By Wen CHEN, Principal at Oliver Wyman
With the evolution of international trade and advancements in domestic industrials, many companies in the Chinese market are turning their attention towards improving their procurement strategies and supplier bases. The companies already have many well-established methodologies for executing these types of strategies, most of which focus on “buying cheaper”, “spending smarter”, and most recently, “adopting digitalised sourcing.” Moreover, the companies’ overarching objectives and approaches are similar and will not be repeated here.
However, in the unpredictable Chinese market, companies implementing these seemingly simple and straightforward changes can encounter many pitfalls. These challenges can result in a company’s inability to implement strategic improvements or, at least, significantly reduce the negative effects of these changes. Based on an in-depth examination of many procurement transformations in China, we believe that it is equally important to both “do the right thing” and “do things right.” In this paper, we will primarily focus on supplier integration, one of the most common and effective initiatives being carried out with regard to procurement transformation.
The common pitfalls of carrying out supplier integration include the following:
• An overly idealised transformation plan
• Ineffective and inefficient organisational management
• Implementation difficulties
From the perspective of creating a strategy that benefits all stakeholders, supplier integration seems simple, but the challenges that arise in actual execution can be extremely complicated. If management and communications are not effective, the abovementioned problems may build up significantly and become a “roadblock” in the company’s cost reduction plans.
Based on Oliver Wyman’s experience working on projects in China, we believe there are four key elements for success: strategy, organisation, data, and tracking, to effectively mitigate China-specific procurement pitfalls:
The primary purpose of designing a strategy is to set a realistic goal that considers all potential risks.
When setting up their internal integration/transfer plan, companies should avoid being blindly optimistic. Whilst pursuing immediate cost savings, they should fully consider the potential risks of each supplier, make timely adjustments in scenario planning, and reflect these changes in the overall execution plan. In external communications, especially when negotiating with target suppliers, companies must pay attention to the requirements demanded and commitments made by suppliers. To get contracts for larger orders, many suppliers tend to exaggerate their available capacity and capabilities during negotiations, or selectively avoid discussing more complex but necessary preparations and investments. These factors should be clearly understood and defined in the strategic design, and it is best to implement a written contract as soon as possible.
Whilst the process of integrating suppliers is complicated, the corresponding organisational design should be as simple and straightforward as possible, with clearly defined roles and responsibilities.
Companies must avoid having dual leadership with conflicting interests (e.g. global procurement vs. China procurement). We recommend that a single, local, senior procurement officer be responsible for all local affairs as head of the Chinese region. At the same time, to ensure communication efficiency and information consistency, there should be a coordinator within the company that works as the single point of contact for each supplier. This way, the coordinator has complete control over supplier negotiations and communications. However, in reality, it may be impossible to completely prevent private conversations between suppliers and other people within the company. To counter these situations, the coordinator should work to convince the supplier that they are the best choice to maximise the supplier’s interests and guide them to use the coordinator as a single point of contact.
On the other hand, strong leaders also need effective team members to get work done. If the procurement team has shortcomings in terms of ability, motivation, etc., KPIs and incentives should be adjusted in a timely manner to motivate the internal team as much as possible. If this still has little effect, the company can also consider hiring an external team to assist.
Accurate and comprehensive data collection and analysis is the best tool to guide project implementation; conversely, missing or inconsistent data can pose major risks for the project.
Effective data management begins with breaking down data barriers across different business units by collecting multi-party data on a unified platform or a common baseline. In particular, the company should pay attention to the unification of standards and terminology to minimise confusion in communications. At the same time, there should be clear ownership of data (e.g. which departments and individuals are responsible for which data inputs, data pulls, data inspections, etc.) to facilitate subsequent review. During the data analysis process, all business units must also use a single data source and the same standards for analysis. At each key decision-making point, documents should be prepared and circulated in a timely manner to get consensus from all relevant parties.
On the other hand, we also need to understand that, in many cases, it is not possible to have a perfect data collection and analysis setup. What is most important is to have a reasonable confidence level (85-95%) and ensure that the entire implementation team has a “single source of truth” to maintain the data.
Due to limited time, an abundance of tasks, multiple sources of information, and constant changes, many companies in China are adopting a high level or one-size-fits-all approach in the process of integrating suppliers. However, if there is no detailed and effective tracking, then a perfect plan may still encounter various pitfalls.
During the project implementation phase, planning should be as detailed as possible, supplemented by various tracking mechanisms and regular core team reviews (in some cases, it may be necessary to do daily reviews). In extreme cases, it may even be necessary to track quotations, BOMs, blueprints, material preparation, equipment preparation, trial production, mass production and other aspects at the SKU level. This will help the team to identify and solve problems as soon as they arise.
In summary, a seemingly simple procurement transformation, if not carefully treated, can become much more of a mess in the complex Chinese market. Only by adopting a forward-looking strategy, along with simple and effective organisation, accurate data collection and analysis, and detailed tracking, can we ensure that procurement transformations create real value for the company.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Hongkong Business. The author was not remunerated for this article.
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Oliver Wyman is a global leader in management consulting. With offices in 60 cities across 29 countries, Oliver Wyman combines deep industry knowledge with specialised expertise in strategy, operations, risk management, and organization transformation. The firm has more than 5,000 professionals around the world who work with clients to optimise their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies.