Welcome To Same World Networking

Sameworld.net is the networking blog for Supply Chain Specialists interested in creating channel partners around the globe.

A key essence for success in a new market is to identify the ‘Right Partner’. We appreciate the huge importance of this aspect and are willing to invest the necessary time and effort to get it right. There is NO substitute for "Grunt Work" and it is essential to meet the prospective partner, understand their technical capabilities, visit their manufacturing unit and assess the management team. With the partners who add to this blog we hope to achieve that. Mark Kennedy Same World Trading


Wednesday, 8 December 2010

Procurement Rules of Engagement

It was suggested to me by a colleague that I might want to blog about the “rules of engagement” for global procurement. I always thought this sounded like something you decide when you’re getting ready for to battle, dig in and shell your suppliers.

I would start out by saying that’s not the direction I see supplier relationships going … the successful ones, anyway.

We’re not looking to wage war at all; we’re here to make peace… and live in prosperity. At Same World, we aim to drive the message of winning by collaboration and cooperation, not conflict or confrontation.

Someone once said about being caught up in the Rat Race; that “even if you win, you’re still a rat.” We think that pretty much sums up the old price-focused approach to procurement. One side bashes the other until they can’t stand up anymore, and no one ends up winning, at least not in the long run.

Let me give you some quick background, most companies strive to become your customers’ best supplier, seems simple enough. But to reach that desired result can mean changing everything upstream in the procurement process. That’s not so simple.

At Same World we are often invited to come aboard to drive the implementation of supply chain management best practices.

We work on transforming that OEM’s procurement practices; and to do this we often use lean supplier development to excellent advantage. Working in tandem with suppliers to cut waste, expense, and develop the best possible product for the best possible cost. Lean practices helped make OEMs, and their suppliers, the most competitive and the most profitable.

I often feel more like a preacher sometimes than a purchasing executive, because to affect the changes and to stay competitive means getting the board to take a big leap of faith, to take a new approach to their working relationships, and develop trust in people they’ve long considered adversaries.


We need to take a leaf out of the Japanese book, because the Japanese corporate culture requires partner participation. Nobody needs to be sold on the ideas behind the collaborative approach, because it’s the accepted practice.

Many companies have to go straight to “Square One” and change the philosophical underpinnings in your company and to reverse the perceptions and values that had been formed by years of contentious, price-focused activity. Often a change of heart is needed within the company in order to make the leap to a system that rewards continuous improvement and business practices that are conducted in good faith.

So, in order to go in the right direction and navigate by a recalibrated compass, your aim now is to build relationships based on mutual trust and collaboration. We are talking about getting lean, not mean. It’s not just a nice thing to do, but a smart thing to do. It’s a lot easier – and more effective and long-lasting – to work as a team to remove waste and inefficiency from the value stream.
In order to transform the extended value stream, you need to take specific steps that will substantially alter your procurement landscape.

First, you need to move to transform your supply base. What do I mean by that? Simply stated, it means you will have far fewer suppliers you work with. But it will result in strong trust-based relationships with those remaining suppliers we choose to do business with. And they will be partners who share in our success.

For you to become a world-class lean enterprise, you must partner with our suppliers to remove all forms of waste – which equals cost – from their portion of our joint value streams. We’re doing this because about 50 to 60 percent of your costs come from our supply base.

To achieve this you need to be focused on “total cost,” improving processes, trimming time to market, encouraging a freer flow of ideas through trust and partnerships, and achieving elevated financial performance. Of course, this is easier said than done.

Your first strategy is to develop strategic suppliers and commodity strategies. Why? Because we need fewer suppliers to be agile. The trick is in selecting the right ones.

Statistics have shown that companies tend to have 75% more suppliers than they need because they try to play on off against the other on price.

The formula needs to be that components with high value and complexity are core and will ultimately be sourced to a group of about 2.5% of your supplier base, strategic suppliers with whom we will have close and deep relationships. Lower value materials, but still with high complexity, may require to be nearer 5% of near-core suppliers.

Niche suppliers – those in unique products or with patents that restrict your ability to compete – and commodities with low value and less complexity will round out our supply base.

Your expectations of these newly defined “Strategic Suppliers” should be high. These suppliers must exhibit a history of flawless launches, meeting zero PPM and zero disruptions and improving first-time quality. They must be willing to work with you, early in the program design and development phase, to establish cost targets that satisfy your companies model-to-model cost improvement goals. And they must be committed with the right attitude toward continuous waste reduction and lean thinking. That’s crucial, because not everyone is willing or able to travel this new path with you.

Your nest strategy is to develop and manage cost standards that determine what a part, or service, “should” cost, with real details.
Once you really know what something should cost, the entire design and sourcing dynamic changes from an “auction mentality” to a joint waste elimination focus. This best practice leads to better designs and better processes and the highest level of true competitiveness.
However, it’s imperative that this information be handled with the utmost integrity and confidentiality by both parties.

This is a leading-edge approach because many business models in our industry still tend to push costs down the supply chain rather than remove the waste. In contrast, your business needs to establish
Best-in-the-World cost standards and use them in everything you design and buy.

Cost standards allow you to clearly see the gap between our price and the most competitive scientific cost the part or service can be purchased for. They also help reveal gaps in design and manufacturing costs, and permit us to gain knowledge, unlock value and promote continuous improvement through joint activity.

Your next strategy is lean supplier development engineering. It is generating dramatic results and it is beginning to build new levels of trust within our supply base.

