which is particularly useful given current economic conditions.

You should also consider asking your Chinese factory to extend the time by which your balance payment is due. Shippers have been able to negotiate terms of up to net 90 days. If you have reasonably stable orders, it is a buyer's market.

3. Inspect, inspect, inspect. The single biggest operations cost killer is receiving incorrect or defective product. Yet, for a fraction of the cost of what you will end up paying for such a problem, you could have hired a service to inspect your product and packaging at the China factory before it shipped. If you choose to hire a third-party inspection company, make the arrangements well before the product will ship so you have time to educate the service on your product standards, potential production variances, and thresholds.

4. Stay in contact with suppliers. The challenges facing the consumer product industry are global, and your Chinese supplier may be facing issues you are unaware of. The last thing you want is to find out that your factory shut down overnight or has to postpone production. There is no fool-proof plan for preventing this from happening, but the more you know about your Chinese supplier, the more likely you are to avoid costly surprises.

5. Improve freight costs. The silver lining in this economic cloud is that a combination of reduced exports and lower oil prices has significantly reduced ocean container costs. If you are paying the same freight rates as in 2008, start working toward a reduction.