Managing the China Supply Chain: One CEO’s Experience

It’s a good time to reflect on changes in supply chain activities, with MPO celebrating its 15th anniversary this year. This month’s column will focus on China, as no other country has impacted the medtech supply chain as much as the Middle Kingdom. Anyone who has dealt with an international supply chain knows that cross-border purchasing is complex. And China is no exception. Even with its growth and acceptance of its manufacturing quality, China remains a country filled with opportunity and risks. It’s an exciting geography in which to operate. The challenge is to be successful while not letting it become too “exciting.”

From the CEO’s perspective, establishing, starting, and managing a small company with a significant China footprint or sourcing from China represents several unique challenges, ranging from distance (in this case from the United States) and the financial considerations to the cultural differences that require unique skills and management. This article will provide insights on this topic from a former CEO (Scott Hayden) in an attempt to provide some navigation assistance based on his more than 10 years of experience working in Asia. The primary focus for this discussion is the opportunities of sourcing within China and the key issues that need to be considered. While the current tariffs and trade war with China may impact the medtech supply chain, that issue is worthy of a separate discussion.

The development of the global manufacturing supply chain within China is decades old. U.S. and European companies have worked with local suppliers to develop their products and technologies, while the local supply base has expanded for these opportunities to meet the demand and to move beyond the challenges. This has led to a mature China supply chain infrastructure, created many joint ventures, and has driven companies to look to expand with their own operations. The China manufacturing climate is unique in the world.

When many Western executives first visited Chinese suppliers to explore the possibilities of sourcing in that country, it was often as part of a one-week, multiple-city trip to visit as many suppliers as possible within a short time frame. The executives spent time in small rooms in big restaurants with jet lag, eating dishes they were not quite sure about (it all “tastes like chicken”) and getting shuttled from place to place. This overview provides a great introduction to the vast capabilities that exist; upon further reading, the column will explain the advantages of taking additional time to understand more about China’s supply chain opportunities.

Location: Shenzhen
While there are many manufacturing locations within China, this discussion is based upon many experiences primarily within the Shenzhen area. This region is located about 25 miles from Hong Kong International Airport. The proximity to the airport allows for multiple convenient options to access the greater Shenzhen area as well as the ability to take advantage of the multiple shipping and logistics options.

For businesses that only source from greater China, managing the distance can require establishing a workable infrastructure. This can include the use of a local sourcing entity that can manage the communications and daily requirements. In the case of working through Shenzhen, utilizing a sourcing contact within Hong Kong may be easier to establish. The Hong Kong business culture is based on a U.K. education system, which is English-based and provides a unique source for experienced resources that have an understanding of Western business as well as Chinese culture. Within China, many suppliers are very fluent in typed English, but not as articulate in speaking the language.

Culture
The previously shared travel example of the one-week, multi-city trip to China may not allow for enough time to create the business relationships required for an effective longer-term customer-supplier relationship. China business requires the investment of time and the establishment of trust between the two parties. This typically requires time and energy. In Western business relationships, we tend to make our decisions on trusting and working with a supplier based on their technical capabilities, quality systems, team dynamic, and our perceptions regarding trust.

Finding and Working with Suppliers
It can be relatively simple to find small- to medium-sized suppliers (with $1 million to $10 million in sales revenue) that are eager to obtain and work with Western customers. Their view is that it can help them gain access to global markets and expanded technologies. These suppliers will typically deal initially on price and do not focus on the other value creation elements that Western companies typically establish for their products. There are several key advantages in dealing with these suppliers in the areas of (1) minimum order quantities, which may be less than expected; (2) shorter delivery times; and (3) lower tooling costs. The founder/owner of these businesses are typically very involved in the operations of the business and will rely on two or three key people in the organization to oversee customer and business interactions. On the payment side, many suppliers will request payment up front before offering payment terms. The negotiation of pricing and terms are always part of the business process. However, it is recommended that a customer shows some type of commitment to conducting business before negotiations begin.

Material Consistency and Product Substitutions
It is common among Chinese material suppliers to make changes to products utilizing lower cost raw materials or components. If a product cannot accept substitutions (as is often the case in medical devices), the best approach should be to include drawings, documents, and specs that clearly state that changes are not allowed or acceptable. An AVL (approved vendor list) and purchase orders should include statements about substitutions and the incoming inspection process should include detailed review and confirmation. From experience, I recommend that critical suppliers be visited at least three times annually (for thorough quality and business reviews) during the first couple of years. Company executives will find it helpful if they spend the time to have their supplier(s) provide recommended changes that can provide cost savings and a plan to appropriately implement them.
Trading Companies vs. Chinese

Established Businesses
When dealing with China suppliers, especially in Southern China, there often is a partner involved that may be considered a “trading” company (typically located in Hong Kong). These trading companies act as an intermediary for the manufacturer and they may manage the communications between the customer and the factory. Often, they also represent other manufacturers, which can offer additional supply and sourcing options. This trading company engagement usually adds cost to the supply chain; thus, the cost/benefit needs to be weighed. When sourcing lower volume, highly customized products, the trading company option may not exist and it is recommended to spend time directly reviewing the supplier and establishing the business relationship. In these situations, some Western companies may utilize an independent resource with industry experience that resides in Hong Kong and provides guidance and assistance. These sources are typically fluent in Mandarin with excellent English skills and a deeper understanding of Western business culture. They can provide a cultural bridge between a U.S. company and its Chinese supplier.

Conclusion
Sourcing in China currently remains a viable option for many components, sub-assemblies, and finished medical products. The combination of a deep supply chain, technical resources, eagerness to work with new customers, and global competition creates opportunities for products across all categories. Navigating the landscape can seem challenging at first. But if companies proceed carefully, it can lead to strong long-term supply partners and a few “interesting” meals. 

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Dave Sheppard is a former Fortune 500 medtech executive and is now a principal at MedWorld Advisors. He can be reached at [email protected].

Scott Hayden, strategic advisor at MedWorld Advisors has significant executive experience in the medtech industry, including being a CEO for two different companies operating from China. He can be reached at [email protected].