A recent article in the April 17th Edition of The Economist in the special report on innovation in emerging markets noted how Li & Fung, a Hong Kong-based company, has long been a pioneer, working closely with a network of about 12,000 companies operating in more than 40 countries. It puts together customized supply chains from its vast network of associates and keeps an eye on quality and order fulfillment. Similarly, Dachangjian, a motocycle-maker in China’s Guangdong province, works with hundreds of parts suppliers.
Specifically, it noted how these post-modern guanxi have several powerful qualities. For instance, they can contract or expand with demand. As a result, Li & Fung and Dachangjian seldom have problems with excess capacity when times are hard or with waiting lists when times are flush. Furthermore, they can be turned into engines of innovation. Li & Fung relies on its partners to help solve problems, not just fulfil orders. Dachangjiang provides its suppliers with rough sketches rather than detailed blueprints and encourages them to innovate.
Guanxi, the linking of two people in a relationship of mutual dependence, is common in Chinese business. While it has its downsides, as every gift of significant value will soon be followed by a request for a huge (personal) favour, it also has its upsides. Your partners stick by you in your times of need because you stick by them in their times of need.
I can’t help but think that if Alcatel had more of a guanxi relationship with their suppliers and kept track of the basics, as noted by Dick Locke in his recent piece, that they wouldn’t be blaming their suppliers for their recent 10% sales decline. But I’m not the expert, so I asked Dick Locke (SI’s resident expert on global trade) to elaborate on the advice he provided and whether guanxi would help Alcatel. This is what he said:
Well, doctor, sometimes I think we’re doing point-counterpoint. I didn’t see Alcatel blaming suppliers and I can’t imagine they could. I don’t know where their supply base is so let’s not put a country-specific name into the conversation. Let’s just call it “relationships”. But yes, they would have done better in their upturn if they had done something different. It could be maintaining better personal relationships, it could be a better matching of business strategies and it could be the existence of better contracts.
I’m not sure where they fell down. I do know that the telecom industry tends to see supplier relationship management as primarily a contractual issue. In my seminars, I usually ask how many people work at a company that ever took a supplier to court. About the only companies that say yes tend to come from the telecom world. Maybe it’s a legacy of being in a regulated industry. If Alcatel’s supply base is in Asia, most companies there value relationships over contracts. If it’s in Germany, it’s contracts over relationships.
I was bothered by the Li & Fung story. Suppliers able to contract and expand on demand? The economist made a nice assertion, but there was nothing to back it up. And putting a middleman between buyer and seller? How can you ever develop relationships? In a world where a toy manufacturer’s paint supplier’s pigment supplier can cause millions of dollars of expense and an an untold amount of reputation damage, buyers need to meet, understand and build relationships with several layers of their supply chain.
I did note that Li & Fung’s primary market was fashion and consumer goods. Clothing is built to old fashioned quality standards, with AQL plans still the norm for quality mangement. Buyers are willing to accept lots with 10’s of thousands of out of spec goods per million. That method of quality management isn’t adequate for most other industries.
Actually, it’s perception vs. reality. Point vs. CounterPoint is when there are, theoretically, two equally valid ways to approach a public issue. What we’re doing is addressing a perceived reality and either affirming it or denying it, so that, at the end of the post, a buyer can make not just a truly informed decision, but the right one. (Which, in this case, is a focus on the core principals of supply management: better strategy, better contracts, and better relationships.)