16 SCS:GLOBAL SOURCING
Hidden links in
Supply chain visibility is a critical issue
in the development of trade between
the Far East and Europe but industrial
fragmentation can hide the true source
of a product. JIM RIDGWICK, who leads
Deloitte’s Sourcing practice for China,
provides some illumination.
Manufacturers in Asian emerging markets often meet
the supply requirements of their international
customers through an interlinked network of sister
operations, business partners, subcontractors or even the subcontractors
of their subcontractors. In many cases the buyer is
not even aware that this trading relationship is happening.
This is particularly commonplace when buyers seek a onestop
source of supply outside of the limits of their chosen
supplier’s capacity or competence.
Trading companies that make global sources accessible to
companies who are buying abroad also add uncertainty to
supply chains. If they were to share information about the
manufacturer, it opens doors for buyers to purchase directly,
thereby removing their role and margin from the transaction.
Suppliers that subcontract or trade without notifying the
buyer, or having trading companies that protect their
commercial position by hiding the identity of the suppliers,
are both accepted business practices in many industries in
Asia. Many industries are so fragmented that, to meet the
product range, volume or lead-time requirements, there
may be no single supplier that can produce the complete
order. Furthermore, even with rigorous supplier
POSSIBLE TRADING STRUCTURES CASE STUDY
Pharma scrutiny
Suppliers that subcontract or trade without notifying the buyer,
or having trading companies that protect their commercial
position by hiding the identity of the suppliers, are both
accepted business practices in many industries in Asia.
OCTOBER 2008 SUPPLY CHAIN STANDARD
www.supplychainstandard.com
identification and screening processes the most capable
manufacturer may still be overlooked due to the lack of
public domain information about them or due to extreme
market fragmentation (for example, there are 10,000
electronics and telecommunications equipment
manufacturers in China with revenues over $800,000).
In many buying relationships the true source manufacturer
is unknown by the buyer. From whichever channel a product
is sourced, it is therefore critical in low cost locales to know
where and by whom the product is being made. Increasing the
visibility of the supply chain not only mitigates some key
global sourcing risks, it also allows capture of further benefits
from a company’s Asian supply base.
Benefits of illuminating hidden links
Open and transparent relationships with the trader helps
ensure that quality requirements have been met. Quality
managers in the buying organisation can speak directly with
those responsible for production, thereby building
accountability. They can also see firsthand evidence by visiting
the factories to be reassured that production workers and their
managers understand, respect and adhere to the buyer's
quality and social responsibility requirements.
The importance of nurturing direct relationships with Asian
suppliers should not be underestimated. It is impossible to
build trust if the buyer and the manufacturer never actually
meet and spend time together to understand one another. By
communicating through the trading entity, messages can be
mis-communicated or, at worst, manipulated to meet the
objectives of the trading entity.
Building direct relationships can also provide the
foundation for service improvement, joint product
development, and cost and price reduction through value
Following the recent deaths of 19 people, the US Food and
Drug Administration (FDA) began an investigation into the
source of the contaminated doses of a leading blood-thinning
drug - Heparin.
The apparent source of this contamination is one of the
Chinese suppliers of the active ingredient in the drug.
Heparin is often imported to European or US manufacturers
or distributors through import trade companies – or in this
case, through a US/Chinese joint venture. These importers
source from several direct suppliers each using other subsuppliers
for the ingredients.
In China alone there are hundreds of foreign pharmaceutical
ingredient manufacturers. With the FDA inspecting only 13 in
2007, both identifying, and adequately monitoring all such subsuppliers
is a considerable challenge for both US and European
companies and the industry watchdogs.
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