18 SCS:GLOBAL SOURCING
Having the trader
as a point of
escalation or as
an intermediary
can be invaluable
to reach a
particular
outcome, for
example, to
overcome
the source
manufacturer’s
resistance to a low
minimum order
quantity or to a
new, unknown
customer.
MONITORING OF SUBCONTRACTORS TO
EMERGING MARKET SUPPLIERS - PER CENT
OF DEVELOPED MARKET MANUFACTURERS
Some
monitoring
49%
Source: Deloitte’s Global Manufacturing Industry Group
to learn how manufacturers are responding to the intense
scrutiny of product safety, quality, and environmental issues.
This survey showed that most executives said they do at
least some monitoring of their suppliers’ subcontractors, but
only one-third said that such monitoring was extensive.
The survey showed that roughly 90 per cent of executives
said they visit supplier facilities in emerging markets, with half
saying these visits occur more than once a year. Nearly all said
that these inspections looked at quality control processes,
followed by facilities/equipment, raw materials, and the skills
of quality control personnel. Companies that are more
successful with emerging market sourcing were more likely
than others to assess the skills of managerial employees and
working conditions in their inspections, as well.
In all such site visit audits, it is important to cross-reference
each answer from the supplier by requesting and observing
supporting evidence. Evaluate their true capacity. Seek
evidence that the target product is actually being
manufactured and that production covers the elements of the
manufacturing process critical to quality and not just
assembly, finished goods testing or packaging.
Finally, traders must understand the importance of buyer
visibility to all nodes in their supply chain, and therefore when
they wish to change the source manufacturer, they should
notify the buyer and gain their approval before any transition.
This should be documented into the supplier agreements
and should be monitored by plant visits through the
contract term.
Even in supply relationships where the buyer works directly
with the source manufacturer, the role of the trading entity
may not necessarily become obsolete. As buyers aim for
transparent trade relationships, the traders must continue to
demonstrate and improve their value proposition to earn their
share of each transaction.
At one extreme their role could be to introduce the buyer to
the manufacturer then to step back. At the other extreme, dayto-day
communication is through them, they receive all
payment and are ultimately accountable for product quality
and delivery. Buyers should carefully consider the role of the
trading company in their Asian sourcing. Having the trader as
a point of escalation or as an intermediary can be invaluable
to reach a particular outcome, for example, to overcome the
Extensive
monitoring
35%
Little
monitoring
16%
SELECTION
Critical questions
Typical telephone interview questions to solicit the real manner
in which the supplier intends to fulfil the order include:
● What is your current capacity utilisation?
● When operating at high utilisation, how do you fulfil
large orders?
● If you were to win this order – what would be your
anticipated bottlenecks and how do you intend to
overcome them?
● Which parts of the end-to-end production process
do you outsource and why?
● Under what circumstances do you outsource
manufacturing?
OCTOBER 2008 SUPPLY CHAIN STANDARD
www.supplychainstandard.com
● What relationships do you have with these factories?
● Do these partners have experience of international export?
● How do you ensure quality requirements are met and
consistency is achieved when using other partners?
source manufacturer’s resistance to a low minimum order
quantity or to a new, unknown customer. The trading entity
may have more influence as it is likely to be trading with the
manufacturer on behalf of other buying companies.
Alternatively, the trader could gain concessions leveraging
personal connections (or "guanxi" in China) through drawing
on the trust gained through their entire business relationship.
This may have a greater effect than the influence a foreign
buyer could apply even with local sourcing staff.
Exit strategy
It is also wise to develop an exit strategy that aims to remove
the intermediary trader from the transaction after a period as
the direct relationship grows. This should also be discussed
with all three parties present under the auspices of keeping
the three-way business relationship lean and competitive.
Based on the recent phenomenal growth of exports from
Asian sources, if a trader with a sustainable value proposition
is removed from one buying chain there are many other
opportunities for them to capture. In this fashion a trading
company partner can become an element of continuous
improvement in a global sourcing programme.
In summary, an accepted practice among Asian
suppliers is that manufacturers will trade or subcontract to
fulfil orders – in some cases without the buyer’s knowledge
– and trading companies will protect their role in the
transaction by concealing their manufacturing sources.
This leads to concealed nodes in global supply chains that
represent lost opportunity at best, and at worst a
significant risk to product quality and corporate brand
equity. Through understanding the importance of full
supply chain visibility and by addressing this point of
exposure directly, tactics can be employed to shine light on
the hidden parts of Asian supply chains.
As global companies press for transparency, trading
companies will have to step up their offering to remain
competitive. Looking forward, this evolution will greatly
benefit the buying companies.
Jim Ridgwick is part of Deloitte’s Supply Chain practice,
leading their Sourcing practice for China; he advises leading
European and US companies on the design and successful
implementation of their global sourcing programmes.
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