It's Not You and It's Not Me . . . It's Our Guanxi

Long-distance relationships are always tough. Even in these days of instant messages, Blackberry addictions and computer conferencing, big things can and often do get lost in translation with your suppliers.

The fact is, the more distant the supplier, the more important the relationship becomes, but in practice, the more distant the supplier, the weaker the relationship.

Since China has become North America's preferred overseas destination for low-cost sourcing, it seems like the perfect strategy, right? The North American company and consumers get what they need at lower costs, and the Chinese manufacturer/distributor gets the business it needs. Everyone is happy, right?

But there are clear signs in the business world that this honeymoon is over. Why? Because the most significant part of Supplier Relationship Management (SRM) -- the actual Relationship -- has either not been fully developed or has been insufficiently nourished in order to thrive. SRM goes to the heart of successful Supply Chain Partnerships, and in China, Guanxi is at the heart of any business, government or personal relationship. More on Supply Chain Partnerships in this article: http://www.tompkinsinc.com/publications/competitive_edge/articles/11-08-supply_chain_partnerships.asp

If you don't understand Guanxi, then you have no business doing business in China. Click here for a great post about the term, "Guanxi for foreigners," in the China Business Blog and Podcast: http://www.technomicasia.com/blog/2005/08/15/many-foreigners-on-their-first-visit-to-china-le/

Loosely translated as "relationship," it really goes way beyond that meaning. With suppliers, Guanxi is a general and deep type of understanding between two entities in which both are aware of the other's needs and always take them into account. It's an ongoing process and often flows on a more personal level than Westerners would consider a typical business relationship.

To source well today, it takes communication on the Guanxi level. It also takes forging a strong supplier relationship while focusing on building a solid global supply chain. Consider these two recent situations, which I learned about first-hand from executives who do major sourcing from China.

Example #1:

The head of global sourcing was nervous. Her company had only one source for a key component that was coming in from China.

Supplier A had done a good job, but from time to time had trouble meeting schedule. The head of global sourcing contacted her agent in China and requested that alternative sources be identified, so as to minimize her risk with Supplier A.

After a long negotiation and qualification process, two alternative suppliers (Suppliers B and C) were identified. Each was given about 25% of the volume. This increased costs but gave the head of global sourcing a sense of security.

When volumes increased, the company hired a China-based consulting firm to do an assessment of the three suppliers. After some digging, the consultant found that A, B and C were all owned by the same firm.

Now, I ask you, how do we expect to source well if we do not have a relationship with the firm with whom we are sourcing?

Example #2:

Out of frustration, a vice president of supply chain for a firm headquartered in North America worked through the entire weekend on a detailed schedule of the exact SKUs and quantities he needed for the next 12 shipments from the company's distributor in China.

Shipments up until then had been way off the mark, but the vice president believed his exact instructions would solve the problem. On Monday morning, he emailed these detailed shipping instructions to his contact in China.

Sixteen weeks later, in came the first of the 12 containers. The VP went to the warehouse as the container was being unloaded and was shocked to see little resemblance between his email instructions and the shipment. The second and third containers were also not to his specifications.

Perplexed and aggravated that all of his work had been for naught, the vice president called the distributor in China. He asked the supplier why his detailed directions were not being followed, and was surprised to learn that the distributor doesn't bother with email, and probably never saw the detailed instructions.

Quality communications are not defined by what you say or write -- but by what the person you are communicating with hears or reads. An effective global supply chain requires quality communications, and the definition of "quality communications" varies from culture to culture.

So what is the solution here? In the North American business arena, SRM is often perceived as the application of SRM software to enhance Supplier Management. But when crossing the ocean, that is not the case, SRM is not about Supplier Management, but the Relationship. Of course, there is SRM technology that is useful for facilitating communication between suppliers and companies, but true SRM with China is a one-to-one process.

SRM in today's global marketplace is simply not about a company lining up all their suppliers and forcing them through the implementation of software. It's about a tailored approach to SRM emphasizing the Relationship and understanding your supplier partner's ways of doing business.

I'd like to hear what you think about global sourcing. What problems have you encountered, and how are you solving them? Are your suppliers in China, and if so, how's the Guanxi?



Jim