The emergence of international outsourcing agents in China: a new type of player in international supply networks.

• Author: Liu, Zheng
• Position: Case study

ABSTRACT

As China emerges as a centre of manufacturing of the world, more and more small and medium sized enterprises (SMEs) start to outsource their production and related supply chain management in China. But it is very difficult to effectively manage the international outsourcing and supply chain mainly because their limited size and resources. International outsourcing agents emerge as a potential solution pursued by many western companies. Currently it has very limited information from both practical and theoretical aspects to understand the agents and their characteristics. This paper, based on four case studies of agents in three major industrial sectors in China, introduces business models and growth paths of the international manufacturing outsourcing agents, and establishes a set of key performance indicators (KPIs) for evaluation. The paper seeks to help western SMEs and high-tech startups recognize the Chinese maturing and an ideal system for implementation, and to provide theoretical insights about the agents role and characteristics in international supply networks.

Keywords: Outsourcing, Agent, International Supply Network

INTRODUCTION

In the last twenty years, China's economic growth has been accompanied by increasing amount of foreign direct investment (FDI) inflow. In 2003, foreign funded enterprises, including Hong Kong, Macao, and Taiwan, contributed 31.2% gross output value. FDI has also brought advanced technologies and management skills into China, and helped China emerge as a manufacturing centre of the world.

Most recently, a new type of collaboration between foreign and Chinese companies are mushrooming in the established manufacturing regions such as Pearl River Delta (PRD) region led by Hong Kong and Dongguan, as well as some clusters like Kunshan and many small counties in Zhejiang Provinces in Yangtze River Delta (YRD) region. The main driver is many small and medium sized enterprises (SMEs) in the western countries as they are facing serious competition and attracted by the much lower costs and maturing capabilities offered by Chinese manufacturing companies. The new form of international outsourcing is now normally carried out through the cooperation of western original equipment manufacturers (OEMs), agents (E.g. import and export companies) and Chinese manufacturers, yet models can be various. Some large OEMs can set up their own manufacturing facilities, whereas others prefer directly contacting manufacturing partners who have import and export licenses. Questions turn out as SMEs or Research and Development (R & D) oriented high-tech startups who have design models want to have their products manufactured in China too. However, their limited resources and small products order volume do not allow establishing factories in China. The geographic distance, culture difference and unfamiliarity with Chinese industry constitute communication problems. Some SMEs and startups are so small that they are even unable to send their managers or engineers to China to monitor and control their products. They strategically need a new type of agent to help them smoothen the supply chain and ensure their products reaching expected levels of quality, quantity, time, cost, service as well as public image.

The manufacturing process can be divided into three stages, purchasing raw materials, production, assembly and packaging. Due to the distance and cultural differences, western OEMs or SMEs cannot control what is happening in the Chinese factories under this new type of international outsourcing arrangement. Problems and dangers exist in each stage of the manufacturing process. In terms of raw material purchasing, the factory may use cheaper materials than specified or copied components instead of imported original ones. The detection of this problem is very difficult as other materials or copied goods may look the same but are definitely of inferior quality. For the production process, western OEMs are worried that the product may be different from the sample. For example, samples are made by highly trained personnel, but the actual production is done by the regular workforce. The final stage, assembly and packaging, might be in a dirty environment with incomprehensive quality controls causing a high rejection rate when shipments are delivered. With the help of outsourcing agents, however, western OEMs or SMEs expect the process to become more secure and effective. They look for agents who can help find the right manufacturers to control each stage of production with a good system of IP protection. In the raw material sourcing stage, all key imported goods and materials are expected to be checked or bought by agents. The goods will be checked and supplied to one of the audited production units. This will lessen the risk of the manufacturer using inferior unqualified materials. In terms of the production line, western OEMs require the agents send quality control (QC) staff to the production centres and constantly monitor the line. If components are too sensitive to outsource to manufacturers, OEMs will require the agents to do the final assembly as well as to test the final quality.

When looking for outsourcing agents, western OEMs need criteria to select the most appropriate one. A set of key performance indicators (KPI) is listed in Table 1. They are developed from interview to western OEMs, especially about SMEs' requirement for the agent. This paper, based on such kinds of industrial inquires and fieldwork researching into outsourcing agents operating in China, introduces the new species of supply chain network in manufacturing industry. It seeks to provider some insights of the new player in networked manufacturing, and at the same time, to enrich established school of internationalization, international outsourcing and agents.

LITERATURE REVIEW

Related literature can be found from perspectives of international manufacturing, international and global sourcing, and role of agent.

INTERNATIONAL MANUFACTURING

During the past decade, manufacturing systems have grown from individual factory based management to international network (Shi and Gregory, 1998). Supply network (Lamming, 2000) and value network (Bovel and Martha, 2000) developed rapidly due to the intensified competition, the fragmented market, global collaboration and technology innovation (Shi, 2003). Three types of organisation--the global manufacturing network (GMN), the international strategic alliance (ISA), and the virtual organisation (VO)--can be seen in Table 2.

Most recently, as a large scale of de-merger of the supply chain pursue global scale opportunity and widely open for collaboration, the matured industry infrastructure fostered global manufacturing virtual network (GMVN) (Shi, 2005). A framework of GMVN contains supply and value creation network, strategic collaboration (externalization), manufacturing internationalization, and strategic synthesis process (Shi, 2005). With the emergence of globalisation and virtualization, or inter-firm collaboration, the contractual manufacturing service providers are transforming manufacturing in many aspects from strategic outsourcing and virtual manufacturing in the western world towards fast manufacturing capability acquisition and maturity in developing nations (Shi, 2005).

GLOBAL SOURCING AND OUTSOURCING

Traditionally, the research on international business focus on the integration supplies into new product development, however, more attention is needed in sourcing procedure which involves integrating and coordinating common items, materials, processes, technologies, designs and suppliers across worldwide buying, design and operation locations (Trent and Monczka, 2005). Four types of international sourcing approaches are (1) totally decentralised international purchasing, (2) decentralised but coordinated international purchasing, (3) centralized responsibility for worldwide purchasing, (4) functionally unique international purchasing groups specializing in foreign sourcing (Giunipero and Monczka, 1997). Trent and Monczka (2002) developed a five-level framework which highlights the progression from domestic purchasing only to the coordination and integration of global requirements. Key features of excellent global sourcing were demonstrated in Table 3. Findings suggested that there is a strong correlation between the level of global purchasing and performance benefits realized (Trent and Monczka, 2005). Firms continue to update their sourcing approach from lower to upper level, and even firms that have achieved Level V (Figure 1) should refine and improve their global capability.

Other relevant works examined the relationship between complexity and outsourcing. Most recent study is Borzekowski (2004), who suggested the positive association between credit union (CU) size and its likelihood of outsourcing the data processing (DP) system. Yukako and Victor (2005) found out that while scale economies are important in outsourcing decisions, the transaction costs associated with using vendors, also affect firms' decisions.

ROLE OF AGENT

The role of middle-man was mentioned in marketing theory, however, only some relevant studies can be found on intermediate trading agents. Intermediate trading agents (ITAS) in economic theory has been studied in theory texts (Lim, 1981). Clower and Leijonhufvud (1977) and Howitt (1977) elevated the role of intermediate trading agents (ITAS). Alchian and Allen (1972) suggested that ITAS provides an information-economizing activity, among which ITAS vary in their characteristics and the services they provide. The motives can be described as 'service of availability,' 'information-economizing activity,' and 'service of risk bearing' (Lim, 1981).

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From the literature review above, it is clear that the study on international manufacturing has provided a general framework of global manufacturing network in terms of...