Creating Value with an Outsourced International Purchasing Office in China

Case Study

Creating Value with an OutsourcedInternational Purchasing Office in China

Dragon Sourcing - 龙源 Your Tailored Sourcing Approach to China

© 2007 Dragon Sourcing. All rights reserved.2

Agenda

1. Context

2. Sourcing Process

3. Governance Model

4. Results and conclusions


Context

European food Conglomerate:

• A global Manufacturer of food products, headquartered in the UK, with over 250 manufacturing locations around the world.

• They employ 85,000 people worldwide and have an annual turnover of £7 bn(14 bn USD)

• Within their portfolio of businesses are human and animal food companies, food additives, and well known consumer goods.

• The organization has recently launched a structured strategic sourcing programme to buy direct from suppliers in China with the assistance of Dragon Sourcing.


Agenda

1. Context

2. Sourcing Process

3. Governance Model



Dragon Sourcing service offering covers the end-to-end sourcing process

Feasibility Analysis Supplier Selection and Contracting Procurement Operations

• Analyse spend category in detail– Specifications and quality requirements– Volumes– Deadlines

• Analyse supply market and identify potential suppliers

• Pre-qualify potential suppliers through an RFI process

• Manage RFP process with pre-qualified suppliers

• Analyse supplier responses and calculate fully delivered price (logistics, import duties, ADT,..)

• Develop Business case and implementation plan

• Shortlist suppliers based on RFI/RFP process

• Audit shortlisted suppliers

• Select 2-3 suppliers for sample development process

• Manage sample development process

• Conduct final negotiations and select suppliers

• Finalise Contract

• Manage P/O and agree payment terms and details (L/Cs,..)

• Check in process production quality

• Conduct pre-shipment QC

• Arrange logistics

• Manage supplier performance

• Monitor new sourcing opportunities

Key

act

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Key

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The first step is to develop a comprehensive understanding of the need and of the functional requirements

19 kg (±0.5 kg) Weight

Short: 190mm - Long: 190 mmCentral Block

Short: 510 mm - Long: 540 mmFork access

1000mm x 1200 mm x 150 mmSize

€150,000 (Business Unit 1)Current annual spend in EURO

€ 45.00Current DDP price in EURO

6.5% (China – UK)Customs Duty

3923900000HS Code

480 pcs/ 40’HC Packaging

Dynamic Load capacity: 1000 kg (±5%)

Static Load capacity: 4000 kg (±5%)

Rack Load capacity: 1000 kg (±5%)

Rack Loading Deflection: 60 mm max

Description

50 % Virgin HDPE - 50 % Recycled HDPE Material

1520 pcs Quantity

Product PicturePlastic PalletProduct Name


Product DemandQuantity

Quantity/40'HC

Samplecharge

(US$/pcs)

FOB price(US$/pcs) FOB port

FOB - CIFtransporta

tioncharges

estimates

CIF Price(US$/pcs)

Import taxduty

CIF - DDPtransporta

tioncharges

estimates

DDP Price(US$/pcs) savings

plastic pallet 1520pcs

Quotations for plastic palletswith recyclable raw material加回料塑料托盘报价

MaterialProportions (%)回料比例

Quotations for plastic pallets without recyclableraw material (Virgin)不加回料塑料托盘报价

Heavy duty HD PE plastic pallet quotation

Type of pallet

Plastic pallets 1000x1200x150 mm（annex1)塑料托盘 1000x1200x150 mm (附件1)

Plastic pallets 1165x1165x150mm (annex2)塑料托盘 1165x1165x150 mm (附件2)

Request for information

To 收件人: Ms. Vi vi an XuEmail 电子邮件: [email protected] number 电话: 021 - 6141 3958Fax number 传真: 021 - 6141 3966

Company Name公司名称Contact Person联系人Title职位Email电子邮件地址Tel电话Fax传真Mobile phone手机

What date was your companyfounded?贵司是在哪一年成立的？Ownership (State Owned/Priviate/Foreign Investement)企业性质 (国有/民营/外资)Registration capital (RMB)注册资本 (人民币)What is the workfloor size (m²)?贵司工厂面积有多少平方米？

How many employees do you have?贵司员工总数有多少？What kind of certification do youhave (ISO, Environment friendly,etc)有何质量管理证书？(例如 ISO,环境Do you have good Englishspeaker and writer in yourfactory? (Y/N)贵司是否有可用英语进行书面及口语交流的人员？(是/否)Are you capable to produce HDPolyethylene plastic pallets likeshowed in annex and that respect all

