Five useful tips for managing risks when sourcing materials from China (or anywhere)

Recently one of our clients asked a question that probably lingers in the minds of business owners attempting to source core materials from China:

“We are in the middle of a global pandemic, how can we minimize the risks?”

Unlike years past, when the most common doubts seemed to gravitate around the protection of intellectual property and product reliability, the current questions seem to be more challenging, especially with the COVID19 pandemic still in full swing in many places worldwide.

It is then not unreasonable to have concerns and many “what ifs” in the back of business owner’s minds.

The ugly truth is, you can never eliminate risk completely, but there are ways in which you can manage risks and reduce the odds of things going badly with a purchasing transaction, in China and honestly, anywhere.

This is why we are sharing five tips for minimizing the risks of sourcing in China. – and anywhere in the world really –

1) Focus on the homework: I am convinced that many of the “things gone right” in business and life have to do, in a great measure, with having the right mindset, mainly because it influences our attitude and actions, and those, in turn, will weight on how we are seen and the like-minded people and circumstances we tend to attract. When trying to source raw materials, equipment or establishing a partnership with a supplier in China or anywhere, don’t go in with mistrust and expecting-the-worse mentality because of the stories you have heard or your own prior experiences. Sure there are some suppliers out there with significant improvements to do, while some companies are not financially or ethically fitted to be in business, and yet, they will all quote for your business if given a chance, but the things we hear should not paralyze us but they should prompt us to do “the homework”. That is, take time to understand and document in detail what do you want to buy, follow a comprehensive supplier homologation framework to ensure the supplier is the right fit for your specific needs, develop clear contracts, reliable procedures and foster great relationships with suppliers. This will not eliminate risks, but it will set a strong foundation for the business relationship, hopefully, strong enough to withstand the instability of today’s world.

2) Have you already found a supplier? Have a contract:  You may be surprised to hear how many businesses award a purchase order to an overseas supplier, in China or elsewhere, without a written agreement. A contract will not eliminate risks, but it will help significantly to document the parties’ responsibilities and, in so doing, align everyone’s expectations. Write the contract in English or your language of origin to ensure all essential clauses are there and share it with your potential supplier to progress discussions until arriving at a final version. Depending on the business’s size and length, you may have a commercial lawyer of your trust review, improve and translate it, so the Chinese language’s interpretation is similar to that in English without ambiguities. Ensure to include clauses that describe how a failure to fulfil’s each one’s responsibilities will be resolved.

Extra Tip #1: You can likely find a reputable lawyer specialized in commercial transactions with China law within your network or the Chamber of Commerce and similar organizations in your region.

Extra Tip #2: When writing a clause about international arbitration, discuss with your legal advisor what is the correct place to indicate that such arbitration will take place. It is often advised that the arbitration should occur in the geographical region where the business’s financial transactions took place. If ever you had to go to arbitration with a vendor, and all their registered assets are in China, even if a ruling that is favourable to you is obtained from an international court elsewhere, you will still need to get a judgment from a Chinese court before any real action can take place.

3) Discuss and document the process:  Have you heard the expression “plans are useless, yet planning is indispensable”? I love the thought provocativeness of this quote, allegedly by Dwight Eisenhower in the early 1950s. It highlights the essentiality of planning while also recognizing that all you planned for may not happen and instead, matters can take unexpected turns. Indeed, the purpose of planning is not to prevent failure but to force us, planners, to widen our thinking to foresee and quickly adapt to the many possibilities in which a situation may divert from the desired trajectory to come up with alternatives and solutions. I often use this analogy to express the vital importance of potential clients and suppliers coming together over paper and ink to describe and agree on how everyone’s operational responsibilities around the business deal will happen. A written process does not replace a contract, but it is one of its essential complements, and it should be referenced in the contract to make sure all involved are looking at the agreed version.

3) Follow up, follow up, follow up: Don’t expect that you can place an order on a supplier and forget about it until the scheduled shipment date comes; if that were the case, I would have to find another way of making a living. It is true that doing the homework at the supplier selection process and having a well-thought contract and process agreements are crucial in minimizing risks. Still, these alone will not be enough to let any material or equipment order run 100% on auto-pilot. So what does follow up mean? When you send an order, talk to the receiving end to make sure it is received. Ask questions. Is the order understood and accepted? Ask when the raw materials will be ordered and delivered to the vendor’s plant? And when will production occur? Write down the dates and contact the supplier again before these milestones are to occur. Confirm everything is okay. If you feel that things are not clear, follow your instincts and ask for a 15-minute call to clarify. If you don’t get support, escalate within your organization and try to get answers and resolutions as early as possible in the process. The ultimate purpose of supply follow up is to resolve delays before they happen; if you and your supplier genuinely understand this, believe me, you have a good thing going on in your hands.

5) Be the client you’d like to have: Experts agree that organizations that dedicate efforts to develop their suppliers and foster effective communication are more likely to meet their costs and productivity targets. If contracts, procedures and KPI’s describe how things will be done in the commercial relationship, to develop a supplier is to make genuine efforts to help them be successful in delivering their side of the bargain. Amidst the pandemic, clients are doing this by making extra efforts to provide correct and timely information to their suppliers, being generous and quick in sharing their best practices and using economies of scale whenever possible. When things go wrong, please focus on the resolution, take the time to understand the issue, test solutions to prevent reoccurrence and include new learnings in the existing procedures.

And remember, in business and life, treat everyone as you wish to be treated, despite the organizational or financial hierarchies.

Happy procuring!

By: The Ana Lovera Inc and Sourcing Values Editorial Team. Copyright 2022.

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Photo by Thomas Despeyroux on Unsplash