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and possible change. bengtsso@student.chalmers.se
Supplier Dependence in China
Philip Bengtsson
Chalmers University of Technology
bengtsso@student.chalmers.se
Introduction
During the last ten years more and more global/western companies are moving their
production to China. China mainly offers very low salaries. Other advantages are the hard
working people, politically rather stable and the fast growing market. However we should
be aware of that China also has treats and disadvantages; Cultural differences, low
educated worker, quality problem etc. This thesis is about a company that have had
problems of all sort in China.
Background
X is a company that sells radios. X develops the radio, which is produced by another
much larger company in China, lets call it Y. X moved due China six years ago, mainly
due to dissatisfaction with current supplier. 90 % of X’s sale is in August and September.
Present
The Chinese company have been producing one similar model for six years and one for
three years. However the quality is still very bad. At the tests at X’s company
approximately 20 % are sorted out and sent back to China for rework. The quality
problem is often due to simple mistakes done in China. The first year of production these
kind of problems are normal and acceptable. In September the year before X’s makes his
the order for products the next season. According to the production schedule the products
should be shipped in March. The last years, the final products haven’t arrived before late
July. The reason for this delay is the production problems that Y faces. As stated before,
about 20 % must bee sent back because of bad quality. The Chinese company has similar
testing machine as X.
Supplier dependence
The problem is this situation is that X can’t change supplier without making a whole new
product design and construction. The construction and design of the radio is owned by X,
but they do not own the tool for moulding the frame of the radio. This tool is very
expensive and is therefore owned by both companies. This makes it impossible to move
the tool to another supplier. So X is dependent on Y as a supplier until X makes a new
design, which costs much money for a small company like X and takes over one year.
There is a contract between the two companies according to British law. As long as X is
dependent on Y as producer, it would be crazy to sue them because of the problems.
The trust between the two companies has not been good from the beginning. Y promised
X that it shouldn’t be a problem to produce such a high quality product. Y always
promises that the products are good and that they should be ready on time, but their
promises are seldom kept.
Vicious Circle
X is not among the biggest costumer of Y. He is a smaller costumer that is dependent on
Y. What we can see is that Y in this situation is not really interested in satisfying X as a
costumer. X needs to push Y when the products are not coming on time. X has to solve
many of Y’s problems and is very involved in their productions problems. If he doesn’t
push it’s a risk that he won’t get any radios at before sale season. It becomes a viscous
circle;
X pushes Y
Y delivers radio with bad quality
Y has to pay airfreight and rework radios
Y is more unwilling to satisfy X as a costumer
When the quality problems are detected at X. Y needs to pay airfreight back to China and
to Sweden, because the time is running out and shipping is to slow. The next year Y
wants more money for his products, because of these expenses.
The problem in China is distracting X from visionary and other important work in the
company. It takes a lot of energy and concern. The problem recognized at Y are mainly
that it’s not a costumer oriented organisation and a short term cutting organisation. The
former CEO had a lot of ideas and concept of how to improve the company, but as long
at it cost money in the short run, the board of the company was not interested. After two
years the CEO quitted his job.
Positive Aspects
It should be stated that the products that are going out to costumers have very high
quality and works fine. The price of the products are so low that it’s still worth producing
in China although all the problems. X is also negotiating very hard for lower price, which
could affect Y’s willingness to serve him as a costumer.
Future strategies
China is still in some respect an insecure country and we don’t always get what we want.
It’s worth the extra money to invest in the whole moulding tool. A moulding tool gives
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