Vendor Due Diligence – Securing Your Supply Chain in China

By Timothy Anderson, timothyanderson2005@gmail.com

“They say,” said Ian Riley, chair of the evening’s discussions, “that Chinese companies make the best samples in the world!” Of course, there still the question of the quality of the goods that follow. How can vendors ensure that those high quality initial samples really are representative of a potential supplier’s capabilities and that a given supplier is actually one they want to work with?

“A key task is to carefully define the supplier selection criteria,” suggested panellist Matt McCurdy of PricewaterhouseCoopers. “Considerations such as size, export experience, production capacity, location, along with a comprehensive assessments of various other commercial, market and environmental factors are all a part of the selection process.”

Getting out and seeing the factories, warehouses, shipping facilities and employees is vital – anything and everything that proves a potential supplier has the capacity to deliver the goods they claim they can produce. But where to begin?

“Management is key”, said Roger Owens, General Manager of Drennan (Shanghai) Co. Ltd. and one of the evening’s panellists. “A supplier may have a superb plant with modern machinery, competent personnel and sufficient technical know-how, but in the absence of dedicated, engaged and competent management, a satisfactory supplier relationship is unlikely. Meeting the owner is crucial when making a judgement regarding a company’s likely level of commitment to its customers”

Of course, the job does not stop there.

“Suppliers in China are best kept on a short leash,” Mr. Owens continued. “This means getting involved in every process, ensuring they are able to source the materials required to fulfil orders and continually inspecting the final products.”

Vendors should not be afraid to reject goods, even if it ruffles some feathers. It is crucial that goods have no flaws once they leave China. They should also be prepared to work closely with suppliers to improve quality.

“A lot of companies arrive in China without having considering why it’s cheaper – and get shocked when they see the real conditions,” noted Daniel Tay of B&Q. “Vendors coming to China should not expect to be met with international standards. Old equipment and poor safety standards are all too often the norm.”

Companies planning to do business in China need to recognise that corporate social responsibility (CSR) has costs - and they should be prepared to something for it. Unfortunately, not all do. Ultimately, CSR is a high-level judgement call that the management of each and every company coming to China must make. A firm decision regarding what can and cannot be violated by a given supplier is important, because tolerance will always be necessary in some areas.

“Managing the people is the most effective approach in China,” suggested Chris Chen of China Country Manager of Thomas Swan, offering some realistic advice to close the session. “This means insisting on hard proof to support all claims being made, and putting in place the necessary processes to make sure such proof can always be obtained.”

While the approach to supplier relations advocated throughout the evening may be a time intensive one, requiring a high level of effort, energy and commitment, companies must be realistic about the business environment in China. Contracts can offer a certain degree of protection, but court battles are costly and cannot resolve all disagreements. Ultimately, comprehensive due diligence from the start and continual, hands-on management throughout is the best assurance and protection a company working with Chinese suppliers can obtain.

Originally published in the May 2006 issue of ‘The Beat’, the monthly magazine of The British Chamber of Commerce in Shanghai.