This strategy requires the expertise of lean supplier development engineers, dedicated to enabling suppliers to achieve the best levels of lean manufacturing in their operations.

The lean supplier development process starts with a meeting, then a workshop that includes you and the supplier’s CEO, laying out your expectations of each other, with regards to reduction in people costs generally ranging from 20 to nearly 50 percent, increases in productivity need to range from 30 to 60 percent, first- time quality should improve in a range of 10 to 45 percent.

And, as you can guess, this process generates savings, which helps everyone involved. Remember, this is not about eroding margins; it is about eliminating waste and thereby reducing cost. Just as margins are important to your company, your strategic suppliers also need them to remain the most competitive suppliers in the world.

Obviously it is critical that we work with our suppliers and customers as early as possible in the design process, not only to eliminate waste and save money but also to ensure on-time product and flawless vehicle launches.

When you begin to consider the many possible applications for lean principles in design, engineering and production, you begin to understand the profound potential these tools offer us in operating at maximum efficiency and profitability. They are too powerful to ignore!

This is winning by collaboration. It means redefining our idea of “business relationship” – a term that in too many cases has become devalued to mean simply “lunch and a round of golf.” The collaborative model has room for both to win, and plenty of compelling reasons for both to intensify the lean process, since both stand to benefit.

That’s why I said at the beginning … lean supplier best practices are not just a nice thing to do but also a smart thing to do. I sincerely believe that the end result of this approach is a better product at a better price.

The people who truly understand how to implement lean end up with the most competitive product in the marketplace. There’s nothing mystical about it. It’s just good business – and the proof shows up in the bottom line. Seeing these bottom-line results and forging strong relationships with suppliers motivates your team and me to do more. It’s just that simple.

The golden rules really boil down to forming long-term partnerships with a few key suppliers, based on mutual trust. We share ideas, designs, best practices, and the rewards that are derived from eliminating waste from our combined processes. This includes the savings as well as the practical knowledge that we gain from our efforts.

We get stronger, leaner, smarter, more profitable, and more interdependent, which further cements that relationship. It’s certainly easier to develop the necessary trust when you can see the tangible results.

And that’s the best part – we know it works.

Monday, 9 August 2010

The Hidden Costs to Freight Forwarding



There is no real science to the hidden cost, but many companies chose the CIF route because it is easier, so they think, and therefore hidden costs can be inevitable.

Importers face higher freight costs under CIF terms because the supplier chooses the freight company and is inclined to mark up freight costs for the extra service provided in arranging shipments. There are several reasons for this:

1. The shipper does not have the vested interest or the leverage, to get the best freight price.
2. The shipper pays for the insurance; which there may be substantial surcharges.
3. Currency rates fluctuate widely and the shipper may charge additional cost to cover them.
4. Import quotas, bad weather, and other problems may add additional unexpected cost, which the shipper will cover using a higher rate.
5. The shipper will charge a higher rate to cover its administrative costs for licensing, storage, loading, and other activities.

Hidden Costs

Trading Incoterms used to be limited generally to “Cost, Insurance, Freight” (CIF). CIF terms include all insurance and freight charges in the shipping price, making verification of the charges for freight and insurance difficult.

CIF terms can also involve reporting and information delays and incorrect or insufficient shipping documentation. This creates problems as companies increase their number of overseas suppliers and overall freight volume, and can find it harder to obtain information and mange their inbound shipments.

As a result, CIF shippers often build substantial additional freight charges into their rates, which often are not itemized for the importer.

For Greater Control you should use use “Free on Board” (FOB) Incoterms, giving you greater control over their shipments and eliminating the hidden shipping costs that create inefficiencies. Increased supply chain visibility and the control of import shipments are critical FOB benefits.

By taking control as cargo crosses the ship’s rail at the port of origin, importers are better able to obtain accurate and timely shipment information by working with their choice of third party logistics provider.

If you are shipping at present then perhaps you could do with looking at a Freight Audit which Same World Trading can offer a free consultation and a no gain no fee basis.

If you’re not shipping yet but are about to or are thinking about it I can recommend a Freight forwarder who can help you with your new venture or we can offer the full service with Quality Control for your manufacture base, or looking for suppliers. We also offer a representation for your company via our Indian or Chinese offices.

Contact me via www.sameworldtrading.com

Mark Kennedy

Wednesday, 16 June 2010

Understand Incoterms for exporting and importing



Mark Kennedy
Same World Trading Ltd


Incoterms are standard trade definitions most commonly used in international sales contracts. Devised and published by the International Chamber of Commerce, they clearly divide the rights and obligations of the buyer and seller in relation to the delivery of the goods.

There are 13 Incoterms - or International Commercial Terms - and in order to be sure you are using the correct one it is recommended that you consult the full ICC texts. It is recommended that investment is made in purchasing a copy of the official rules for the interpretation of trade terms (INCOTERMS 2000) from the International Chambers of Commerce or the Institute of Export. Unfortunately, there are many unauthorised summaries and approximate versions available on the internet that are not legally binding. Using these can cause confusion and prove costly.

Types of Incoterms

Incoterms have been grouped into four categories, applicable for sea and inland waterway transport or for all modes of transport. The point of risk and cost transfer in the transport chain moves from the seller's premises to the buyer's place.

Below are the 13 Incoterms - for full details of the risk and cost obligations refer to the Incoterms 2000 wall chart.

