A leading fishing equipment and accessories company achieved an average of 26.74% cost savings by sourcing directly from Chinese manufacturers
A leading Nordic fishing equipment and accessories manufacturer wanted to assess if it had the best possible supply base in the market for its Indonesian factory.
The company has production facilities in both Europe and Asia. Their primary production site is based in Indonesia. The main raw materials for production are chemical powders, most of which come from distributors in Korea, China, and Indonesia.
Asia Perspective was contracted to review the client’s sourcing practices and supply base to present a fact-based assessment of the current operational efficiency and identify potential areas for cost reduction. The assessment included an analysis of the Chinese chemical powder market, evaluations of the company’s purchasing terms, and recommendations for improvements.
Prior to engaging Asia Perspective, the client ordered the majority of materials from only one distributor, rather than from manufacturers directly. By purchasing directly, the client can build direct relationships with the suppliers and bypass the middlemen.
Asia Perspective studied the chemical powder industry in China thoroughly and identified major trends in the following areas:
- Industry Size: During the last 5 years, the Chinese chemical market has increased ~5% annually. It is expected to be worth €1.3 trillion by 2025. In China, there are 30,000 large chemical companies with annual sales of ~€2 Million or greater capable of providing a variety of chemicals. This enables the company to purchase most of the relevant chemicals within China instead of in multiple countries.
- Localization and Quality: Due to the market saturation of basic chemicals available for sale, many Chinese companies are creating R&D departments to enhance their competitiveness. This action does not only increase the quality of their products, but also reduces the cost of production. The client would benefit from this competition in purchase price and quality if they decide to order from China.
- Exports and Environment: Chinese companies are expanding through exportation of their chemicals overseas. With the improvement in logistics channels, the average lead time of a transaction has been reduced to 5-10 days in total, a significant improvement from the current state. Additionally, the environmental protection are governmentally regulated. Most chemical companies are required to have ISO9001 and ISO14001 for operations. RoHS and REACH are also required when applicable.
To find the best cost-savings opportunities, a comprehensive study must be implemented to identify products with high cost-savings potential, to evaluate China’s chemical powder market, and to benchmark and create implementable recommendations.
- Preparation: Before the project began, a kick-off meeting was held between the client and Asia Perspective to understand the client’s current state purchasing process. The meeting enabled the team to discover products with the highest cost-savings potential. Additionally, it enabled Asia Perspective to clarify the project objectives and evaluation criteria.
Three categories (PVC powder, pigment, and stabilizer) were identified to have the highest cost savings potentials. The best outcome will be to either find new suppliers or to improve the contract terms with the current suppliers. This established the baseline for the benchmarking evaluation.
- Market Study and Evaluation: 131 suppliers, including both manufacturers and distributors, were contacted. This enabled Asia Perspective to have an overview of the Chinese chemical powder market, including technology, price, quality, export capability, and purchasing terms. A set of criteria was created to evaluate the supply base. Asia Perspective was able to identify 5 alternative suppliers for PVC powder and pigment. We also benchmarked the purchasing terms for stabilizer.
- Recommendations: Shortlist of suppliers, achievable cost saving targets, and additional processes were presented to the client so as to assist their decision on how to improve supply management.
- Balancing cost saving potential and transition cost, we recommended that the client onboard new pigment and PVC suppliers from China and retain the current stabilizer supplier.
- Three new suppliers (2 for pigment and 1 for PVC) were highly recommended to the client.
- The client should contact potential suppliers to verify product information and request samples for trial. The client must fully test the products before ordering any new materials for mass production.
- A total of 131 suppliers across the three commodities were evaluated based on experience, technical knowledge, qualification, and professional communications
- 16 suppliers were short-listed and 3 of them were recommended in the end (2 pigment; 1 PVC)
- By optimizing the supply base, the client, could expect an annual cost savings of 26.74%, with an optimal total cost savings of 47.03%:
- Pigment: average cost savings/year of 32.58%; optimal cost savings/year of 68.92%
- PVC: average cost savings/year of 24.78%; optimal cost savings/year of 32.31%
- Stabilizer: average cost savings/year of 3.08%; optimal cost savings/year of 10.53%