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China Sourcing, Assembly and Packaging

Who buys the materials when production is outsourced?

The question of who buys the materials needed for production has implications on supplier(s) behavior, quality control, and on the risks incurred by the buyer. Yet it is rarely given much thought by importers who buy from China or other Asian countries.

There are basically three options, which I list below:

Option 1- The manufacturer purchases the materials from its own supplier(s)

This is by far the most common practice: one company buys the materials, turns them into a finished product, packs it all and ships it out.

Advantages:

  • Easy to manage for the buyer.
  • The supplier is “hooked up” because he likely disburses more cash than the deposit he received from the buyer. He can hardly risk an order cancellation until he gets the rest of the payment.

Drawbacks:

  • Most Chinese suppliers buy either from friends or from the cheapest source. Quality is not a prime concern, so a pre-production inspection focusing on materials is often necessary.
  • The supplier will seldom admit to any responsibility if materials are substandard, even though THEY selected the sub-supplier(s).
  • Buyers feel that the process is easy, and they don’t take the pain to define the “bill of materials” (BOM). When they discover issues related to unsuitable components, they are in an uncomfortable situation…

Option 2- The importer appoints a supplier(s) from which the manufacturer HAS to buy

This is quite common for labeling and packing accessories, since the goods have to look similar when placed side by side on store shelves.

It is also the case for the main components of the product when a designer works on the basis of specific materials to elaborate a collection (before suppliers are selected and production is launched.)

Advantages:

  • Quality issues are less frequent, and collections have the same overall look.
  • Here also, the supplier is “hooked up” by the size of the cash outlay.

Drawbacks:

  • Prices are usually higher (even if the approved supplier agreed on a discount!)
  • The manufacturer might use it as an excuse (e.g. “your appointed supplier’s delivery was late”, or “we wasted time sorting out the bad products from your supplier”). But they will probably not control these incoming materials… It is left up to buyers to arrange it.

Option 3- The importer buys the materials and rents some “factory time”

This is called CMT (Cut, Make & Trim) in the textile industry, where it is quite a widespread practice. (It is used in other product lines as well.)

Advantages:

  • Workshops are truly interchangeable with a lead time of a few days.
  • The buyer is certain that the materials come from the right supplier.
  • The buyer knows how many finished products can be made, and the manufacturer has a hard time selling extra production via parallel channels.
  • Again, lower quality risks, and higher predictability in the finished product’s aesthetics.

Drawbacks:

  • The manufacturer is not hooked up in any way, so they might ask for a price increase at the last moment (e.g. “this is more complex and time-consuming than we thought”) or even take another order instead.
  • And all the drawbacks previously listed in option #2 above

At the end of the day, it depends on how much of the supply chain the buyer wants to control. It takes some real organization, but also a deep understanding of the situation; importers seldom realize how complex supply chains in China really are.

Written by Renaud Anjoran on April 1, 2010 revised Jan 2011




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