1. Departure term
Applicable for all modes of transport, including water:

• EXW (Ex Works) (...named place)

2. Shipment term, main carriage unpaid
Applicable for sea transport only:

• FAS (Free Alongside Ship) (...named port of shipment)
• FOB (Free On Board) (...named port of shipment) Only use when the goods pass the ship's rail otherwise use the term FCA.

Applicable for all modes of transport, including water:

• FCA (Free Carrier) (...named place)

3. Shipment term, main carriage paid
Applicable for sea transport only:

• CFR (Cost and Freight) (...named port of destination) Only use when the goods pass over the ship's rail otherwise use the term CPT.

• CIF (Cost, Insurance and Freight) (...named port of destination) Only use when the goods pass over the ship's rail otherwise use the term CIP.

Applicable for all modes of transport, including water:

• CPT (Carriage Paid To) (...named port of destination)
• CIP (Carriage and Insurance Paid to) (...named port of destination)

4. Delivery term
Applicable for sea transport only:

• DES (Delivered Ex Ship) (...named port of destination)
• DEQ (Delivered Ex Quay) (...named port of destination)

Applicable for all modes of transport, including water:

• DAF (Delivered At Frontier) (...named place)
• DDU (Delivered Duty Unpaid) (...named place of destination)
• DDP (Delivered Duty Paid) (...named place of destination)

Choosing the right terms

There are a number of factors to consider when choosing the right Incoterms for your export/import contract:

• Relationship with buyer/seller
• Economic and political climate of the import/export market
• Mode of transport
• Carriage of goods
• Costs
• Risks

Benefits

• Prevents misunderstandings and disputes, especially when the buyer's and seller's countries have differing trading practices
• Reflects current worldwide trading practices
• Suitable for every mode of transport
• Authorised translations available in 31 languages

Action Checklist:

• Visit the Incoterms 2000 website for more information
• Choose the right Incoterms for your import/export contract
• Ensure all trading parties understand the terms

If you need help with frieght forwarding please contact me at my website:

www.sameworldtrading.com

Tuesday, 8 June 2010

.... 10 ways to avoid the Pitfalls of Sourcing from China . . .. .parts 8,9&10…



8. Understand Payment terms

You should be aware that if you’re starting a new relationship with a Chinese manufacturer. If they have not dealt with you before, they will require Cash with Order on your first shipment.
If you have been referred to them by an influential contact, then they may settle for a large deposit.
I’ve never found a manufacturer in China that did not ask for cash up front when embarking on a relationship with a new customer.
What follows is a careful climb up the “trust ladder”.

1. Fist business - Cash with Order
2. Dependent on volume - repeat business - Cash before Shipping
3. Several trades later - May get payment terms.

Whilst once you’ve established a good relationship with a supplier, getting payment terms is a good way of doing business, there’s a huge problem for those companies in the UK looking to place their business for the first time. Cash with order effectively means you have to finance the manufacturing yourself, and don’t forget it could easily be 6-8 weeks before you receive your goods. This means you’ll have to raise finance to place an order, which is a fairly risky exercise if you’ve never placed business with that particular manufacturer before.

There are UK companies that specialize in financing Chinese trade, but, as you would expect, they are not cheap.
There are also huge issues relating to balance of risk and title to goods.
Put very simply you don’t want to pay for and own goods until you are satisfied with quality and availability.
There are many horror stories of products received in the UK that bear no resemblance to specification or approved samples.
This would be huge problem to your supply chain anyway, but this becomes a complete disaster if you have used up your capital paying for defective goods.

Seeking redress in China is very difficult indeed.
Is there a way around this problem?
There are options.
For example, you could partner with someone who already has a credit line with local Chinese manufacturers. This will involve sacrificing some margin, but could save you thousands of pounds.
Financial solutions that balance risk for both sides, such as letters of credit are also very useful.

In this case your supplier knows that as long as he fulfils the terms of the letter of credit he will get paid. However, should he fail to satisfy all the legal criteria, he will only get paid at your discretion.

9. Don’t get involved with Bureaucracy

It’s certainly not making any great claim to say that corruption exists in China.
There doesn’t appear to be any clear rules on tax and moving goods around the country can be difficult. Also, you’ll tend to find the rules vary somewhat from province to province, so from the outside China can be a very confusing place to do business.

When trading with any foreign country it’s always wise to work with the system, rather than try and battle against it - because you certainly won’t win!
When I started trading with China, the only effective way I found to deal with this issue was to have a trustworthy local presence in the country that knew how to solve problems and keep things moving. This can sometimes be rather a crude way of doing business, but it can often be the difference between success and failure.
Even the biggest companies struggle to get the various licences , and there are many, required to trade goods.

Therefore, you should always allow for some disruption from local Bureaucracy, and ensure you have some local capability in place to deal with it.

10. The 3 Golden Rules you should NEVER break

1. Respect the local culture You often find that things you take completely for granted in the UK, are not the same in China. For example if you have a business meeting over dinner, it’s can, depending upon the region, be considered rude to discuss terms etc. over dinner. It’s considered much more polite to discuss your family, and areas outside business. It’s also considered bad luck if you meet on the way out when leaving a restaurant, so it’s polite to allow your guest 10 minutes to leave.

2. Maximise your touch time If a project hit’s a snag it’s not unusual for the normal communication lines of business such as email and telephone, to go very quiet indeed. This problem can be exacerbated by the 7 hour time difference between the UK and China (almost the whole working day!) You should seriously consider, when sourcing a new project in China, working with a project manager that’s experienced in solving problems with manufacturers, and has easy access to them. The alternative tends to be a lot of flights to China, unsuccessful meetings, delays and inflated costs. i.e. Failure!

