Your Chinese Supply Chain Designed to Fail, or Gaunxied to Succeed?
China has been a low cost sourcing country for many Western companies for years, some established their own facilities on the ground, and others are engaging third parties to monitor the extended supply chains. While most organizations have materialized the benefits from China souring at different extends, but issues also came along from day one. What makes the situation even worse is that few will be aware of problems in their Chinese supply chain until it’s too late.
Supply chain syndromes, like: late delivery, quality does not match specs/samples, supply failure, excessive air freight, rigid lead times, price hiking, etc are not uncommon in Western supply chains. But you will get burned badly when the suppliers are thousands miles away with language and culture barriers. It costs you more, and is hard to recover. The diagram below describes a typical life cycle for an extended supply chain to China.
Supply chain problems are rarely caused only by one side, the mis-match between Western supply chain view points and the Eastern practices often plays a role of crisis creating rather than problem solving. Clashes start from the very first step of setting up a Chinese supply chain to the entire development process.
Clash 1: Assessment
Western companies use comprehensive methodology and scoring system to evaluate suppliers. Focuses are on quality, products and processes, health and safety, facilities, and conformance, etc. Suppliers must meet the criteria to be qualified, prescriptive oriented Western framework is widely used.
Chinese suppliers are always looking for next better deal. Volume, price, payment term are their main criteria of opportunity assessment. Growth oriented Eastern practice applies.
Results: Show factories/facilities/systems are used to get the deal secured. What you have measured is not necessarily where your products come from, or how the products were processed. Receipt for disaster.
Clash 2 Alignment
Western companies rely on IT systems, standard operation procedures to align the supply chain. Analysis is based on the order fulfilment, stock levels, forecasts, etc. System generates schedule regularly with constant updates/changes. The critical measurements are on time delivery and availability.
Chinese suppliers never sayNO to you, all orders/requirements are accepted. The analysis is based on container load, work order, and scrap rate. The change of volume, variety and volatility can easily cause disruptions on the shop floor. The critical measurements are overall volumes and rate per hour.
Results: Inappropriatevolume/variety/volatility allocated to suppliers, they fail to deliver.
Clash 3 Development
Western companies integrate supply chain partners by collaborative fulfilment, data exchanging, and information sharing. System integration plays a key role on supply base development.
Chinese suppliers rarely have or use advanced systems for external communications although more and more matured supplies do have IT tools like ERP. Email, telephone, and fax are still main means of messaging.
Results: When problem occurs, there is no/very limited visibility.
Similar clashes also take place when two parties need to work together to solve the problem/crisis, and sustain the long term mutual benefits. Many Western companies end up using old suppliers at disadvantage rates or keeping switch suppliers in China at high costs and experience similar problems again and again.
Supply chain success presumes a level of mutual understanding and trust which is never fully present between China and the West.
There is no panacea for these syndromes, but, if there is anything to bridge the gap, it is Guanxi.
Guanxi is a central concept in Chinese society and describes, in part, a personal connection between two people in which one is able to prevail upon another to perform a favour or service, or be prevailed upon. Understanding this concept is vital if you hope to build successful supply chains from China. Establishing and using Guanxi wisely can help you to avoid potential pitfalls and solve problems more effectively.
With Guanxi in place, you can achieve things with/without extensive infrastructures, because this is all the Guanxi about. The philosophy of Guanxi is widely applied in social and business occasions in China. From being able to get a table in a fully booked restaurant to ink a multi-million dollar contract, Guanxi plays a critical role in Chinese society.
To get things sorted more effectively in China, it’s about having Guanxi or knowing someone has the Guanxi with someone who can help. Guanxi is similar to network, and it can be classified at different levels as well.
Entry level: It’s about knowing someone who can help. At this level, things are not guaranteed, but at least, you are not a stranger to those who can influence the results.
Middle level: It’s about knowing someone who is willing to help. At this level, as long as what you want doesn’t require extreme efforts, things can be done in most occasions
Mature level: It’s about knowing someone who will help. At this level, things will be done without any conditions.
The use of Guanxi is also highly interactive and sometime crosses multi-tier. You can use other people’s Guanxi to get things done, in the meaning time, the Guanxi of yours can also be used by the people who have right Guanxi with you.
The value of Guanxi can not be quantified or moneytized, if it is the case, it only means the end of a Guanxi. With Guanxi in place things can be done:
More quickly: You don’t have to start from scratch and go through all procedures.
At minimal efforts: Sometimes it is only a phone call away.
When it normally can NOT be done: Like the example above, get a table in a fully booked restaurant.
What exactly is Guanxi in supply chain vocabulary? You do NOT necessarily have the Guanxi if you
- Meet your suppliers several times a year and have had dinners with them
- Have placed big orders or granted price increases
- Have signed a contract with them
- Talk to them from time to time
These are only the interactions, and can prove no more than you have certain relationship with a supplier. Guanxi is more than just a relationship, it is a mutual understanding and trust between two people. It is at the personal level, but can be used to achieve business benefits and supply chain excellence.
Trust is the weakest link in supply chains, and it is even more problematic when supply chain extends to the regions you barely understand. Guanxi is a substitution word for trust in supply chain, it can be used to weave and strengthen your Chinese supply Chain.
To develop and maintain superior Guanxi with your suppliers in China, here are the things to bear in mind:
Both sides are equal. Buyers have inherent advantages over suppliers, but over-use of this power will damage the Guanxi. Always treat suppliers as partners, understand their bottlenecks, and feed them according to their capabilities. Supply chain problems are very rarely caused by only one end, and tackle issues together. Stop blaming, start sharing.
Align the strategies. Never share bed with someone with different dreams, or you may have suppliers end up as your competitors. Understand why supplier should value you as a key client, and what can you do to strengthen this value. Volume and price do NOT equal to Guanxi, because suppliers are always looking for next better deal. Make sure Guanxi is built on a solid long term mutual goal, or it designed to be short-lifed.
What can I do to make your life easier? Always ask this question to you supplier. Price and order quantity are not the only things supplier cares. Your ordering pattern, the MOQ (minimal order quantity), the specification ambiguousness, the demand visibility, etc all have direct impact to factory planning and execution. You should help suppliers to help you.
Frequent interactions. Do NOT only ring or visit your suppliers when there is an issue. Show your treat them more than just a supplier and care about them. A casual chat may help you to identify potential issues and mitigate unforeseeable risks. Interactions do not always have to be business oriented.
Take a step back. Guanxi can be interpreted as a very close relationship. Like all relationships, crisis does happen. When it happens, take a step back, are you afford to lose this Guanxi? If not, try to find a common ground. Always bear a long term view, when you have to compromise, be confident you will get something in return if not now, but surely in future. It is very reason for Guanxi to exist.
Do NOT abuse Guanxi. Only use Guanxi to leverage critical issues, because it will make your counterpart feel they are important to you. The more you use it on trivial things, the less effective it will be.
Guanxi is something not easy to establish, but straightforward to maintain, and can be very effective to tackle supplier chain issues. Understand the implications of Guanxi in your Chinese supply chain, and Guanxi your supply chain to next level. Develop a strategy to build up the Guanxi, and always treat it as a key factor for your supply chain success.
