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Key Take Away: In order to protect the company's IP in China, EW is driving in China their Procurement -Warehousing - Quality Testing - Manufacturing - Shipping in China, thus enabling the company to service their Asian customer base which is their fastest growing market.
Background:
Western-based industrial company had been exporting to the China market for over 10 years. The company had a sophisticated manufacturing process and their Intellectual Property (IP) was their expertise of developing these products to meet the client's specific technical requirements and raw material mixture to ensure a quality end-product.
The company had resisted manufacturing in China because they were very concerned about losing their IP to Chinese competitors. The loss of their IP would seriously threaten their sales into the China market and create Chinese competitors who would attempt to supply the US market. Additionally, the loss of this IP to competitors would limit their ability to maintain a solid profit margin and affect their brand marketing efforts.
Their customers in China were Western and Asian customers, who wanted the Western-based supplier to manufacture in China to ensure a local supply and product availability. The company and East West discussed storing product in a Shanghai warehouse and providing the products to clients in a consignment model. After East West gathered warehousing and logistic costs, the company and East West ruled out this option as too expensive.
The China market represented the company's fastest growing market. The company had a Shanghai office which was primarily focused on working with their Chinese representatives, executing their Chinese sales strategy and overseeing the company's licensing agreements.
Challenge:
Establishing a raw material procurement and production plan, which serviced the needs of their Asian clients and made it difficult for competitors to copy the final product.
Solution:
The company hired East West (EW) to serve as their procurement - manufacturing - quality control - logistics arm in China. Thus, our client's name would never be seen on invoice and the Chinese firms would always be dealing directly with East West.
As a result, EW conducted the following 10 steps - on behalf of the client.
- Purchasing the raw material
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EW is going to purchase the raw materials from suppliers, which they have identified and qualified based on the company's technical criteria.
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Company approved the qualified suppliers identified by EW
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Company provided pricing guidelines and EW conducted the price negotiations
- Labeling on the raw materials
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EW provided labeling instructions to the suppliers
- Conduct regular pre-shipment inspections on quality as well as labeling
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EW was responsible for conducting inspections on labeling and product quality based on pre-agreed quality standards and testing methods. This testing will be conducted prior to product shipment to the warehouse. The Quality Assurance will be overseen by EW employees and conducted by designated testing agencies and the testing facilities at the supplier's site.
- Control on the Warehouse
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The warehouse which receives and stores the material from the suppliers is identified and managed by EW. Our employee will inspect the quantities, packaging and labeling of materials and in the event the product is damaged, EW can fix the problem for our client at the warehouse.
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The warehouse has been chosen based on criteria defined by the company and EW - this criteria includes the warehouse's location, size, use of computerized tracking systems, bonded vs. non-bonded
- Control on the transport to Toller
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Transportation carrier chosen to collect shipments in the warehouse and ship to the Toller (manufacturer) will be designated and managed directly by EW.
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EW will contract directly with the transportation company, so our client's name will not be known to the carrier.
- Control on issuing VAT invoices to the client's China office
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For the products sold by the raw material suppliers and shipped to the Toller, EW will need to issue the VAT invoices to the company's China office.
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It is important to ensure the product names placed on the VAT invoices do not reveal actual technical information. Under China's VAT regulations, the VAT invoices must indicate what products have been sold.
- Warehousing of Final Product
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EW will store the manufactured product in a second warehouse, not the warehouse which is storing the raw materials. Storage in a different warehouse will help protect the confidentiality of the company.
- Managing warehouse and delivery to End Users
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EW will contract with a second transportation company to deliver the final product to the end-users in China. Using a second freight forwarding company will help protect the confidentiality of the company.
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Since there will be inland transportation freight involved, EW will coordinate between the Toller, warehouse, transportation company and company's China office.
- Inspection on Final Product in Warehouse before delivery to End User
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Prior to shipment to the end-user, EW will conduct inspections of quantities, packaging and labels at the final warehouse.
- Management on East West China Employees
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The composition of the raw material products will be known by only 2 of the senior executives of EW. The execution of the work will be conducted by several EW employees and their jobs will be performed separately by each employee.
Result:
Company is able to manufacture product for their Asian/Chinese clients in a manner which best protects their identity and Intellectual Property in China.
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