3. Only ever place business on a referral basis! I cannot stress this rule enough! There is such scope for variation in China that you must place business with manufacturers that have been recommended to you, preferably by one of their existing customers from the UK with a similar product. I can still remember the day I found out that despite following all the steps discussed above, a simple error had left to the wrong steel being used in an injection moulding mould we had procured from Guang Zhou.

We were now at the mercy of the supplier to correct the problem. The only guidance to the outcome was that the Mould Maker came highly recommended by a trusted contact. In the end the Mould Maker remade the tool at his own cost, working around the clock.

Our project was delayed by the mistake, but the situation was recovered.
I still get goose bumps imagining what might have happened had we not used a Mould Maker with a proven track record. .

And the biggest Pitfall of all…..FINANCE!

One of the biggest risks you’ll find when sourcing parts and components from China, is that you’ll find that you’ll have to finance the cost of producing your product - upfront!
Often bespoke tools and moulds have to be produced, from which your product will be made, which you’ll have to finance before even just one of your products has been produced.
So if you get any of the 10 other pitfalls wrong, you’ll probably lose your money! -undoubtedly one of the biggest risks you need to overcome when sourcing from china.
Before you give up - I may be able to help.
If your project is viable, I may be able to give you the necessary finance to kick start your project in China.

Just send me the details of the product you’re trying to source from a manufacturer, and I’ll try to help, if I can. Just contact me via my website www.sameworldtrading.com

Tuesday, 1 June 2010

.... 10 ways to avoid the Pitfalls of Sourcing from China . . .. Part 6/7



6. Ignore shipping at your peril

One of the most commonly overlooked areas when sourcing from China is that of shipping your goods to the UK. Often an afterthought once goods have been produced, this is an area that can cause huge delays, massively inflated costs - or even worse.. your goods disappear!

There are several areas to be aware of

1. Original costs and quotes can rise Familiarise yourself with the different terms e.g. FOB means goods are just shipped to the port in China. CIF includes shipping and insurance of goods. When negotiating, you can get a ‘door to door’ price for your shipping, so that you can ensure that you’ve covered all costs in your calculations. However, if your Chinese supplier arranges transport, he will expect to make a margin on it.

Engineering your supply lines to the UK is every bit as important as finding a Chinese supplier, and managing the manufacturing process.
All your hard work in China can come undone between the factory gates and your UK warehouse.

2. Over packaging can increase costs Be aware that goods can often arrive from China with a huge amount of packaging to protect them during transit. Whilst this ensures your goods will arrive in sound condition, the impact on your business can be significant. For example, say you receive a shipment of 100,000 components individually package, even though you didn’t request this. Now the cost of packaging these goods individually in China with labour rates of 15p per hour will have been insignificant, but you’ll need to pay your staff £8 per hour to unpack them for assembly. If a worker can unpack an average of 20 components per hour, it will cost you nearly £40,000 just to unpack your goods! As mentioned in my section on quality be sure to specify the level of packaging upfront.

3. Pest Control can damage products. Assume your products will be treated with chemicals during shipping, so their packaging must be able to withstand this process.

4. Pay attention to product descriptions Import tariffs vary according to product description, so you should make sure your products are described accurately on your shipping documentation. E.g. if you goods are components and not a finished product, you must ensure that your documents state this clearly, to avoid unwarranted costs.

5. Allow for delays You should allow 4 to 5 weeks from your goods leaving Shanghai / Hong Kong to arriving in the UK. Bureaucracy in China can sometimes add further delays of 2 weeks or more, and if your documentation is incorrect, your shipment will suffer further delays clearing UK customs.

6. Economies of scale pay dividends As already covered in section 3 of this report, you’ll find that if you’re placing repeat and bulk business with your shipping agent you’ll receive a completely different level of service than if you’re just placing occasional business with them. I have a great relationship with my shipping agents, as I’ve built up my business with them over the years, and have become a key account for them.

7. Learn a different kind of negotiation.

One of the hardest things I had to get to grips with when I first started sourcing from China was that of negotiation.

Unlike the UK, you’ll commonly find if you ask if something can be made for a certain price, the answer is always “YES”.

So that’s no problem, you’ll get exactly what you want, right?

WRONG!

Just because a manufacturer in China has said they CAN do something, it doesn’t mean they WILL do it.

To negotiate effectively you need to become a master of asking the right questions, and in many different ways.

I was once introduced to a manufacturer in China by a business contact.

The people were skilled and had excellent communication skills.

Their products were similar to those I needed to source.

Location, core competence, experience, quality systems? They had it all.

Despite running through the logistics of the project many times, I could not fault their grasp of what was involved.

I was on the point of arranging to visit their factory in Dongguan, when I decided to probe a little deeper into their financial position.
Everything checked out!

They clearly understood all financial aspects of the project. However, I could not help noticing that their Finance Director was looking a little unhappy and kept sipping, almost convulsively, at his drink.

I decided to dig deeper, almost to the “teaching Granny to suck eggs” level that would be very rude in the UK. It transpired that the working capital cycle for the project would account for 3 times the entire annual sales turnover of their company.

Of course they realised this as soon as I explained the quantities involved, but just could not make themselves say “NO” to the project.

Often a UK salesman will play the game of “first get the order and then we’ll work out how to process it”. However, I suspect the Chinese invented this game thousands of years ago, and furthermore a black belt is the minimum qualification required for a commercial person before being turned loose on customers.

