November 5th, 2021It makes perfect sense. You are starting a new business and are tight on money. Therefore, you are looking to source your Chinese products from the best possible source. You have always comparision shopped before, and it makes sense to do this now. This means you are spending time on B2B websites looking for good sources. For you, there is no difference between the supplier and the source of your supplies and products.
Many do not recognize this as a mistake – an all too common one at that.
Here is what many are thinking as they combine the two into one. If I can find multiple suppliers, I will achieve two things:
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- I have a guaranteed flow of quality products for my business;
- I can get the prices and quantities I want by manipulating the supplier. I.E. If the first supplier will not meet my specific demands on discounts or brokerage, I will find a supplier who will.
Issue at hand: This does not take into account the long-term benefits of strategic competition of your company. Caring only about immediate benefits is shortchanging your overall cost planning and layout. The results are short term contract relationships between you and your supply source. Trying to strong arm a supplier to meet your specific demands will not lead to a successful, long term relationship.
Those who are looking at a supplier as a simple supplier of products follow this general process:
Internal demand analysis > Supplier decision > Negotiation and selection > Procurement
(N.B. – Sourcing Nova is strongly against this process and decision. It is not a good way to conduct business over a long term like we have said previously.)
There are no friends in the business world. Any product that is on the market can always face pressure from prices and demand. Many buyers do not stop and consider the costs. Instead, their focus is on low-price, high quality for one purpose – to best their closest competition.
This means many are looking for the impossible utopia: good, fast and cheap. Very often, this is not feasible in most supply chains. Granted, it is feasible in some, but these are quite different. The result is a business who will not take the time to look at the overall package. All they want is that impossible utopia, and they will find it – for a very short time.
Their short-sighted behavior will only lead to serious problems finding suppliers and a complete loss of business as a whole.
As much as anyone would like to believe it, good, fast and cheap simply will not happen.
It is normal to want these three, but in actuality only two are feasible at any one time. Here is how each will break down:
- Good and cheap – not fast
- Good and fast – not cheap
- Cheap and fast – not good
Basically, as a buyer, you cannot have your cake and eat it too. It will not happen even under the best of circumstances.
Those who ignore the business partnership of the supplier and manufacturer do reap some short-term gains through a push of the competition for business in various ways or demand continuous supply through intimidation and force. This will only destroy the long-term benefits of what could be a positive business relationship.
In markets of stiff competition, those looking for products often find a substantial number of suppliers. This makes for a strong buyer’s market. Those who are looking at suppliers as a simple stream of easy-to-replace products will not recognize the long term damage of their short term thinking strategy.
In this particular market, the sourcing staff often adopts “the customer is always right” attitude and treat them accordingly. The result is the buyer will turn this into something approaching a God-like status: superior attitude, ignore requests, demand rebates, fail to make payments, expect discounts just because and more.
How can a buyer reasonably expect to maintain any successful business relationships with this mentality?
Proper sourcing and procurement, as you should know if you are a regular reader of this blog, is a process – one that takes considerable time. This short term thinking that many are considering means more time than necessary in finding new suppliers, overlooks the procurement performance and ultimately damages the relationship between buyer and supplier, often permanently.
When the market shifts from a buyer’s to seller’s market, the roles are reversed. Here are two specific examples: The container shortage caused by the pandemic and the power restrictions in China. This means suppliers will look to their more favored and respected clients. Those who used the supplier as a short-term business partner will be relegated to the back of the line if not completely ignored as a business partner.
For a successful business, the long-term perspective is key. Those who do not consider the solid relationship between a buyer and supplier over time will fail to understand the pricing structure of supplier management practices.
The supplier is an extension of the corporate competitive
As the online economy continues to grow and change with more and more competition, elements of that competition begin to shift. The supply chain is now the corse of the enterprise and competition rather than the technology and management behind it. This means the supplier is a vital key in the supply chain and are considered an extension of the competitive nature of the business with a resource to keep one up on the competition.
This translates to whomever has the best relationships with high-quality suppliers has the advantage needed.
Those looking for a steady stream of quality products with a good profit margin and delivery is the goal of anyone in the sourcing industry. However, it means there must be a solid relationship between the buyer and supplier. The ultimate goal should be less on the big three above but more on how resources and capabilities complement one another in strengths and weaknesses – changing the competitive element.
So, an excellent supplier can meet business needs while also improving their own capabilities for the buyer’s constant changes and upgrades to their own businesses and product requirements.
The loyals suppliers need to be on the front line with the buyer, ready to share the development and improvement with a cooperative relationship.
Until reality sets in.
The better suppliers will lack loyalty, and the loyal suppliers will lack the quality.
This means businesses can only continue to develop new relationships with new suppliers as older, out of date suppliers are replaced. Doing so means the entire supply chain will upset – materials, prices and delivery will fluctuate. The quality of service will dwindle as well.
Looking at this from within the supply chain, any company that is making purchases from a supplier fails to see the supplier as anything but a never ending source of products and not a living, breathing partner in the business. The behavior and attitude of the buyer will translate directly into a resulting behavior on the part of the supplier.
What does this mean exactly? It is very simple. If a buyer or a company treats their supplier as garbage, makes unfair or impossible demands, the supplier will respond in kind. This will lead to a complete disruption of the business procurement process and likely shutter the doors of the business.
It is absolutely vital and in the best interest of the company to consider their supplier as a part of the business, only in another country.
How, then, does the buyer and company manage to disrupt the supply chain or ruin a relationship? It starts with what we have said previously about the short term gain. To borrow a metaphor, ‘you cannot see the forest for the trees.’
