Until recently, most foreign companies had to develop their procurement operations in China by relying on limited experience, common sense, and trial & error. For these reasons there have been many cases of sub-optimal procurement. Today, we have enough track-record to know what works in which case and to make accurate decisions regarding how, when and where to run procurement operations in China.
The following table summarizes and compares the alternative scenarios available to the foreign company which is planning to do procurement in China (how many of these were you in fact aware of? Which one do you belong to?):
| scenarios | ||||||||
| 1 | 2 | 3 | 4 | 5 | 6 | 7 | ||
| Buy from a local supplier (NO China) | Buy through a trading company sourcing in China | Rely on a procurement services firm | Buying directly from China without resources on site | Run a procurement office in China | Open a purchasing company in China | Open a manufacturing company in China | ||
| l i n e s o f c o m p a r i s o n |
preparatory work | None |
|
|||||
| activities run in-house | None |
|
||||||
| purchasing lead-time | Immediate | 2 months | 2 months | 6 months | 6 months | 9 months | 9 - 18 months | |
| investments and yearly expenses | None | 100k USD | 500k USD | 1+m USD | ||||
| Does not include expatriate personnel compensation packages starting at 100k USD / year | ||||||||
| overheads | None | Some | Full | Full | ||||
| expected payback period | None | 1 year | 1 - 2 years | 1 - 3 years | ||||
| transparency over suppliers and prices | None | Some | Full | |||||
| control over the operations | None | Full | ||||||
| margins | None | Some | Most | Full | ||||
In many cases the efforts necessary to set up such China-based procurement operations are disproportionate to the results, particularly if we consider the initial expenses, financial and human capital, the legal restrictions, the learning curve, the integration with the head quarter, the optimization of the resources deployed, selection of the providers of the basic services, the overheads, not to mention the research, recruitment, and compensation of the proper expatriate management personnel. Moreover, legal and financial commitments (e.g. banking, leasing, labor) often limit the flexibility and adaptability of foreign companies.
In the case of the most basic purchasing office (scenario 5), comprising one staff and one administrative, this is a hypothetical cost breakdown:
| Yearly expenses (USD) | Notes | |
| Expatriate management personnel | $80,000 | Talent research (costs, effort and delays) Talent training (costs, effort and delays) |
| Legal and registration expenses | $10,000 | Legal commitments |
| Office leasing (80 sqm) | $20,000 | Delays in finding the proper facility Leasing contracts Basic office equipment investments Under utilization of office space Lack of flxeibility for relocation |
| Recruiting | $1,000 | Labor contracts commitments Difficulties of recruiting in the Chinese talent market Delays in having the resources on board |
| Direct staff (1 resource) | $30,000 | Need to build the necessary network (costs, effot, delay, efficiency) |
| Administrative staff (1 resource) | $8,000 | Need to become familiar with company matters (delay, efficiency) |
| Travel expenses | $40,000 | Including, flight tickes, trains, taxis, hotels and meals |
| General overheads and services | $8,000 | Accounting, tax filing, basic IT support, office maintenace etc. |
| Taxation | $22,000 | Estimate according to local regulations |
| $219,000 | ||
Learn how our professional help can provide customized solutions and get results in a short time.
© 2008 Pro-Q Limited. All rights reserved.