If I can help with finding a manufacturer that CAN and WILL manufacture your product, just contact me via my website. www.sameworldtrading.com

Mark Kennedy

Wednesday, 26 May 2010

.... 10 ways to avoid the Pitfalls of Sourcing from China . . Part 4 & 5


4. Avoid complex manufacturing processes

This is a huge pitfall to avoid, as you could waste a fortune trying to source a product that just doesn’t fit the Chinese model.

There are many manufacturers in china that produce complex products such as digital cameras and consumer electronics, to a very high standard. However these are usually produced directly for large global companies that have their own strong presence in China, exerting direct control of the manufacturing process, ensuring nothing goes wrong.

Follow this simple rule

The more complex the product, the more ways it can (and will!) go wrong when sourced from China.

Sometimes Chinese assets can become liabilities.

Let me explain.

In the UK we often have a high degree of automation involved in our production processes. This allows us to avoid costly labour when producing.

However, we should not forget that automation often brings repeatability and reproducibility. Microprocessor controlled machinery has not only reduced cost but also enabled precision and quality without the need for expensive rework and scrap.

In most cases, the low labour cost in China more than wipes out the cost benefits of automation.

Enthusiasm for the resultant low cost price can also blind us temporarily to the product problems caused by variation in the process.

This is often hidden during development because endless samples can always be cheaply produced, but the ones submitted for approval may have been selected from a large population of “off spec.” parts.

The Chinese solution to this is often to throw labour (a cheap resource) at the problem. Provided labour content is high and the product not too complex, this solution prevails.

If your product is too complex, or tolerances too tight, this solution will not work.

In general, the Chinese labour force is relatively unskilled, when compared microprocessor aided UK operators, so complexity is always going to be an issue when sourcing Western Standard Components from China.

Need help deciding whether your product is too complex to source from China?

5. Don’t take quality for granted

There is a huge variation in the quality level of products being sourced from China, and this should be an area you pay particular attention to.

It’s simply not sufficient to take a back seat, and let the manufacturer worry about this, as they probably won’t worry about it at all.

In my experience, an ISO certificate in China is no guarantee of quality. So when sourcing from China, managing the level of quality is a great way to remove risk.
Here are some general guidelines, direct from my own experience to help control quality

1. Provide your Chinese contacts with a very clear and understandable product specification. Remove all ambiguity and cover all the angles. Try to predict areas and scenarios that could go wrong, and specify the minimum level of quality in each case. Assume nothing.

2. Walk through the entire product development and production process with the manufacturer to ensure that you both fully understand, in detail what will happen at every single stage. Don’t forget to include how your product should be packaged.

3. Never delegate control of the manufacturing process. You must always own and dictate the process, in order to control the level of quality. This may initially mean frequent visits to China, but without this direct ownership, you are throwing the quality (and reputation!) of your product to chance.

4. Be aware that there a two unofficial quality levels in China with two separate price lists: European and Chinese, so if you’re supplying a European based market, you’ll need to specify this.

It is essential to get your supplier to explain all your requirements to you many times until you are absolutely certain that he or she understands perfectly.

If you don’t have access to a trusted local agent you may be working through an interpreter. These are often young people selected for their excellent language skills. It is very unusual to find a good interpreter that is also a competent engineer, or technician.

If you’re looking to source a product from China, and are concerned about the level of quality, contact me to see if I can help you minimise the risk.
Just contact me via my website www.sameworldtrading.com

Wednesday, 19 May 2010

.... 10 ways to avoid the Pitfalls of Sourcing from China . . ..Part 2/3 of 10


2. Have you considered China for the right reasons?

So once you’re satisfied that your intellectual property is safe, you should then consider exactly why you want to source from China.
Obviously sourcing from China should reduce your costs - but only on certain kinds of products!
The whole basis of sourcing from China relies on the simple but huge differential below

Typical Cost of Employment (£/hour) UK = £9.00 China = 1.70p

So it follows that the products and components that require a very high degree of labour intensity, or man hours to produce, will be the ones that offer the greatest opportunities to reduce costs.

So analyse your own product. .

How many man hours from start to finish does it take to produce it?

Does it require hand assembling, filling, or packing off?

Is lots of manual finishing involved?

I began sourcing cosmetic component assemblies from China to supply to UK fillers, when fully assembled products from China became available, landed in the UK, with selling prices lower than the cost price of local unassembled component parts.
For example, a Make Up Compact, with Mirror, of the kind carried in a lady’s hand bag, unless produced by automation in the millions, would be assembled by 6 UK workers at rates similar to those in the table above.

In other words a UK purchaser can purchase a local product that has a labour content based on £54/hour, or source from China at £10.20/hour.

However, it’s advisable to check that the manufacturer has the right type of labour force.

For example:

Are they experienced in the processes or products you require?

Are they ethically employed?

Are they well trained?

These may sound like strange questions to ask, but when you consider that the larger factories often have thousands of workers living in site dormitories, there is some variation in how they are treated, and an unethical set up will never be a sound long term business relationship.

Will your product fit the Chinese labour market?

3. Do you have sufficient economies of scale?

There’s no doubt that the larger manufacturers in China prefer larger manufacturing runs and to manufacture in bulk.
That’s not to say that you won’t find a manufacturer that will process smaller MOQs. After all, if you look hard enough, and for long enough, you can source anything in China.

