Building a China Supply Chain: A Process, not An Event

1/1/2010 - Part of TCBN's Quality Series
With over 20 years of experience in sourcing and manufacturing in China, Paul Stepanek is the found of USActive, providing due diligence and consulting for companies implementing their China initiatives.  Twenty years has seen the opening of Chinese businesses, but Paul's challenge still lies in westerners building strong relationships with Chinese suppliers.





TCBN: Greetings everyone, I’m Michael McCune, and this is The China Business Network.

For over twenty years Paul Stepanek has been directly responsible for sourcing and manufacturing industrial products in China. Over that time, he has witnessed radical changes in quality, transparency, and management within Chinese companies.

We reached him via Skype at his office in Shanghai to discuss how companies can partner for success, manage for quality, and innovate with trust in their supplier relationships in the PRC.

So Paul, I know you’ve got a lot of years under your belt in China, and you’ve worked with a lot of different companies both in directly manufacturing products or even in getting supply of parts to into products that you’re manufacturing. One of the main issues comes back to: how do you choose who to do business with? How do you go about selecting the right partner you think’s going to help you succeed? I was hoping you could share with us some of how you’re approach has evolved, some of the insights you hope to gain, or how you go about doing due diligence with these prospective partners that you need?

STEPANEK: I think when we started out, say 10-15-20 years ago, it was more of a focus on finding a supplier that was going to meet some price point and also be able to deliver some quality level. This is evolved to be much more dynamic than that and partly because the Chinese factories and suppliers have moved up the value chain and they’re able to enter into the markets where the clients are playing. Even if they’re not able to enter with total credibility they’re able to enter and disrupt the markets through pricing.

When, like I said, when we originally were out looking for a potential supplier, the focus was on price and quality points. The way it’s really evolved is that we’re taking much more time to find out the world of potentials. So we want to know all the potential players that we have in the market, within reason. So we’ll go out and find 10 or 20 potential suppliers. Then we try to find the best fit based on a handful of parameters that the client says that are important to them. And it could be important to the client, for example, that the factory has experience in producing to some FDA standards, so that they’re not trying to get up that hill at the same time that they’re trying to help them get up the hill of understanding their particular product. Some industry understanding might be important.

TCBN: When you’re doing due diligence and obtaining this information, how has your trust in such information evolved over time? It seems like there’s so much, and they can supply so much information about themselves. How do you discern the truth, aside from the obvious thing about physical visits. What kind of due diligence double check work can go on in China these days?

STEPANEK: When we started doing this, factories used to play their cards very close to their chest. They would be extremely concerned about revealing any information about their process, or their supply base, or their customer list. Today what we find is that companies - the factories over here welcome us with open arms. They understand that this is a very typical first step that any potential partner or client would want to know these kinds of things about their company. They’ve been through the drill when other potential clients come through and visit them. I think that they’ve found that if they don’t provide this kind of information, that there’s no chance that they’ll do business with a potential client. If they do, then it moves them into the box of there is a chance if they’re appropriate.

And so we’ve seen they’re much more willing to share information. That being said, the way we develop trust with them and the way we develop our understanding of what they provide is it does take a visit to see their facilities. It’s simply not possible to pick up the Thomas Register, or to go onto Google, or to go to Alibaba and say, “Oh yes I’ve found supplier,” or “I found ten suppliers and from the information I receive online, I’m going to be able to make an informed valid decision.” The information that you receive on the phone or online does not necessarily match up with what reality is. And in some cases it may be that somebody is posing as a manufacturer, and in fact, they are a trading company. In other cases it could be that the factory has control over one of the process and they’re outsourcing other processes – which might not be a problem but we want to know as part of our due diligence what it is that’s vertically integrated and what is that’s outsourced to other companies; what it is that they’re going to have more control over and what it is that they’re going to have less control over.

TCBN: When you hear individuals talk about sourcing or working with manufacturers in China, sometimes it seems like they’re too glib in saying “oh we could just source that widget from China,” while there might be a factory price they’ve come across. To hear you talk about the time it takes to do correct due diligence, the time it takes to manage relationship once it’s up and running, it would seem like a lot more cost in there than lot of manufacturers or buyers would expect. Do you find them coming prepared with that understanding or is part of the education you have to get them through?

STEPANEK: It’s part of the education process. We’ve worked with clients that are manufacturing companies that have literally 100 years of manufacturing experience in the US. It’s always interesting for us to be working with them and the assumptions that they make - it’s sort of “if we build it they will come.” There was a particular client we were working with, and they were setting up a factory in China to be producing small gasoline engines. Their attitude was “ if we set up our factory here we’ll have suppliers knocking at our door.” Over the course of 100 years in business in US, undoubtedly they had spent literally decades developing their current supply base in US. What ended up happening is that that particular client became very frustrated with what they had originally – with what their original assumption was – and they engaged us to be going out and finding the world of potentials and working with those potential suppliers to get them to the point where they were actually going to be capable suppliers of those types of parts for them in China. It was a process that took literally years.

I agree, Michael. A lot of companies come over here they make the assumption that it’s a switch that you turn on. It’s an event and it will happen. I think if they look long and hard in the mirror at the way they’ve developed supply chain in their home country, they’ll realize that, “wow, this is really developing a relationship.” And that relationship develops one issue at a time. For a client to come over and say, “jeez we’re going to get a Chinese tool shop to make us parts, and we’ll just place orders, and they’ll just make good parts” is incredibly naïve. In fact, when we run into a potential client that does not have any China experience, we tend to let them go on their way. It’s the clients, I think all of our client that we have all have extensive China experience and they understand that it is a process not an event.

In fact, clients that we have have existing factories in China, and they understand doing new set up new facility that they need help with that kind of thing, and they want to outsource that to somebody who can get that done without distracting current team over here. They do understand that there is quite a bit of work that goes into it. And so, yeah, the guys that have been over here, trying to do it, that have been burned a few times are much more willing to go through the process. The companies that come to us and say, “we need this shipment in two months and we gotta get pricing next week” - that’s always a red flag for us.

TCBN: I’ve been speaking today with Paul Stepanek with USActive, a company based in Shanghai that helps manufacturers based in the US and other countries come into the market and expand their capabilities in China. Paul, thank you very much for having time to speak with us today.

STEPANEK: Thanks Michael.



Find out more about Paul Stepanek's work at USActive by visiting their website.