The three mistakes
So, what are the most common mistakes that buyers make when falling into this short-term consideration? They are:
1. Buyers looking to the lowest possible price.
Buyers are always interested in the lowest prices. Sourcing Nova believes that a constant push for the lowest price will inhibit long term, successful business growth.
In the supply chain, the supplier is one of many in the eyes of the buyer. The buyer has a simple concept in mind based on price comparison and the idea of ‘the lowest price is the winner.’ The buyer has in mind to get products as cheaply as possible and is not concerned about whether or not the factory turns a profit. This can be highly detrimental to the buyer. No factory will work for free and normally have a base profit margin of 10 percent. This means to meet the demands of the buyer and still earn enough to stay in business, the manufacturer will be forced into one of a few choices: cheaper materials, reduce production process or simply refuse to supply the buyer.
No matter which choice the manufacturer makes, the result is the same. The buyer’s supply chain takes a hit and can be disrupted permanently. This is the price paid for short-sighted behaviors and strong arm tactics.
2. Focus on the inspection process as the only step
Those suppliers with poor product design and manufacture, low supply or slow delivery are always issues that a buyer can find with a supplier. The solution, for the buyer anyway, is to set a more stringent inspection process with much tighter standards. This can even punish the supplier with penalties.
This is a major mistake. Relying strictly on inspection over the other valuable steps of the procurement process can cause serious issues with the supplier and buyer. Suppliers can become angry over these practices, and the products and customers are the ones that suffer ultimately. The issue is not handled at the core of the problem and improvement at that point but the superficial – exactly the wrong place to have it happen.
It is a commonality to have the buyer think of the supplier as an enemy and not a partner. Sourcing Nova stands behind the idea that a supplier is a partner in the business. Good suppliers want businesses to grow and thrive.
If there is a problem in the supply chain, it is important to find it. What is the root cause: poor product design, manufacture, supply or delivery? Whichever one it may be, it is best to work with the supplier to resolve the issue. If a solution cannot be reached, then it is time to find a new Chinese supplier of products.
3. Credit payment option
Rather than pay on time as agreed, many business owners will hold payment, “credit payment option” as a part of the sourcing process or use it as a tool in performance appraisal of the sourcing work in general. This has led to the idea of payment in arrears as the de facto method of payment in sourcing. Some businesses will dig for any excuse not to make payment or demand discounts on minor flaws or delivery delays.
This may help the business with some degree of savings but at the cost of damaged image and poor credit.
Sourcing Nova regularly talks with our regular suppliers and manufacturers, mostly as a part of our guanxi. Here is a specific story on what we are talking about:
A supplier got an order from a customer on Alibaba for bamboo products but did not want plastic packaging. The customer asked for a delay in shipping new product because sales were low at that time. The manufacturer explicitly told the buyer a lack of plastic wrapping would lead to mold on the bamboo, but this was ignored by the buyer.
After the bamboo products arrived, the customer demanded a discount because of the mold, a discount that would have been over the profit of the bamboo products. The factory tried to reconcile, including free replacement of the moldy products, but each was rejected by the customer. All the customer wanted was a discount and no other compensation was acceptable. The customer warned the supplier of a formal complaint to Alibaba if the demand for a discount was not met. Left with little alternative, the supplier agreed to the discount and did not earn any profit on the order. The result: The buyer’s fee was less than the cost of the supplier. The buyer “won” in this case.
Later on, the customer put in a new order for the Christmas rush and was denied. Additionally, the supplier would not accept any further orders from the buyer thereon. Since his was a highly customized product, the chances of finding a new supplier in enough time to meet the Christmas rush was nil.
We are not privvy to whether or not the buyer found someone new to supply his bamboo products, but it is fair to surmise his demands cost him dearly in the long run.
The better suppliers in China, the ones that Sourcing Nova typically sources from, require on-time payment. Those buyers who are prompt with payment often get perks – better service, product quality and delivery times.
Buyers who request credit payments, excepting giants like Wal-Mart, are pushed to the bottom of the order ladder. For example: A product takes a week to manufacture from start to finish. Buyers asking for credit payments may wait a month. A delivery period of three months expands into six and beyond.
4. Changing suppliers
“This one does not work. Find a new one.” This is the general paradigm of many corporate purchase makers.
The customer only cares about three things when it comes to finding products: price, quality and service. Everything else is irrelevant – including the supplier itself. The customer can easily find suppliers based on these demands and work out preferential treatment as a consequence.
This mindset leads to obvious shortcomings. The business cannot build a solid relationship with the supplier, and this will not lead to improvements in the supply chain process. The supplier may also consider the business as a single buyer and treat the business as a “one and done” customer.
Final Thoughts
Sourcing Nova does not believe in putting all of your eggs into one basket by any means. We also believe there is no need for a single basket for each egg.
Considering suppliers as a source of benefits to the business can be profitable in short term. However, the damages associated with this short-term thinking will do no good for the development of a long term, positive business relationship. This will also limit the business and its opportunities to develop into a solid competitor in the specific niche.
Those who consider a supplier as a source of products means there is only a short term benefit. Suppliers are keen and quickly recognize this in a potential customer. The supplier will treat the customer in the same way. The supplier will look out for their own short term interests at the expense of a long term relationship.
Sourcing Nova is always looking for suppliers that will form a long term business contract and relationship. Keep this in mind as you are preparing your first order, and contact us when you are ready to place that order.