Once your goods have been produced, you still have to have them shipped back to the UK (see Part 8. on shipping coming soon), and if you’re shipping your goods in half empty containers, you’ll be paying a huge premium, and wiping out your original cost savings.

Not only that you’ll find that manufacturers, hauliers, shipping agents will take you much more seriously and give you a much better level of service if you’re able to place bulk business with them.

So in summary bulk orders are a must when sourcing from China.
However, with every rule there are always exceptions, and there are sometimes ways around this.

When we first started sourcing products from China, we realised that savings were being seriously eroded by the fact we had little purchasing power with freight forwarders, and low container utilisation.

We got around this by partnering with a local Company that shipped unrelated goods to the UK.

This allowed us to gain economies of scope and suddenly, not only we shipping in full containers by sharing capacity with our local partner, but we were also taken more seriously by freight forward companies.
Our shipping costs tumbled, as did our partners, and our margins improved dramatically.

If you have a smaller requirements from China, and by that I mean 1 to 5 pallets of goods per shipment, you’ll probably need to trade off the back on someone else’s trade relationships to make it worth your while.

Struggling making your project work in China, due to insufficient order sizes etc.
Contact me at www.sameworldtrading.com - we might be able to find you a trade partner to help.

Monday, 17 May 2010

.... 10 ways to avoid the Pitfalls of Sourcing from China….Part 1of 10


The essential guide in taking the risk out of sourcing from China

Introduction
Let me introduce myself, I’m Mark Kennedy, owner and Managing Director of Same World Trading a Supply Chain Specialist in Construction, Hotel FF&E and manufacturing companies that produce parts and components for a large variety of industries.
Over the last decade I’ve seen huge changes affecting my industry and customer base. None greater than the arrival and dominance of China in the Global manufacturing arena. Manufacturers such as myself were given a simple choice; Change or Die!
Fortunately for me we’ve adapted to those changes, and have re-sourced the most appropriate parts of our business out in China. When venturing into unknown territory, the risks were high and the learning curve often painful, but now we’re sourcing from China on a regular and successful basis. I’m even helping some of my old customers source their components and parts from China that they’d have traditionally sourced from me, as I know there’s absolutely no way I can compete on price – like I say Change or Die!
I’d like to pass on my experience of dealing with China so that other UK companies can also trade successfully with China, and more importantly, not expose their businesses to excessive risk when they take those early tentative first steps.
I’ve identified 10 major pitfalls that I believe to be of crucial importance when dealing with companies in China that should save you a fortune, and could even save your business!
I hope you find my experience useful, and it stops you making some of the costly errors I made when first sourcing from China. If you need further help, please don’t hesitate to contact me if I can help you in any way.

1. Protect your intellectual property

Before you even consider whether your products and components are suitable to be made in China, you must think about exactly what you’re risking by sourcing from China - and that’s your intellectual property.
So what can we class as your Intellectual Property?
1. Patents and copyrights on your product
2. High value proprietary design
3. Your Ideas
4. Your brand
5. Your channel to market
6. Your customer base
7. Key Business Relationships

Copyrights, Designs, Ideas and Brands.

You must assume that if you source from China all of these will be copied with ruthless efficiency and effectiveness. You may even find that if you try to source one of your new product designs from China, a copy of your design appears on the market before yours!
And what can you do if your product is copied?
Not a lot!
Have you ever tried to sue a company in China? In all of my years experience trading with China, I don’t have any personal experience of any cases of a Chinese company being sued successfully for copyright infringement. So please assume that if you have a product worth copying, there is a strong likelihood that it will indeed be copied.
Customers, relationships and Channels to market

You must also assume that if a company in China can trade directly with your customer, distributors or contacts, they may do so, as you’ll simply become an un-necessary link in the supply chain. So protecting your relationships and customer base is just as important as protecting your product.

How can Intellectual Property be protected?

1. Firstly ask yourself, will this product/ my business be damaged if it is copied? For example, it’s often wise to source sub-components of products rather than finished goods in China. Copying components has reduced commercial value, as the sub-components are only useful to you. However if you need to source an entire product, ready to be sold to the end user, then this can clearly be copied, to your detriment.
2. Is it possible to conceal your customer base? If you’re having unbranded goods produced, then it should be fairly simple to conceal your customer base, but say the product has ‘Marks & Spencer’ stamped onto it, then you’re clearly not going to keep this customer for yourself. So if dealing with well know brands or distributors, you should be extremely protective of this information.
3. Can your market be reached from China? If you have a fairly fragmented market i.e. lot’s of well dispersed customers buying your product, then you may well find this working in your favour, as this type of market can only really be effectively serviced from the same country as the customer base, or through established distribution. This makes it an unattractive proposition for a china based business to target. Conversely, if 60% of your business is with 1 key customer, then the alarm bells should be ringing!

So in summary, there are many forms of intellectual property it would be wise to assume it will be taken from you if you don’t protect it.
Need to discuss protecting your intellectual property in China? Contact me via my website at www.sameworldtrading.com , as I may be able to help.

Thursday, 4 February 2010

Trade Partnering with India


India’s manufacturing base, which is the fourth-largest among emerging economies, is among the fastest growing and has seen more investments as a proportion of gross domestic product than any country except China. Same World takes a look at this economic giant and talk to Tarun Gupta of Inside India Trade (IIT) Same World Trading Ltd Indian Partner who is helping some of the UK’s and Europe’s leading Construction and Engineering Companies take advantages of the savings and qualities India can now offer.

