How Outsourced Sourcing Works
An outsourced provider employs team members on your behalf, provides office space as required, and pays other approved operational expenses. In return, the provider requires reimbursement of these costs plus a mutually agreed management fee. This enables you to set up a sourcing office in China with all the benefits but without the cost and risk of establishing your own entity.
Common Functions of an Outsourced China Sourcing Office
Outsourced sourcing offices typically handle a comprehensive range of supply chain activities including sourcing, supplier management, purchase order management, quality control, social compliance, new product project management, tooling management, graphic design, packaging optimization, and shipping and logistics management.
Key Advantages
The outsourced model offers several compelling benefits. You can achieve fast setup with your office established within weeks rather than months. There's no cost of establishing and maintaining a China entity, and the management fee is typically not based on a percentage of your purchases, delivering considerable savings versus using a trading company or sourcing agent. You avoid the need for registered capital investment in a China entity while gaining scalability and flexibility to adjust team size and capability according to evolving business needs. Additionally, you eliminate the HR and administrative burden of managing a China entity without requiring corporate oversight of a related entity far from your home office.
Is This Right for Your Company?
If you're considering establishing a China sourcing office but aren't prepared to set up an entity, several factors can help determine if you need a sourcing presence.
Cost Reduction Potential
Having people on the ground in China improves your ability to achieve cost reduction and supply improvement. Companies that haven't actively sourced from China may see high benefits, while those with many years of active sourcing will see lower benefits. However, if your spend is high, even a relatively low percentage cost reduction could deliver significant dollar savings. Many companies have funded their sourcing office from year-one cost reductions.
To evaluate this opportunity, determine target product cost savings percentages and establish annual purchase dollar projections. From here you can estimate the potential overall cost saving amount.
Product Strategy Considerations
Identify target products or product categories, as this helps you select a provider with relevant industry experience and identify the best geographic area for establishment. Consider how you want to win in the market - whether through cost leadership, product differentiation, speed to market, or other factors. This will help determine the required skill set for your China office team.
Supply Improvement Benefits
Well managed people on-the-ground in China will improve supply performance. Consider whether you're currently experiencing issues with long lead times, late delivery, slow speed to market, limited innovation, differentiation challenges, quality defects, social compliance problems, poor visibility, suboptimal container utilization, high shipping costs, shipping shortages, damage in transit, IP infringements, or inadequate tooling control. If so, evaluate the financial and market impacts to help build your business case for establishing an on-ground presence.
Organizational Readiness
To be successful, your home office team must be prepared to accept the outsourced team as part of their organization. An "us versus them" mentality will not work. Senior management and operational teams need to fully support the arrangement as long as required results are delivered. There must be preparedness to accept cultural differences and maintain a strong understanding of roles and responsibilities.
Selecting the Right Provider
Evaluate potential providers across several critical dimensions to ensure success.
Legal and Operational Foundation: Verify business licenses, trade certifications, and compliance with both Chinese and international regulations. Look for providers with appropriate resources on the ground in China and geographic coverage in areas needed for your business.
Communication and Stability: Ensure they have bilingual staff, modern communication systems, and clear reporting mechanisms. Look for providers with at least five years of operating history to ensure stability and reliability.
Strategic Alignment: Assess cultural fit and alignment with your company's values and working style. The provider should understand Western business practices while effectively navigating Chinese business culture. Evaluate their ability to scale with your business and handle increased volumes or complexity over time.
Market Knowledge: The provider should have deep understanding of Chinese manufacturing ecosystems and sourcing and supply best practices relevant to your industry. Look for providers with established relationships across multiple industries and regions. It's advantageous if they already have qualified suppliers and a third-party service provider network you can leverage.
Critical Success Factors
Several key elements are essential for establishing a successful outsourced office.
Organizational Alignment: Ensure all relevant stakeholders in your home office are involved in the transition to the outsourced provider and understand the value of the arrangement. Develop a true partnership relationship with your provider based on mutual trust and shared objectives.
Communication and Standards: Maintain open, frequent communication with all stakeholders including suppliers, internal teams, outsourced teams, and the outsourced provider. Establish clear expectations and consistently enforce them.
Strategic Perspective: Build relationships and capabilities for long-term success rather than focusing solely on short-term cost savings. This investment in foundation-building pays dividends over time.
Common Pitfalls to Avoid
Learn from common mistakes to increase your chances of success.
Planning and Process Issues: Don't underestimate complexity - allow sufficient time and resources for setup and ongoing management. Invest in relationship building and process development. Ensure there's a clearly defined process including reporting lines with well-defined roles and responsibilities.
Cultural Considerations: Ensure key leaders have cultural awareness and are prepared to invest in relationship building and mutual understanding. Avoid cultural miscommunication and set realistic expectations from the outset.
Conclusion
Setting up a sourcing team in China through an outsourced business process provider can deliver significant competitive advantages when executed properly. Success requires careful planning, strong partner selection, robust operational processes, and ongoing commitment to relationship building and continuous improvement.
The key to success lies in treating this as a strategic initiative requiring commitment from all organizational levels and adequate resources. Companies that invest in building proper capabilities and relationships typically achieve substantial long-term benefits including cost savings, quality improvements, and enhanced supply chain flexibility.