Supplier Diversification and Your Exit Strategy

Diversify your suppliers in China

Having selected a factory and developed your product in China is only the first step in your sourcing process. It is important to diversify your supplier base. Throughout the procurement process, there will be times when unexpected delays can turn into extra months for producing deliverables. The natural process is to accept the reasons for delay and “hope for the best”. When doing business in China, having patience with your supplier is not always the best method for action.

It is important to lay out strategic plans of action with measurable milestones. See your end goal and put the invested emotional quotient aside. In conjunction with these plans, penalties for lack of execution on both sides must be implemented. Enforce these penalties, but also expect to negotiate during the time for payment. During an import venture mentioned below, the supplier had to come to the table with a signed contract entitling me a 65% discount.

While the delays were excessive, you cannot expect the supplier to lose all profit and even material/labor costs. If communication has broken down, take the high road coming to the table with an understanding of the supplier’s perspective, but only to the degree of reasonable doubt on the reasons for the delay. Do not take the reasons for the delays at face value.

Other common schools of action are complaining (many of us do this in the wrong manner) and while this will put new thinking in the minds of your supplier (that you will not accept further future delays), the deed has already been done. Maintaining the right kind of respectful relationship is key to any business endeavor (or even personal relationship) and complaining in the wrong way can damage this fragile, long distance relationship.

The foundation for my understanding of the business principles, included in this article, in China, was derived from a venture into importing private label modular cabinetry. In my case an intermediary was engaged to resolve some of supplier problems. Read in detail my experiences in this area and specific actionable items in Avoid the Middleman and Seek the Intermediary.

My experience in producing cabinetry in China tells me that having an exit strategy is key to making a bad situation transcend the fundamentals of a failed import venture. If you have selected the wrong supplier, the first delay is not the end, but only the beginning.

There are times when the smart business decision is to cut your losses for the time being, regroup and engage your second supplier. The supplier always has the upper hand in your dealings with them. They have your deposit, you need the product and having to switch suppliers midstream would incur delays and costs. This balance of power can be flipped if you are open to turning the tables with diversification.

If the end result is obtaining the product in the required schedule, the second supplier you had lined up may be your lifeline. In the mean time, you can resolve issues with the current factory and complete the order post the newly engaged factory delivers. This scenario works if you will need additional inventory or you can negotiate with the current supplier to reduce order due to your delays and having to engage the other supplier to accomplish the endgame.

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May 24, 2008 | Filed Under Negotiating & Strategy 

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One Response to “Supplier Diversification and Your Exit Strategy”

  1. Diversification » Supplier Diversification and Your Exit Strategy on July 21st, 2008 4:19 am

    […] Supplier Diversification and Your Exit StrategyIt is important to diversify your supplier base. Throughout the procurement process, there will be times when unexpected delays can turn into extra months for producing deliverables. The natural process is to accept the reasons for … […]

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