China’s economic growth has been praised by some, feared by others. But while the strength of the Chinese economy represents a paradigm shift in the global business environment, U.S. businesses should not fear the implications of the Chinese boom.
Instead, American managers should work to embrace the benefits that Chinese economic growth can offer their businesses, and begin to make peace with this burgeoning giant.
If China is the country that everyone is talking about, outsourcing is usually the theme of the conversation. More and more businesses are sourcing products from China, where labor is abundant and relatively inexpensive, and manufacturing processes have been refined by increased market demand.
Rising pricing pressures have increased global competition, creating a race to the bottom line and forcing companies to procure products from the lowest cost sources globally.
China has become a recognized powerhouse in global production and supply chain operations. Sourcing product from China allows companies to obtain savings of 30 percent to 50 percent, ultimately driving down prices and making businesses more competitive.
This downward pressure on prices delivers tangible savings to a company’s bottom line, all the while improving cost structures and making goods more affordable. The end result? Increased profits for businesses and abundant choices for consumers.
The benefits of implementing a sourcing initiative are clear, but oftentimes managers are unsure of where to begin. Luckily, there are three steps businesses can follow to help simplify the process and maximize their return.
- Step one: Start small. All too often, businesses that have decided to source products from China begin with their most popular or expensive product.
But business owners should recognize that there is a learning curve associated with sourcing products from global markets, and should begin their sourcing experiment with a simple product to test the initiative and make adjustments if needed.
- Step two: Find the right partner. For businesses that choose not to establish a Greenfield manufacturing operation or acquire an existing manufacturer, choosing a suitable agent or sourcing office is the business equivalent of finding a spouse; it is one of the most important decisions a business can make.
When choosing a supplier, managers should discuss quality standards, lead times, procurement practices and payment terms at length with any potential business partners. Factors such as duties and tariffs, as well as transportation and freight forwarding costs, should also be considered.
Outsourcing part of a business’s production process or supply chain can carry costs unfamiliar to U.S. businesses, and managers should take care to calculate and analyze these costs before deciding on specific business partners.
- Step three: Measure performance. After managers have outlined the sourcing strategy, they should establish a system to monitor, record and report the results of their sourcing experiment. They should monitor product quality, as well as the movement of products through the supply chain, in order to identify areas in need of improvement.
Each business partner should understand its role and responsibilities, and the performance of the global sourcing initiative should be tracked and discussed. Where have cost reductions been attained? What impact has the sourcing initiative had on product lead times and inventory levels? How has the operation affected the company’s bottom line? Managers should consistently reevaluate their sourcing initiative in order to refine and improve their strategy.
Paradigm shifts within the global business environment have always been met with a mixture of praise and fear. China’s rise as a global economic power raises serious questions regarding the future of outdated business processes, inefficient cost structures and protectionist economic policies.
But it also offers American business owners an opportunity to leverage the strengths of the Chinese business environment and improve their own businesses. In the upcoming years the Chinese economy will continue to grow, and American businesses will be forced to further adapt their behavior in order to accommodate China’s presence.
The best strategy to manage change is to embrace it, and adopting global sourcing solutions is the first step toward making peace with a rising star.
Denny Bolzan is a principal with Pfingsten Partners L.L.C., an operationally oriented private equity firm located in Deerfield, Illinois. For more information, visit www.pfingstenpartners.com.
Communication (days 1 through 15)
At the point of closing, communication to employees, customers and vendors is essential to minimize anxiety and potential disruptions to the business. The content of the communication should be tailored for each stakeholder, and include topics such as ownership transition, customer focus, growth and a team-based management style. Shortly after closing, establish long-term communication programs for shareholders, employees, customers and vendors, using input from managers and the employees themselves.
Planning (days 60 through 90)
Clear strategic and tactical plans are essential for building a better business. One way to set the strategy is to hold a two-day, offsite meeting with senior management and middle managers. Share due diligence findings, historical financial data, operational performance data and industry benchmarks with the managers. Armed with this data, new ownership and managers can work together to identify strategic goals and a tactical plan to address growth opportunities, customer satisfaction, human resources, infrastructure, operational improvements and financial management. After this initial planning meeting, the team can produce a financial plan that supports the strategic goals and tactical plan. Then execution begins.
Organizational alignment (days 90 through 120)
Cultural and economic alignment between ownership and management is essential for building a better business. Open communication (e.g. employee surveys, newsletters, employee meetings, events, planning sessions and management meetings) and a team-based management style (which empowers employees and promotes cross-functional cooperation) accelerate the cultural alignment, particularly at companies that previously had centralized decision making and an autocratic management style. Economic alignment is achieved during this period through the creation of incentive-based compensation programs and offerings to purchase or earn equity in the new company.
Tools for execution (days 120 through 180)
After plans are completed and execution begins, establish visual metrics to measure progress versus goals or other benchmarks. Display these performance metrics in common areas of each facility to serve as both a measurement and a communication tool for employees, customers and vendors.
The first six months following an acquisition is a critical period. A properly executed transition plan that provides open communication, strategic and tactical planning, organizational alignment and tools to enhance execution will accelerate the process of building a better business and shareholder value.
Denny R. Bolzan is a principal at Pfingsten Partners LLC. Reach Pfingsten Partners at (847) 374-9140 or www.pfingstenpartners.com.