Supplier selection analysis in China A case study at a Swedish manufacturing company

Global sourcing strategies and outsourcing production to China has during the last decades been a highly discussed issue within supply chain management. Outsourcing is seen as an opportunity for companies to reduce manufacturing costs and focus resources on what is seen as its core business and products. The case company for this study, under the anonymous name “Focus”, has identified market trends such as an increased demand of cutting tools in emerging markets like China and India, where customers’ main decision criteria is the competitiveness of the purchasing price of the product. The company is therefore exploring the possibility to outsource manufacturing of some products within the company’s cutting tools segment to Chinese subcontractors. This Master’s thesis was conducted with Focus as a case company during six months and was both performed in Sweden and in several areas in China where the project’s field study was performed. The purpose of the Master’s thesis is to determine appropriate subcontracting suppliers in China for selected products within the company’s cutting tools segment. In order to fulfill this purpose, the authors have constructed a generic supplier selection tool. The tool has been developed with regards to academic theory about supplier selection and global sourcing, as well as interviews with relevant staff at Focus and empirical findings during visits at potential suppliers. Moreover, this tool has been applied and developed by performing a supplier selection analysis of potential suppliers in China. The results of the thesis are divided in two parts; the first part is the supplier selection tool, which was created as a ten step model with three main phases: Set scope and requirements, data gathering and supplier base reduction. Moreover, to support the company in the work to assess potential subcontractors, the authors have also created a factory observation sheet, which is to be applied when performing similar supplier selection analysis. The other result of this Master’s thesis is the supplier selection analysis performed during the study. When conducting the analysis, the authors determine that seven of the ten visited suppliers are qualified as potential suppliers for one of the product segments. However, four of them are primarily recommended to continue with negotiations and further audits. For another product segment, four out of the ten suppliers have qualified as these products have higher technical requirements and require better machines and more developed quality inspection procedures from the visited suppliers. For this product segment, the authors recommend two suppliers that should be contacted by Focus in the next step. The supplier selection analysis also shows that the average price quoted by the Chinese suppliers is 40-76 % of the internal production cost for similar products. However, the authors conclude that there is often a direct correlation between the price quoted by suppliers and the production capabilities, where a higher price most often also means better processes for quality inspection, more technically advanced production equipment and a good management structure. The report also shows that the increasing labor costs in China and the trend of increasing value of the Chinese currency could mean less competitive prices in the future if the company decides to outsource production to China