If you work for a manufacturing or retail company and have not yet moved operations beyond domestic borders, someone in your boardroom has likely asked in the past year, “Should we source from China?”

Larger companies, which profit more from cost-cutting moves because of their scale, have already made the move, with many giants such as Wal-Mart Stores, Inc., and General Electric Co. setting up purchasing centers in China to feed their global supply chains. Even companies that have decided that their existing manufacturing operations are best left untouched for now are reexamining their upstream supply chains and confronting their suppliers with price quotes from Chinese producers. If your company has never looked at the option before, now may be the time to look. And if you have looked before, it may be time to look again, since the manufacturing dynamics in China change quickly.

The big question

The first question for the uninitiated, of course, is: “Should we go to China?” The answer depends in part on your company's products. Most analysts note that China excels at sourcing components or goods made from templates, such as furniture, toys, and consumer electronics and appliances. Telecom, biotechnology, and electronics are also emerging new strengths, and General Electric Co., Microsoft Corp., and Motorola, Inc., among others, have set up global research and development centers in China to capitalize on them.

The 1-2-3 of Sourcing

1. Pick product to source
2. Define supplier and product criteria
3. Search for suppliers
4. Research supplier qualifications
5. Evaluate samples
6. Audit factories
7. Test order
8. Choose supplier
9. Establish reliable quality control
10. Establish communications
11. Establish supply chains
12. Monitor patent protection
13. Enforce long-term cost reductions
14. Repeat as needed

The answer also depends on the level of PRC exposure your company seeks. For companies entering China only for procurement, cost advantage is still China's primary draw, but companies considering more permanent stakes may find better product quality and manufacturing flexibility, as well as growing domestic demand, to be more important.

 
Source: This is an excerpt from an article originally published in the Sept-Oct, 2004 .issue of the China Business Review. Reprinted with the permission of The US-China Business Council, Washington D.C.

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