Performing your China supplier due-diligence

Supplier [gōngyìngshāng] 供应商 David Petersson 潘德伟These days almost any product you can imagine is being produced in China. This means of course that there are quite possibly products already available or able to be produced that would meet your business needs also. But you’ve probably already considered these possibilities, which is why you’re reading this post.

Of course, such opportunities also come with risk. Striking the right balance and identifying the ideal supplier – one that can provide the level of know-how, processes and equipment to consistently deliver the best quality at the right price – is naturally a tricky undertaking.

If you are located in China then you probably already have your purchasing-sourcing organisation established. So how would you handle this when you can or intend to make only occasional visits to China? In either case, the key is to qualify your supplier by performing thorough due-diligence allowing you to identify and mitigate potential risks and weaknesses.

Here are a couple of things to consider:

• First, make sure the people you speak have a genuine business by asking to see their original Business Licence or possibly also by contacting the local Administration of Industry and Commerce (工商行政管理局 ) for their legitimacy.
• Now that you know what their scope of business from their Business Licence (titled 企业许可证), you would want to make sure they actually produce the product they want to sell you. Do this by visiting their factory or factories. Just looking at a brochure or web site will not be sufficient.
• When visiting the suppliers’ factory, check if their hardware is able to produce products that meet your specifications. Ask to see samples and measure whether they meet the specifications on their drawings.
• OK, so they have the factory and the machinery to produce your product. Now, ask what capacity are they running at and check if they can accommodate your current and possible future production volume. Look for bottlenecks in machinery and tooling.
• At your factory visit, also assess their soft skills. Do they have the appropriate engineering skills and experiences? Of course, in most cases they would say they do so ask to see organisation charts and identify how many skilled workers they have and assess if this will be sufficient. You might also want to meet with the managers from Engineering and Q.A., etc.
• Check what quality control systems they have in place. But be warned, an accreditation doesn’t necessarily mean they are accredited or actually have a proper system in place. Do ask for a copy so that you can check with the accrediting body later. It will be hard to make a whole system audit at a short visit so if you’re pressed for time, look at their documentation on the factory floor to get a feel for how well they have implemented a system.
• Are you comfortable to hand over drawings and specifications that can be copied? Probably not. Is there anything you can do about it? Generally not, but some products would allow for parts produced between several suppliers and assembled, inspected and packaged at a final. This could be one solution. A reputable customer list and evidence of actual business transaction between them can also give you an indication of trustworthiness.
• Last but not least, is the supplier committed to work with you? You would want to represent between 10 – 30% of their business to assure that your orders get the priority they deserve.

The key word is in qualifying your supplier. If you don’t have the ability to do that in-house then look for professional help locally. By avoiding time and cost consuming mistakes, professional help will pay for itself over time.

After you have signed the necessary contracts and agreements and your products are being shipped, don’t forget to visit them every now and then to check your suppliers’ status and maintain a strong relationship.

In different situations there would be other things that would need to be considered such as raw-material sources, contractual and IP protection issues.

Inputs of your experiences are most welcome.

8 comments to Performing your China supplier due-diligence

  • Hi David,

    I give lectures in Global Sourcing to mostly European graduate students in Shanghai. Your blog will become required reading in September!

    Thanks,
    Brian J. Schwarz
    Adjunct Lecturer at Shanghai Jiao Tong University
    Visiting Professor at the ESSCA Graduate School of Management
    Linkedin Profile
    http://www.linkedin.com/in/chinachallenges
    Mobile: 13621644621

  • Excellent post. Nothing to add.
    Over time, buyers should keep sending someone regularly in the factory, to check if production is not subcontracted (it is quite frequent and the result is usually devastating regarding quality).

  • Terence Khoo

    This is a great discussion topic and David has covered it very well.

    I would suggest following :
    • Clear and comprehensive specifications of the product or service is to be procured. This will prevent any unnecessary disagreement later on.
    • Outsourcing is alright; if done well it can save cost and time for everyone. Why limit your choice of good suppliers if they lack certain non-critical processes or machineries ? It is essential that you point out to them that specific outsourcing is acceptable, provided you are informed and approved it before such action takes place.
    • Good communication is critical. It ensure no time is wasted, and worse of all, both parties had a different interpretation of important matters. Many China suppliers may not speak fluent English but they can read and write fairly well.
    • Suppliers’ export experience is important. I’ll not work with any supplier who has dealings only with domestic customers. There exists complex taxation (duty-free instructions vary from city to city in China), export licences, delivery arrangements etc, just to name a few.
    • Source inspection is another way to ensure to a certain degree that you are getting quality products. By hiring an independent pre-shipment inspectors (or if budget allows, resident engineers) to be stationed at the suppliers’ factories to be your incoming QC. It saves you tons of money and time.

  • […] Petersson gives some tips on identifying good and reliable suppliers in […]

  • David Petersson

    Dear Brian, Renaud and Terence,

    Thank you all for the nice and constructive comments and I agree with all of Terence’s comments with underscore on good communication.

    All the best,

    David

  • Very pertinent. We have made a good living in China offering due diligence services prior to the contract being signed.

    Of course, we have made a better living in China trying to clean up the messes that are made because the company does no due diligence!

  • tsanko

    Wonderful ..thanks a lot for posting a good informitive blog

  • Brown Belt

    I definitely appreciate your writing style. This can be a great post! Thanks!

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