The growth of global competition has been accompanied by rising pressure to keep prices low. To meet this challenge, companies are being forced to develop more effective procurement strategies to ensure their continued success and, in some cases, even their very survival.

Today's successful companies are those that have developed progressive, efficient and cost-effective procurement strategies. They have recognised the value of continually optimising the global value added chain and forming good relationships with the best suppliers worldwide. In the era of globalisation, strategic sourcing has become a vital part of company procurement activities. Today, German companies are turning increasingly to suppliers in China, which has developed into Asia's most important procurement region.

A survey recently conducted by the consulting firm BearingPoint in cooperation with the Department of Economics and Industrial Sciences at the University of W¨¹rzburg examines the procurement strategies of German companies in China and measures the level of satisfaction that these companies enjoy with respect to their procurement endeavours in this part of the world. The survey analyses the challenges that German companies face when dealing with Chinese suppliers and identifies the factors that lead to successful procurement activities.

High level of satisfaction with Chinese suppliers

Seventy-five percent of the companies surveyed reported that they were "satisfied" with the results of their procurement activities in China. Nine percent of these companies even said that they were "very satisfied" with their Chinese suppliers. The main reason that more and more companies are turning to the Chinese procurement market is the pressure to keep purchasing prices low. Two-thirds of the companies queried said that their search for suppliers in China was an initial strategic step aimed at paving the way for their own entry into the Chinese market. Companies that already operate production facilities in China use Chinese suppliers extensively in an effort to increase the share of locally procured items. By buying locally, companies strengthen relationships with Chinese suppliers and save on shipping costs.

Success factors: purchase price, product quality and supplier reliability

The primary factors that ensure the success of procurement activities in China are attractive purchase prices, high product quality and the reliability of the suppliers. The results of the survey show that German companies are quite satisfied with the price of goods procured from Chinese suppliers. However, they report wide discrepancies with respect to the level of satisfaction, the quality of the purchased goods and services, and the reliability of Chinese suppliers. The survey also indicates that the added costs incurred in dealing with the problem of poor-quality goods and unreliable suppliers often exceed the amounts saved through the lower purchase prices.

Dealing with Chinese suppliers is the biggest challenge

Searching for suppliers, selecting suitable ones and negotiating procurement contracts are all big challenges. But the companies surveyed maintain that the biggest challenge of all is managing the procurement process. They must constantly monitor the supplied goods to ensure that they meet the proper standards for quality and that deliveries are made on time. The most successful companies are the ones that form good, long-term relationships with their Chinese suppliers. Companies that focus on the short-term and fail to develop long-term relationships are often disappointed with the results of their procurement activities. The companies surveyed said that the success of their procurement activities in China in the coming years will depend on the fulfilment of the following three objectives:

Continual improvement in product quality and reduction of prices with respect to existing supplier relationships;

Greater protection for the company's intellectual property;

Improvement in the level of expertise of the Chinese suppliers and their ability to innovate.

What do successful companies do right and less successful ones do wrong?

The companies surveyed were divided into two groups in accordance with the level of success they achieved in their procurement activities in China. A comparison of the successful and less successful companies revealed significant differences. Two-thirds of the successful companies reported that they were able to cut procurement costs by more than 25 percent. Less successful companies were only able to cut procurement costs by one to 10 percent. The survey identified the following factors that determine the level of success:

Building personal relationships (guanxi)

It is very important that companies deal directly with their suppliers and not through a middleman or mediating agency. The level of satisfaction achieved is directly dependent on the quality of the company-supplier relationship. The stronger and more personal the relationship, the more satisfied and more successful both parties will be. Successful companies conduct their own procurement activities and do not outsource them to a third party. This also goes for procurement activities in Europe as well as in China.

Full control over logistics and other organisational procedures

Successful companies manage the logistics chain and other organisational aspects of the procurement process themselves as far as possible. They handle the shipping details and assume responsibility for fulfilling customs and tax obligations on location. This eliminates any hidden costs, excessively high fees and organisational inefficiency at the supplier end of the procurement process.

Controlling the production process and product quality in China

It is vital that the production process and product quality be closely monitored. The Chinese supplier must pledge to monitor quality on an ongoing basis, and company representatives should periodically visit the supplier for the purpose of checking product quality. Successful companies often assign their own quality-control agent to the supplier or position employees in China for the purpose of making frequent quality checks. Onsite company employees are able to spot quality deficiencies at an early stage and take prompt corrective action. This not only improves quality but also strengthens the company-supplier relationship.

In general, conducting procurement activities in China requires a lot of patience and perseverance. It is of prime importance that good, long-term company-supplier relationships be formed so that the cost benefits can be clearly measured over years. The majority of the companies surveyed believe that the volume of goods procured in China and the number of supplier relationships will continue to grow in the coming years.

Jan Bernstorf is leader of global
market expansion strategy at BearingPoint.
BearingPoint is one of the world's largest
providers of management and technology
consulting services to Global 2000 companies and government organisations in
60 countries worldwide