Manufacturing in India contributes about two-thirds of the total exports of the country. It is estimated that manufacturing exports from India will increase to USD 300 billion by 2015, simultaneously increasing its share in world manufacturing trade from 0.8 per cent to 3.5 per cent Inside India Trade (IIT) was set up in response to customers who wished to move their business to the ‘next level’ but were unsure where to start. The primary aim of IIT is to 'provide procurement solutions for UK-based organisations aiming to source goods from India. IIT also provides consulting and operational support to UK companies who are aiming to enter the Indian market.' IIT assist in identifying strategic partners/ vendors in India and prepare a shortlist of 3-5 potential partners. They then propose an entry plan into the Indian market based on research of the relevant sector, different market segments with that sector and various sales/supply channels pertaining to that sector, which covers consulting (including business-negotiation services) and finalisation of contractual terms. They facilitate introductions between the client and organisations in related business community in India giving quasi representation for client locally to ensure better visibility and stronger relationship with customers and business partners/vendors.

Tarun Gupta is the co-founder of IIT. His last role was based out of Cardiff in Wales. Previously he had headed an international business team of HSBC for Wales, Northern Ireland and West of England. He was part of the United Kingdom Trade and Investment, Southwest steering committee on India and a keynote speaker at several events on ‘Doing business with India’. Tarun is a graduate in Mechanical Engineering from Delhi University and an MBA from the prestigious Indian Institute of Management. During his stay in the UK, Tarun worked closely with the SME segment and other supporting organisations such as Business West, Cardiff Chamber of Commerce and South Wales International Trade Organisation. His key responsibility was to advise SME customers on their international plans and achieve implementation of those plans in the most prudent manner. Prior to moving to UK, Tarun was the regional head of commercial banking for HSBC in India, running a wide portfolio of corporate customers operating in diverse industries. Having worked both in the UK and India, Tarun has a good understanding not only of the regulatory and operating framework in both the countries but more importantly the nuances and problems which organisations encounter as they expand across different geographical and cultural zones.

The competitive advantage that India enjoys across a range of sectors has led to a rapid increase in India’s exports. The cumulative value of exports during 2007-08 grew by 23.02 per cent to total USD 155.51 billion as against USD 126.41 billion in the corresponding period last year. The key strengths of Indian manufacturing are products which are engineering and design oriented, often' items catering to a niche segment. For example India is emerging as an important hub for complex automotive components. India has a strong engineering and capital goods base.

The engineering sector is the largest segment of Indian industry. The most important groups within the engineering industry include machinery and instruments, forgings, fasteners, castings, electronic goods and project exports. The engineering sector employs over four million skilled and semi-skilled workers. Growth in India’s manufacturing sector has provided a stimulus for the engineering industry to develop capabilities in product development and advanced manufacturing technology. India manufactures the entire range of industrial machinery. Indian engineering industry is highly competitive with a number of players in each segment. The intense competition has led to Indian players developing improved capabilities that have made them more competitive.

Companies have become more quality conscious and upgraded their technology base, besides diversifying their manufacturing range in tune with global market requirements. For example, more than 2,500 firms in the engineering sector in different areas such as castings and forgings, automobile parts, machine tools, electrical machinery, pumps, textile machinery, etc. have acquired ISO 9000 accreditation. Indian companies are also becoming renowned for their adherence to global quality standards. Already, India is amongst the countries with the highest tally for 2007 with total TPM Excellence Awards It also has 15 Deming award- winning companies (amongst the highest tallies worldwide outside Japan), and one Japan Quality Medal winner.

The size of construction industry in India is over USD 25 Billion and it accounts for approx. 6% of the GDP. With the opening of Foreign Direct Investment in this sector, coupled with the increased focus of the Indian government on infrastructure development, the construction industry is set for a boom. The upswing in the Indian economy has enhanced the demand for construction equipment. Infrastructure is the buzzword in Indian economy and the increase in
foreign investment and technology has led to a tremendous growth in requirement of construction equipment. With the GDP growth likely to be in the range of 6-8%, the demand for construction equipment will continue to grow and it is strongly correlated with the growth of other segments like infrastructure construction, ports, pipelines, roads, steel, cement, power projects, hydel projects, engineering industry, mining; building construction etc.

The construction equipment sector is comprised of four major segments: earth moving equipment (excavators, backhoes, loaders, bulldozers, etc), construction equipment (road rollers, concrete mixers, hot mix plants, road making machines, stone crushers); construction vehicles (dumpers, tippers, tankers and trailers) and materials handling equipment (mobile cranes, gantry cranes, hoists, forklifts, etc). India’s construction equipment sector has a market size of approx. USD 3 Billion, a fraction of the global market of over USD 80 Billion. The global industry is growing at 5 per cent, whereas in India growth averages around 30 per cent annually.

Before the opening up of the Indian economy and the entry of international majors, much of the infrastructure development and construction in the real estate sector was done manually. But with the infrastructure and construction sectors undergoing dramatic changes ¬ with 60-storey skyscrapers being built in cities like Mumbai, and thousands of kilometers of expressways and highways being laid across the sub-continent ¬ builders and contractors are acquiring sophisticated equipment to execute the multi-million dollar projects. This has attracted international giants including JCB, Volvo, Terex, Caterpillar and Hitachi. There are about 200 domestic manufacturers (small, medium and large).

