Global Suppliers

Taking the risk out of Asian sourcing
Careful checks of potential suppliers can head off quality and reliability issues
Gordon Graff
Purchasing April 7, 2005
 


 
Before choosing a new supplier in Asia (or elsewhere)…Visit its production sites Evaluate its financial stability Check its reputation Analyze its product samples for quality, consistency Place trial orders Assess regulatory certification needs Check its documentation and record-keeping policies Check its labeling and packaging policies Check its transportation and shipping policies SOURCE: VARIOUS INDUSTRY SOURCES


ADVERTISEMENT
Chemical and pharmaceutical companies with long experience procuring raw materials from China, India and other parts of Asia usually report few problems with the quality of the imported goods and reliability of their suppliers. But issues can and do arise if a company is new to Asian sourcing and has not carefully investigated potential suppliers. As a result, veterans of Asian chemical procurement advise newcomers to the region to do their homework before choosing a supplier.

For chemicals, "the Chinese situation right now is kind of like the Wild West," says Mark Silver, president of Special Materials, a New York-based specialty chemical producer that sources about 85% of its raw materials from China. A new class of freewheeling entrepreneurs is rapidly sinking capital into factories and seeking quick returns on their investments, he notes. Meanwhile, he adds, the future of the older state-run factories is uncertain as China steps up its transition to a market economy.

While the proliferation of privately owned plants and factories in China means more choices for foreign purchasers, it also presents risks for the unwary, say procurement managers, since quality and consistency of products may not be the top priority for profit-conscious owners of these enterprises, and some of these businesses may be on shaky financial ground. Dealing with a state-owned plant can also be risky, they note, because it may be phased out in the future.

Then there are a variety of cultural issues that can be troubling for Western chemical importers. "We've had situations where we had, say, a 97% minimum purity standard" for an imported Chinese chemical, says Silver, "and it came in at 99.5% one time, and 97.5% another time. The Chinese factory may say 'the more purity the better,' but in this country, our standard is not 'purer is better,' but 'the same is better,' and that's a point we have to get across."

Similarly, the sometimes casual attitude in Asia toward delivery deadlines can be problematic. In many parts of Asia, a promised delivery of "tomorrow" means "tomorrow or the day after," says Nailesh A. Bhatt, managing director and CEO of Proximare, a Princeton, N.J. consulting firm that advises pharmaceutical and biotechnology firms about sourcing in India and China.

Long-term importers of chemicals from Asia cite other problems that sometimes crop up. These range from sudden jumps in the prices just before they are shipped, to mislabeling of imported goods—which can lead to fines by custom officials, or even seizure of the goods at seaports.

The Western chemical companies that have been sourcing in Asia the longest usually have well-established relationships with suppliers they can trust. But they have usually put years of effort into developing these relationships. Many of these firms have set up offices in China and some do their own manufacturing there. (Foreign chemical manufacturers in China can now own factories outright, and are no longer required by law, as they were until a few years ago, to form a partnership with a state-owned business.)Changing environment

The experience of one company, Wego Mineral & Chemical, illustrates how chemical sourcing from China has evolved over the years. A global distributor and manufacturer of a wide range of specialty chemicals, Wego has been sourcing raw materials from China since 1980 and now obtains about 85% of its supplies from that country. Most of its manufacturing is also done in China, with the exception of one U.S. plant. Executives at Wego, which is headquartered in Great Neck, N.Y., report dramatic improvements in quality and reliability of suppliers in China over the past 25 years, and Wego has been the beneficiary of these changes.

In the early 1980s, chemicals sourced from China, typically from Hong Kong traders or Chinese-owned companies, were often inconsistent, with properties varying from shipment to shipment, recalls Bert Eshaghpour, president of Wego. To overcome this problem, he says, "it soon became clear to us that we had to pursue relationships with the factories in China that were actually producing the chemicals."

Much of this early interaction with the factories involved upgrading their equipment and processes to produce more uniform materials, recalls Wego principal Edward Khalily. For example, he says Wego supplied some Chinese factories with crystallizers and grinding machines when their equipment was not up to the company's standards. Wego also revamped some producers' citric acid facilities "from soup to nuts," Khalily adds. (Like Wego, many other companies from North America and Europe have cultivated relationships with Chinese plants and helped them, when necessary, to meet their standards.)

Today, Wego has offices in four Chinese cities: Beijing, Shanghai, Chongqing and Guangzhou and operates two of its own factories in the country, one in Qingzhou, another in Kunshan. Last year, Wego bought Degussa's thiourea dioxide business and is now making that product in China for international distribution.

