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How one EMS company formed a purchasing office in Shenzhen.

Late last year, SMC and its EMS partners opened an International Procurement Office in Shenzhen City, China. The IPO will eliminate the need to use a broker to source and acquire components, thus eliminating the cost of a middleman. The expense of staffing the IPO will be considerably lower than the cost of using a broker. In addition, a broker is less likely to make on-site visits to custom component manufacturers, which the IPO is required to do. An IPO staff member will visit the component manufacturer to verify its production capabilities and product quality and assist with production issues. And unlike a broker, which might work for several EMS or OEM providers, the IPO is focused on sourcing components for SMC and its ems-Alliance partners.

(Ed.: The ems-Alliance is a group of electronics manufacturing services providers located throughout the world with combined sales of over $400 million.)

The IPO also eliminates the need for additional staff at corporate headquarters to source parts and qualify components. This cuts the expense of additional purchasing and engineering staff in the U.S. to support sourcing custom component suppliers in the Pacific Rim, not to mention the cost of traveling overseas to qualify each new vendor.

The office was established in Shenzhen City due to the adequate and inexpensive office space available and the network of similar operations already in the area. This office is central to many potential component suppliers. Shenzhen is in close proximity to Hong Kong, where experienced and professional staff is readily available. Within Shenzhen, the area of Shekou was chosen as the location for an office due to good quality office space, local hotel accommodations, safety and a well-established communication system.

Day-to-day operations are run by a Western general manager with a background in supply-chain management and experience sourcing from Asian suppliers. The GM has spent much of his career in the electronics industry and has been a resident of China for two years. He is familiar with several component manufacturers in the area and has experience working with many of them. He is also familiar with the business process in China, knowledgeable about how to set up the representative office and understands the logistics of shipping components.

The office staff is comprised of English-speaking Chinese nationals, consisting of buyers and engineers, whose primary focus is to represent SMC and other companies in sourcing components in the Pacific Rim, most heavily concentrated in China. Having locals working with locals is viewed as a big advantage. The Chinese are much more comfortable working with those who are local and understand not only their business operations but culture as well. This can often result in better pricing and a better overall business relationship.

The IPO staff currently focuses on sourcing custom build-to-print products such as PCBs, cables, wiring harnesses, metals and plastics. They can also source relays, connectors and transformers. New suppliers go through an evaluation phase. The IPO office works with SMC to evaluate, qualify and approve a custom supplier prior to any purchases being made. On-site visits are mandatory for each new custom supplier that is used. Although this can add time to the purchasing process, the goal is to ensure that each supplier is providing the best quality product possible. The location of the office makes it convenient for on-site visits and thus conducive to effective management of the supplier and better working relationships.

Once a supplier is approved, SMC's purchasing department then takes over and makes the actual purchase of the components, handles the payment to the supplier and uses its previously established logistics companies to ship product. SMC is currently purchasing approximately 10% of its manufacturing materials offshore but sees this number increasing now that the IPO is in place and expects an overall reduction in material costs by 10 to 20%.

Craig Schuster is CFO of SMC (smcems.com); cschuster@smcems.com.