Reducing Supplier Risk in International Trade
Valery Zelixon, Managing Director SupplierEvaluations.com
Editor’s note: Valery Zelixon is a frequent contributor to this blog.
Creating a successful source base outside of your native environment is a daunting challenge that businesses manage in variety of ways. Solutions range from having a fully owned subsidiary to completely outsourced operations. Whatever solution you choose, building an on-going trust with your supplier base is crucial to successful enterprise. Given the fact that the cost of inventory can be as high as 80% of your total product cost, managing source base is as critical to your bottom line as growing the revenue.
Building trust
Prepare for the long haul. Traditionally, supplier selection process involves a careful review and evaluation of potential supplier operations, especially seek strategic source suppliers. This means sending skilled procurement auditors to meet the supplier management, review of the manufacturing and quality management processes, understanding the logistics, getting to know the social practices.
All of the above takes the knowledge of the local culture and customs, understanding of the body language, negotiation styles, and knowing how to interact with the decision makers. All of this knowledge cannot be gained by reading a book. In some cultures it takes a long time to build a working relationship. China, for example, which has become the manufacturing choice for much of the world’s economic powers, building “guanxi” is often more important than the actual details of the current deal being negotiated.
For potential customers, having choices of bona fide is critically important. Strategic tools like supplier verifications and factory audits, especially for small and medium size companies, can spell the difference between success and failure.
What can supplier verification do for you? Essentially, it is one of many checks you need to go through to become comfortable dealing with a given supplier organization. Simple verification will confirm the business ownership information, business registration details and export license. In countries like China one must have a license to sell outside the country. It was recently revealed that Chinese companies hire unemployed actors to pose as their western managers. Business verification will help you avoid traps like that.
Factory audits and supplier inspections is yet another tool to help you make the right choice before extending significant funds. You would want someone you trust to help you inspect the company by paying them a visit, review the paperwork, interview the management, look at manufacturing facility and report back the findings. Someone who knows the culture can read a lot of signs a foreigner would not be able to read.
As you become more involved with selected supplier over time, supplier evaluation will be key to know what you are getting out of this relationship.
Valery Zelixon is a founder and managing partner at www.supplierevaluations.com. Follow Valery on Twitter, connect on linkedin or become a fan on Facebook.