Many companies are, for the first time, seriously considering relocating manufacturing out of China. Relocating outside of China may be the best decision (though not always) for a company given the changing economic and geopolitical landscapes; however, it is not a quick nor easy process. We have highlighted the difficulties and recommended solutions to those challenges in previous blogs.
There is one difficulty that we have not discussed previously and that is how you should handle your previous supplier. It is rarely as simple as a gentlemanly handshake and wishes of best of luck all around. There is a loss of product expertise when leaving a supplier, especially a long-established one. For companies that have not manufactured their products in a long time will most acutely feel this loss. Often times, suppliers may retaliate in direct and indirect ways for a sudden departure.
Here we will give you an overview of your options for dealing with a supplier and how you can protect your company as you find a new supplier and/or develop your own manufacturing operations.
What are Your Options?
There are two primary options that companies have when they want to find a new supplier outside of China: partner with their existing suppliers in China to start new operations elsewhere or move on without them.
Partnering with Your Current Supplier
A lot of companies choose to partner with their suppliers to move out of China. “Partner with” is used broadly in this case. Some companies demand that their supplier start manufacturing operations outside of China while others form a partnership to help defray the costs of moving or even set up a joint venture. For the purpose of this example, these lead to the same result: a new location with the existing supplier.
There are a lot of advantages to this method. It keeps continuity between the existing and future manufacturing operations and builds on a pre-existing relationship. The supplier probably already understands how to manufacture your product and has the expertise to do so. On the other hand, any problems with the existing manufacturer will likely become more pronounced at a new location as they will take the process to a new location with new people that will need to be trained. A relocation can be successful and improve the outcomes compared to the previous location; however, our experience shows that it can be a long and challenging road.
Move On
Moving on to a new supplier or manufacturing your products is the other option. These two options will take your company down to different roads yet are useful as an example as both involve a break with your current supplier. Moving to a new supplier or manufacturing yourself can help mitigate risks from manufacturing in China. It also can give you more control and an opportunity to improve manufacturing outcomes.
There are significant risks to consider. The first is the potential loss of manufacturing expertise, as mentioned previously. The risk is greatest for specialized products that few other manufacturers know how to make. A client of ours had this problem. The company leadership believed that they could force the supplier to accept unfavorable terms. The majority of the leadership came from the apparel industry where there was no shortage of available suppliers and strong-arm tactics are more successful. For specialized products, it is not so easy. Both the buyer and the supplier need each other.
A risk we see more companies grapple with is searching for replacements or starting their own manufacturing operations without the existing suppliers finding out. Unsurprisingly, suppliers do not want to give up business so they may punish the buyer if the buyer’s intentions are discovered. A supplier may decide to raise its prices to the buyer if they think they will lose business in the near future. It is a logical action on their part as it allows them to maximize the revenue for their current business since there will not be any further business.
A longer-term risk is that the company may start to sell its former company’s products on the open market. Even a casual search on Alibaba or MadeInChina will show dozens of companies providing products that look suspicious close to existing products. The supplier often has the drawings, the expertise, equipment, and sometimes even the molds so reproducing their previous customer’s products is easy.
How Should My Company Avoid the Risks of Moving On?
If you want to start your own manufacturing operations or move to a new supplier, you must carefully plan your activities. Start by determining what options you wish to pursue and then develop a reasonable timeline to research the options and execute them. There is no need to make any changes to your current business relationship with your supplier while you are planning to leave.
How you execute the plan can depend on a large number of factors such as what your exact goal is, what the product type is, and your expertise with sourcing and manufacturing. Many of our clients find that employing a third party is useful as it creates a layer between you and your client. A third party allows your company to go about business as normal and focus on the existing challenges and long-term planning.
We recommend starting out slowly. Gradually reduce the orders instead of an immediate cut. Doing so gives your company the flexibility to return to your current supplier or keep them as a secondary source going forward. If you are expanding, it is advantageous to keep the current supplier at or near their production and produce new products yourself or from a new supplier. Doing so allows for gently phasing out old products without major disruptions.
Navigating the changing economic landscape is difficult and it is important to understand the impact your future planning will have on current operations. Understand your goals and your relationship with your current supplier before making any large moves or big announcements.
What can MTG do to help you improve your operations?