DRAGON SOURCING 龙源有限公司上海代表处

INTEND TO RESPOND答复意向

Then, an RFI/RFP process is administered to filter out most capable suppliers

Businessinformation

Logo on the pallet

Product and priceinformation

Logisticsinformatio

n

Contact detailinformation


1 Shandong 13-Sep 27-Sep € 17.18 € 31.24 —2 Zhejiang 12-Sep 27-Sep € 18.29 € 32.43 19-Oct3 Guangdong 13-Sep 27-Sep € 18.43 € 32.57 19-Oct4 Fujian 12-Sep 27-Sep € 20.16 € 34.42 19-Oct5 Zhejiang 10-Sep 27-Sep € 22.86 € 37.29 —6 Beijing 14-Sep 27-Sep € 36.90 € 52.24 —

Sample sent

Company Information

FOB priceSupplier Region RFI/RFQ sent RFI/RFQ replied

RFI/RFQ follow up

DDP price

During the tender process, the suppliers’ willingness to collaborate and to provide complete and accurate information is also assessed

Supplier 2:– Recycled HDPE at 50 %– Fork Access

• Short: 255 mm (required: 350 mm)• Long: 270 mm (required: 365 mm)

– Central Block• Short: 190 mm (required: 190 mm)• Long: 190 mm (required: 190 mm)

Suppliers 4:– Virgin HDPE – Fork Access



Supplier 3:– Virgin HDPE – Fork Access



X

XX


1 Shandong € 17.18 40'c 325 € 10.34 € 27.52 € 1.79 € 1.93 € 31.24

2 Zhejiang € 18.29 40'c 325 € 10.34 € 28.63 € 1.86 € 1.93 € 32.43

3 Guangdong € 18.43 40'c 325 € 10.34 € 28.77 € 1.87 € 1.93 € 32.57

4 Fujian € 20.16 40'c 325 € 10.34 € 30.50 € 1.98 € 1.93 € 34.42

5 Zhejiang € 22.86 40'c 325 € 10.34 € 33.20 € 2.16 € 1.93 € 37.29

6 Beijing € 36.90 40'c 325 € 10.34 € 47.24 € 3.07 € 1.93 € 52.24

Current € 45.00

CFRFelixstowe

value

Customsduties

Freight costfor inland

transportationper unit

DDP EURpriceSupplier Region

FOBPurchasing

Price

Containertype

Number ofpallet in a 40

container

Freight costper unit

Then all relevant information is collected to calculate DDP prices

Shanghai

SHANGHAI

Gansu

JiangxiZhejiang

BEIJING

Jiangsu

Guangxi

Hunan

Hubei

Ningxia

Shaanxi

Anhui

Fujian

Neimongu

Shanxi Shandong

Sichuan

Yunan

Guizhou

Henan

Jilin

LiaoningHebei

Guangdong

Gansu

Heilongjiang FOB Price (supplier) Freight forwarding, customs & duties

DDP Price

3

5

4

2

6

1


Price Comparison

€ 0.00€ 5.00

€ 10.00€ 15.00€ 20.00€ 25.00€ 30.00€ 35.00€ 40.00€ 45.00€ 50.00€ 55.00

supplier1 supplier2 supplier3 supplier4 supplier5 supplier6

Logistic Costs from FOB China to UKFOB Price

Finally a Go/No Go decision to proceed is given based on the savings potential vs. the risk associated with changing suppliers

Current DDP price € 45/pcs

€ 31.24

€ 52.24

€ 32.43

€ 32.57

€ 34.42

€ 37.29










• Audit short listed suppliers











Key

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Short-listed suppliers are audited to assess long-term partnership opportunities

Audit questionnaire

Audit report

Audit summary

Objectives• Meet top management and sales management teams• Present order details• Refine supplier offer understanding• Understand organization• Validate manufacturing capabilities• Visit factory and check work conditions

Topics• General Management• Order management• Shipping / packaging• Planning process• Goods flow• Procurement• Purchasing• Production• Quality…


Collected information is shared with customer through detailed audit reports

GENERAL INFORMATION

SUPPLIER NAME XXXXX Plastic Products Co., LtdCity Ningbo

Province Zhejiang

Zip code 31555

Contact person L G

Job title Purchasing Manager

Email [email protected]

Phone number 86-0555-5555-5555

Fax number 86-0555-5555-5555

Website www.webpage.cn

BUSINESS INFORMATION

Found Year 1993

Ownership foreign investment Capital in million RMB 27.3

Work floor size (m²) 50,000

Number of employees 500

Revenue/Turnover (in million RMB) 2007 100

% Sales exports to western markets 90%

Main export markets US & Japan

Actual annual production of plastic pallets 45,000 pcs

QUALITY & ENVIRONMENT CERTIFICATION

ISO 9001:2000 YES

ISO 14000 YES

Others JIS, UL, CSA

FACTORY PICTURE

　

