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Reducing risk in procurement from the Far East

May 28, 2024 | General

Procuring goods from overseas is the best way for your customers to get the perfect product at the most competitive price.

Providing you with an opportunity to access manufacturing skills and talent that potentially isn’t available in the UK, you also have the opportunity to tap into pricing competition.

However, procurement does not come without risk.

Risks such as component shortages, production delays, issues with raw materials, increases in oil prices, problems over unit cost negotiations, communication issues (made more challenging with language barriers), time differences, and more.

These risks all affect your business performance and bottom line, making it essential that they’re well managed.

This is where procurement risk management is essential and working with a professional procurement team comes in.

Types of Procurement Risk

Inaccurate stock-flow analysis – your stock-flow analysis focuses on your merchandise and understanding how a product sells, and this is vital information as you need to build into this analysis lead and shipping times to ensure you can continually meet demand.

Managing manufacturing and logistics effectively allows you to manage your stock flow correctly. Everyone wants shorter lead times, and it’s important to be aware that manufacturing lead times are negotiable, and your procurement partner can manage these discussions on your behalf, if they have the correct information from your stock flow analysis.

Experienced procurement teams will also be aware of the difficulties and challenges surrounding logistics and shipping (especially sea freight at the moment); however, using their experience, they can provide you with alternative options, for example, rail and road freight or courier express vs. traditional air freight.

Poor vendor sourcing and management – it’s vital to evaluate all suppliers in the supply chain in depth at the beginning of any procurement relationship. Carrying out due diligence to have confidence that the supplier you source can actually deliver what they say they can, and that the factory chosen for manufacturing has the correct productivity production certification and supplier management audits.  

In addition, when you finally source the supplier, who is responsible for managing the relationship effectively? Checking that KPIs are met, quality standards are upheld, etc.? Having someone in place to manage the supply chain is vital and often mistakenly overlooked.

No contract or written agreement— this is a critical area, as ultimately, you won’t have a complete understanding of what is required from you without an appropriate contract in place. For example, if goods are inspected and they fail the inspection, who is responsible for correcting this? Or, if the lead time on production is meant to be 30 days, but it takes 60 days, is there a penalty charged? Is there even an understanding that the 30-day period was strict?

Without subject matter expertise and incomplete or out-of-date data, you risk being entitled to nothing when something goes wrong.

Price instability – prices have increased over the past 12-18 months as the cost of raw materials has risen considerably. When procuring overseas, these costs must be considered, along with understanding how often price increases happen, what happens if exchange rates change, etc. It’s also important to understand that when purchasing goods from the Far East, these transactions are carried out in dollars. However, this isn’t the local currency, so factories will have to convert to local currency to pay their staff. There must also be an understanding between you and the factory that prices must be held and remain valid for a certain period. Again, this should be negotiated and built into robust contracts.

Supply chain bottlenecks – often, bottlenecks occur when someone places an order before development has finished; as if the product is still being developed, there are still several things that need to be signed off, and this can take a long time to complete, all while the original order is in place.

For example, packing compliance is a huge area, and areas such as warning labels, chemical testing information, etc., must all be included on the packaging; otherwise, you won’t be able to get your product into the destination country, causing bottlenecks within your supply chain.

Mitigating Risks in Procurement

Working with an experienced procurement partner when sourcing goods from the Far East can significantly reduce risks and bring you a wealth of benefits.

How?

Experience

Experienced procurement partners understand supply chains and work with trusted suppliers who have previously and are regularly vetted and checked.

They use their experience to support you in areas such as pallet loading and various shipping options. They help control lead times, manage risk on a balanced scale, and ultimately ensure a smooth process from development to production through to packaging and delivery.

Through carrying out robust and thorough supplier vetting

Experienced procurement partners will have established relationships and networks in the region. Relationships that have grown from suppliers who have been appropriately vetted for their reliability, level of quality, and compliance with regulations and guidelines.

This reduces the risk of working with non-compliant suppliers, which can negatively affect your brand image and reputation through association. It also prevents you from receiving low-quality goods that don’t meet standards or specifications.

Having clear levels of communication

Communication needs to be clear and quick. You need to get to the point, using language that cuts across the barriers as you avoid colloquialisms and nuances.

It’s important to be direct and explain what you want and how you want it, all of which should be supported by a proper technical file for your desired product.

Procurement teams with local expertise and teams in the region can help bridge the communication gap and address any cultural and language barriers. Facilitating effective communication, hence reducing the risk of misunderstandings and misinterpretations, allows for better negotiations with suppliers.

Ensuring full compliance with regional regulations

Experienced procurement teams are well-versed in international laws and regulations. They can help you navigate this minefield with little disruption to your supply chain, avoiding hefty fines and goods being seized.

Ensuring ethical working conditions and fully compliant products, procurement partners help to reduce the risk of you being fined. (For example, importing the wrong pallet type can cost you in excess of a hundred thousand pounds.)

That’s why at GHL procurement, we work with compliance experts to ensure that all products are fully compliant and meet all ethical standards.

Securing better terms with detailed contracts

Agreeing terms and conditions should be completed early on in the supplier relationship.

Of course, payment terms can vary. For example, some standard terms include 30% payment on ordering, with the remaining 70% paid on completion. Others request payment 90 days after completion. Pay on arrival of goods. And for smaller orders, sometimes payment can be requested upfront.

Whichever payment term is agreed upon, it must be understood and communicated with both parties at the beginning of production.

Terms can also vary and are negotiable. For example, who is responsible for compliance testing? Are you purchasing based on a FOB basis (Free on Board)(identifying who is responsible for the goods if they are damaged during transit), or are goods paid for in advance? What are the lead times? Are there any penalties built in if these aren’t met?

By leveraging your procurement partner’s networks and negotiating power, they can often secure better pricing and terms from suppliers, helping to reduce procurement costs and minimising the risk that you overpay for the goods you require.

Check out our post on “How a procurement partner can boost your business operations.”

Carrying out regular quality checks

With people based in the Far East working with local factories and suppliers, regular quality checks can be carried out to ensure that processes and standards are followed.

This can include onsite inspections and audits to ensure goods all meet the agreed standards. Meeting people face to face is the most effective way to build a good relationship in person rather than creating a purely transactional relationship.

This tracking of supplier performance prevents you from receiving substandard or defective goods.

Having a contingency plan for disruptions

Risk management is a vital part of procurement, and it’s crucial to identify and mitigate various risks associated with procuring from the Far East.

Implementing risk management strategies that safeguard the procurement process when challenges arise, such as currency fluctuations, geographical issues, supply chain disruptions, and even regulatory changes.

Looking outside the Far East is one way to build resilience into your supply chain. For example, can you source the same product/service in Turkey or India? Providing you with suitable alternatives and reducing the level of risk if something does go wrong.

Providing Confidence

At GHL Procurement, we bring you our expertise in sourcing, negotiating, and managing suppliers so you receive high-quality goods delivered on time and within schedules outlined in detailed, robust contracts.

We take on the responsibility of procurement, ensuring that the products coming from the factory are of high quality and meet all the required checks and compliance standards.

Providing you with confidence through our experience, hard work, and unrivalled understanding of the supply chain process we offer quality control and assurance, competitive pricing, international logistics, and support with supply chain resilience.

Partnering with us reduces risks, complexity, and cost.

Supporting agile processes, which give you a competitive edge, we are a British-owned business with staff in the Far East working only with approved factories. For a procurement partner, you can have confidence in contact us today. Alternatively, check out some of our procurement products online.

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