The strategy of forging ties with individual factories and opening offices in strategic locations around the country is essential to assure continued quality of chemicals sourced in China, Khalily says. "Your presence in a meaningful manner" at the sites of production is also a must, he continues. Khalily says he and some of Wego's product managers from the firm's headquarters visit its manufacturing sites in China four or five times a year.Background checks

But how can companies with little or no prior presence in Asia ensure the quality and reliability of chemical imports from the region? The first step, advises Bhatt, should be "a very detailed background check" of any potential supplier. This includes visits to its plant, talks with its management and evaluation of the company's finances. For Western visitors who are unfamiliar with the cultural and business terrain of Asia, says Bhatt, there are companies like his own. Proximare evaluates its clients' sourcing needs, then escorts them around India or China and introduces them to appropriate suppliers with good track records for quality and reliability.

Of course, not every firm interested in sourcing from Asia has the means or the time to visit the region. Many hire agents, who can be helpful when price is the main objective. But agents can also be risky. "The prime motive of agents is to sell and get commissions," Khalily says, with quality and reliability lower on their list of priorities.

Electronic marketplaces are another way Western companies make contact with Asian chemical suppliers. But again, buyers cannot always be certain of the reliability of a supplier they have located through this mode. One online chemical marketplace, ChemConnect, says it has developed some features specifically to help its users get a better feel for the type of organizations they are dealing with. According to Eric Paulsen, vice president for commodity markets at ChemConnect, users can obtain "preliminary qualification" information on suppliers from all over the world, including production capacity, research programs, references and supply chain arrangements. "While ChemConnect does not officially provide ratings of suppliers," he says, "we do inform buyers of previous problems with a given supplier."Evaluating suppliers

But many chemical and pharmaceutical firms, especially the larger ones, have their own internal procedures for finding and evaluating reliable new suppliers from Asia. At Philadelphia-based Arkema, David Albany, director of chemicals purchasing, says his firm—the chemical unit of the Paris-based Arkema Group—uses the same qualifying procedures for new suppliers in Asia, Europe and the U.S. When evaluating a potential supplier, he says, "typically we first want to get some sort of a small lab sample" of the product for analysis. "We also have to do specification approval and regulatory reviews," he adds, "particularly for imports." After these hurdles, Albany continues, "there are usually some trial runs." Another review, he says, focuses on the product packaging and the way it is shipped "to make sure it will be handled properly." Finally, he adds, there are financial checks of the supplier.

Plant visits to ascertain production standards are also part of Arkema's qualifying process, says Albany, in Asia and elsewhere. For China in particular, Arkema's procurement people source for both the company's manufacturing plants in that country and for its global supply chain.

International chemical distributor Univar also has an established routine for weighing the qualifications of new suppliers in Asia. When investigating such suppliers, "one of the things we find critical is an onsite inspection of factories," including "a fairly extensive interview" of the factory managers, says Tom Biggs, director of international sourcing at Univar USA, located in Kirkland, Wash. In the preselection process, he adds, "we look for producers who have their quality processes in place and who can provide exactly what is specified in our orders."

For suppliers without an established reputation, says Biggs, the evaluation process may include not only the plant visit but independent sample testing and a few trial orders. Evaluations are made easier, he notes, because Univar has set up offices in China and India to facilitate interaction with individual manufacturers in those countries. Both Univar's U.S. and European divisions use the same approval process, so an Asian supplier approved by either division can sell to the other.Documentation is a must

Even if imported chemicals pass a purchaser's internal test for quality, they often must receive official certifications if the buyer hopes to sell the materials for food, drug or other highly regulated applications. Depending on the type of chemicals, these regulatory approvals might include ISO certification, FDA registration, Underwriters Laboratories certification, or even Kosher certification. To obtain such approvals, importers must be able to provide such services as lot-by-lot analyses, and certificates of origin that trace a product back to the plant where it was manufactured.

Buyers are also responsible for supplying a material safety data sheet (MSDS) on each chemical they import, and for making sure that any hazardous cargo is properly labeled in accordance with rules of supervising agencies such as the U.S. Dept. of Transportation. Bills of lading declaring a cargo's contents must also be accurate and complete to avoid possible fines or seizure of the goods by customs officials.

Ideally, say importers from Asia, providing the documentation to support certifications and compliance with regulations should be integrated with the purchasing process. At Wego, for instance, Eshaghpour says that every product the company purchases includes with the shipping documents a certificate of origin and analytical data for each lot.

Even if products purchased from an Asian supplier initially meet all quality and regulatory requirements, some erosion of quality may occur over time. One way of avoiding this, says Bhatt, is for customers to drop in on the offices and factories of their suppliers in Asia at least twice a year. Although this can be a hardship for companies with no local offices in Asia, such visits, says Bhatt, "create a tremendous rapport" between the parties and encourages suppliers to keep up their standards.

© 2005, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.