COMPLIANCE WITH LOCAL LAWChildren labor YES

Working hours YES

Health & Safety YES

Environmental issues YES　


Audit outcome is summarized in a rated profile of each supplier

DS Scoring Description

Please check the relevant

box

91 - 100 % Excellent

81 - 90 % Good

61 - 80 % Satisfactory

51 - 60 % Inadequate

- 50 % Poor

M 1 Management 77%4.1 Quality system and environment 80%4.2 Quality assurance and improvement process 90%2.1 Logistics: General 68%2.2 Logistics: Order management 64%2.3 Logistics: Expedition / Packaging 80%2.4 Logistics: Planning Process 64%2.5 Logistics: Goods flow 75%2.6 Logistics: Procurement 80%2.7 Purchasing 77%

T 3.1 Production and Work preparation 77%3.2 Development - general 75%

C 5 F&A 70%Average score 75%

Q

L

.0

.0


A closer look on collected samples shows slight feature differences among different suppliers

Supplier Name Province Recycled Stat. Load(kg)

Dyn.Load(kg) Fork Access Central Block Price €

FOB Picture

1 Shandong YES – 30% 1000 4000 Short: 220 mmFront: 270 mm

Short: 180 mmFront: 180 mm 17.18

2 Zhejiang YES – 50% 1000 4000 Short: 255 mmFront: 270 mm


3 Guangdong NO 1000 4000 Short: 260 mmFront: 260 mm


4 Fujian NO 1000 4000 Short: 260 mmFront: 260 mm


5 Zhejiang YES – 10% 1000 4000 n/a n/a 22.86

6 Beijing NO 1000 4000 Short: 268 mmFront: 268 mm



The final supplier selection relies on the short-listed suppliers’ offers, audits and sample quality

Suppliers’ quotation

Samples

Audit summary

Supplier Name

Supplier 1

Supplier 2

Supplier 3

Supplier 4

Supplier 5

Loadingamount 40Ft

in pcs

FOB-CIF SouthHampton 40Ft cost

FOB-DDPZaandma 40Ft

cost

1 Shandong € 20.00 325 € 3,360.64 € 3,988.27 € 30.34 € 1.97 € 32.27

2 Zhejiang € 21.11 325 € 3,360.64 € 3,988.27 € 31.45 € 2.04 € 33.38

3 Guangdong € 21.25 325 € 3,360.64 € 3,988.27 € 31.59 € 2.05 € 33.52

4 Fujian € 22.98 325 € 3,360.64 € 3,988.27 € 33.32 € 2.17 € 35.25

5 Zhejiang € 25.68 325 € 3,360.64 € 3,988.27 € 36.02 € 2.34 € 37.95

6 Hebei € 39.72 325 € 3,360.64 € 3,988.27 € 50.06 € 3.25 € 51.99

Current € 48.00

Import DutyEurope(6.5%) DDP PriceSupplier Region

Logistics Cost Estimation

FOB Price CIF PRICE

Supplier 2: – Recycled HDPE at 50 %– Fork Access



Suppliers 4: – Virgin HDPE – Fork Access



Supplier 3: – Virgin HDPE – Fork Access























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Overall methodology & 7-step process

Quality is regularly monitored during production and at pre-shipment

• Dragon Sourcing teams are trained to follow a 7-step process to execute Quality inspections

• Sampling and criteria requirements are detailed in a specific document for customer approval

• On-site data are recorded in a specifically designed Excel table

• Inspections are documented in a report submitted to customer

• Action plans are defined in order to improve product quality

Sampling & Criterias

Excel recording tool

Checkitem # Box # \ Marking Inner carton Mug Quantity Mug heigth Mug upper

diameterMug lowerdiameter

Wallthickness Mug weigth Material type Quality

1 OK OK 48 104.3 64.9 3.6 326 OK OK2 OK OK 48 103.4 64.5 4.2 346 OK OK3 OK OK 48 104 64.6 3.9 344 OK OK4 OK OK 48 104.6 64.8 3.8 317 OK OK5 OK OK 48 104.3 57 3.6 308 OK OK6 OK OK 48 104.8 61 3.8 317 OK OK7 OK OK 48 103.7 64.5 3.9 328 OK OK8 OK NO 48 103.8 62 3.9 345 OK OK9 OK OK 48 103.3 64.1 3.1 322 OK OK10 OK OK 48 103.2 63.4 3.7 325 OK OK11 OK OK 48 104.4 64.8 3.9 317 OK OK12 OK OK 48 102.3 64.2 3.2 316 OK OK13 OK OK 48 105.4 63 4 316 MO OK14 OK OK 45 105.6 65 4 322 OK OK15 OK OK 48 106.3 65.6 4.1 357 OK OK16 OK OK 48 103.4 65.5 3.9 311 NO OK17 OK NO 48 104.7 64.1 3.8 300 OK OK18 OK OK 48 104 60 3.8 342 OK OK