INDIAN RAILWAYS
Indian Railways (IR) is the second largest rail network in the world, having more than 63,000 km of track, of which about 28 per cent is electrified. IR comprises of two basic customer segments ¬ freight and passenger. The freight segment accounts for two-thirds of revenues, the rest comes from passenger traffic. Currently the high density network, the Golden Quadrilateral, which connects the four metropolitan cities of Chennai, Delhi, Kolkata and Mumbai, has got saturated at most locations, including its diagonals. It has become necessary to augment the freight carrying capacity of the railways to handle the increase in the volume of traffic in the coming years.

Specific Opportunities
Indian Railway intends to invest USD 18.80 billion to upgrade infrastructure over the next seven years, USD 62.64 billion in five years for upgradation of information technology network and USD .06 billion investment via Private-Public-Partnership (PPP). Apart from these, Indian Railways is keen to attract foreign players to work on the following projects:

Dedicated freight corridor (DFC)
The proposed DFC along the Delhi-Mumbai and Delhi-Kolkata corridors along the Golden Quadrilateral will ensure multi-modal logistic connectivity and will also significantly enhance railway freight capacity to handle the large volumes anticipated from the ports on the eastern and western coasts. While the western corridor will be used to move containerised traffic and manufactured goods (domestic and imported), the Eastern corridor will serve the coal, minerals, iron ore and steel industries. The investment required for the western corridor alone will be to the tune of USD 9 billion and is likely to involve substantial private sector participation for the construction and operation of the corridor. Logistics parks are also proposed to be developed on DFC.

Modernisation of railway stations
The government has identified 22 stations located in the metropolitan cities and major tourist centres for development of world class stations through PPP route by leveraging a part of the real estate development potential. They will be inviting foreign companies to participate in tenders to modernise railway stations and develop areas around railway stations.

Manufacturing rolling stock
The demand for rolling stock is growing at a rapid pace. The projected requirement of coaches and locomotives at about 22000 and 3600 approximately. This will require augmentation of the existing capacity of production units and setting up new manufacturing units through PPP.

Port-hinterland connectivity
This is an important area to take up port-hinterland connectivity projects. This mainly consists of gauge conversion and construction of new lines. Metros Most major cities are planning to build and extend existing Metros (urban rail systems) or develop these if they do not exist. The Private sector will be used to generate all new Metro systems through PPP projects. The following Metro operations are in planning:

• Delhi Metro extensions (www.delhimetrorail.com)
• Mumbai Urban Transport Plan ¬ new and enhanced lines (www.mmrdamumbai.org)
• Bangalore (http://bmrc.co.in)
• Hyderabad
• Chennai

In the construction sector, Gupta refers to having specifically developed and sourced a number of products from India for the UK market including rubber track pads used in excavators, hydraulic rams and scaffold stairway towers. They are currently working on sourcing of shock absorbers and have recently been mandated by a safety equipment manufacturing company in England to advise them on their entry plans into India and also look at the possibility of setting manufacturing tie up with an Indian partner. They have also appointed channel partners for a UK construction equipment manufacturer who were looking to sell their product into the Indian market.

In the engineering sector they have completed an assignment whereby our clients outsourced production of patented product (i.e. filter valve used in oil pipelines for domestic and industrial heating). They have a client in the water treatment sector and have done sourcing for industrial-sized reverse osmosis plants, which are skid mounted. They have also done work for clients who were looking to build supply chain from India in areas such as agricultural equipment components, hydraulic cylinders, high pressure seamless gas cylinders, GRP products, engineering plastics, engineering steel bars (Grade 708M40) and are currently doing sourcing for steel tubes, complying with EN 10255 standards.

In the textiles and apparels sector they have built a supply chain for clients in wrap knitted polyester fabric and wrap knitted polyester towels. They have also done work in the area of military clothing and technical textiles used in niche applications such as PU/PVC coated fabric, IRR protection and high visibility garments. India shares a common history with Britain and there is a much closer cultural and language fit than other countries. Most of the FTSE 250, companies trade with India ¬ why shouldn’t the UK SME companies do the same. However quite often the UK companies view the prospect of ‘doing business with India’ challenging and, unlike big companies like Tesco who set up their own offices in India, they do not have the resources, i.e. the time and management width to commence the process on their own. Additionally, they often do not want to pay huge fees to the large consulting firms of the world just to get a nice ‘strategy paper’ at the end of the exercise.

The UK SME wanted an ‘end to end’ support ¬ an approach which is commercially oriented, pragmatic and appreciates the different nuances of doing business in the western environment. The SME wanted an effective representation and that much needed ‘on-ground’ support, without which one has to go through all the legalities, paperwork, cost, and time in setting up a local office.

In India the industrial sector is more dominated by the SME companies and accounts for 40% of all industrial output. This sector is also known as the “unorganised” sector as there is no equivalent of a Dun & Bradstreet through which you can do a quick reference check. Whilst a lot of research can be done over the internet, there still continues to be substantial differences in the ‘real world’ as against what appears on the ‘virtual world’.

The last few years has seen an emergence of some good players and the challenge is to find such companies and also to ensure consistency of performance in line with western business environment. The bottom line for business in India is that there is no substitute for ‘grunt work’ and somebody has to physically meet the vendor, understand their technical capabilities, visit their manufacturing unit and assess the management team. Either the client does this by spending a few weeks or months regularly in India or outsources this work to organisations like ourselves. In summary, Gupta hopes clients will view IIT as their ‘quasi office’ in India with the same set of possibilities as they would expect from their branch office. Using the IPO model they aim to offer professional services to replace? Unorganised and unprofessional agents.

Mark Kennedy
Same World Trading
www.sameworld.co.uk