QC Reports provide detailed information concerning production quality


Supplier performance is closely monitored and new potential suppliers regularly audited in order to manage the supplier for continuous improvement

Supplier performance management Alternative sourcing opportunities monitoring

Overall performance

Q1 Q2 Q3 Q4

　　 Potential Supplier

2

Potential Supplier

3

Potential Supplier

4

Current Supplier

Price

Prod. 1 26.4 23.8 24.9 24.6

Prod. 2 36.1 33.8 34.9 33.7

Prod. 3 13.4 15.1 12.2 12.8

Prod. 4 40.2 38.1 41.3 38.4

Region Jiangsu Zhejiang Shanghai Shanghai

Turnover (M€) 6 14 8 19

Staff 350 700 430 880

Capabilities 100/day 120/day 75/day 140/day

Sample quality N/A Good N/A Good

Cooperation Good Good Average Good

Potential supplier assessment

Potential Supplier 1 Potential Supplier 2 Potential Supplier 3 Current Supplier

Competitivity Capabilities Motivation


Agenda

1. Context

2. Sourcing Process

3. Governance Model



The China sourcing programme is managed via a series of frequent conference call meetings

Dragon SourcingClient procurement unitBusiness Model• Dragon Sourcing is a service provider

assisting customer in sourcing and procurement activities

• Customer places Purchase Orders directly with selected suppliers and suppliers invoice directly Customer

• Customer pays DS a fixed monthly mgmt fee + evaluates every quarter Dragon Sourcing performance

Communication• Steering Committees weekly (conference

call) to review overall progress on all categories

• Categories follow-up meetings on an ad-hoc basis to review category issues

• Meeting minutes record main decisions, planned actions and project status

DS CEO

DS Account Manager

President

LCC Programme Director

BU1

Logistics

Buying Analyst

Buying Analyst Vietnam

Buying Analyst

Buying Analyst

Buying Analyst China

BU1 BU1 BU1

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer

Buyer


During these meetings, projects’ status and issues are discussed

Project No.

Project request date

Customer project leader

Job title Organization Product category

Current estimated

annual spend

Current supplier contract ending date

statusTarget

completion request date

Priority

1 Aug J H Buyer US Bouillon Cubes 1.3 M USD Dec Finished Oct Mid

2 Aug C L Cat Mgr BSPlastic Pallets

0.5 M USD None 1st Order Feb High

3 Aug C L Cat Mgr AUBread Baskets

3.6 M USD Dec Finished Nov Mid

4 Sep K M Cat Mgr WW Vitamin C 2.8 M USD Jan In Progress June High

5 Oct C L Buyer AU Bread Bags 1.2 M USD None In Progress TBD Low

6 Oct S G Cat Mgr UKAnimal Feed sacks 1.6 M USD None In

Progress TBD Mid

7 Nov M Q Cat Mgr BS GXNitrates and Phosphates Polypropylene

0.6 M USD None In Progress TBD High


Agenda

1. Context

2. Sourcing Process

3. Governance Model



Spend Categories

Bouillon CubesPlastic PalletsBread BasketsVitamin CBread BagsAnimal Feed sacksNitrates and Phosphates Polypropylene Sugar Sacks Carton packaging Bread Tins Twinings ProjectsTransportation and Warehousing 1 Ton Woven PP and 25 Kg Paper Sugar Sacks Beet Slicing Knives & FraisersIT System Telecom ServicesMultilayered Paper SacksNon-Dairy CreamerSoy ProteinsBuckets Etc….

The sourcing programme has covered a high variety of items

http://www.samsclub.com/shopping/navigate.do?dest=2&item=185824


Savings range from 5 to 30% depending on the product and the “as-is” sourcing situation

Generated savings per product(%)28%

6%9%

5%

12%

5%

0%

5%10%

15%

20%25%

30%

PlasticPallets

Animal Feedsacks

(AB Agri UK)

Animal Feedsacks

(AB AgriChina)

Polypropylenesugar Sacks

Cartonpackaging

Bread Tins

(%)


In addition to savings, the Client benefits from a range of other benefits from our “Sourcing on Demand” service

• Reduced sourcing risks in terms of:– CSR– Capacity/availability/delivery reliability– Quality

• Total Supply Chain transparency– Sourcing process (RFI, RFP, Audits, QCs,…)– Knowledge about the suppliers (regular visits by client)– Assurance that product is really made to the spec

• Pro-active market intelligence about category opportunities and innovative products in China

• Flexibility to increase/reduce sourcing capacity on Demand

• Window to other Asian countries (e.g.: Vietnam, Malaysia,…)

Creating Value with an Outsourced International Purchasing Office in China

Business

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