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NEALE O’CONNOR

CHINA SOURCING GROUP: DELIVERING ON

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In 2004, US-based China Sourcing Group, which specialised in premium and gift products,
established a sourcing office in Shanghai. The Shanghai office was responsible for sourcing
vendors in China and southern Asia. It played a major role in quadrupling China Sourcing
Group’s revenues over the next four years. Despite its contribution to the Group, the Shanghai
office was plagued by frequent late deliveries, especially for new products that required
development from scratch. In 2009, the Shanghai management team decided that something
had to be done to improve the punctuality of its deliveries.
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China Sourcing Group USA
Company Overview
Established in New York in 1912, China Sourcing Group was an international company that
specialised in premium and gift products. The Group was comprised of four divisions,
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including China Sourcing Fabrics. Headquartered in the United States, China Sourcing Group
was an importer of beads, stationery, bridal products, wearables, ribbons, activity toys and
related accessories. Its customers consisted mostly of chain stores such as Wal-Mart, Target,
Michaels, Kmart and Toys“R”Us.

In 2004, China Sourcing Group set up an office with six staff in Shanghai. The office handled
a range of responsibilities, including procurement, product development, vendor auditing,
supplier management, quality control and shipping. By 2008, the Shanghai office had grown
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to more than 100 staff, excluding quality-control staffs who were stationed at vendors’ plants.
The Shanghai office sourced not only from China but also other southeastern Asian countries.
The establishment of the Shanghai office played a major role in China Sourcing Group’s
increase in sales revenue from US$40 million to US$180 million between 2004 and 2008 [see
Exhibit 1].
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Grace Loo prepared this case under the supervision of Dr Neale O’Connor for class discussion. This case is not intended to
show effective or ineffective handling of decision or business processes.
© 2011 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the
internet)—without the permission of The University of Hong Kong.
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Operations

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The majority of China Sourcing Group’s customers were chain stores. The chain stores would

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assign a certain number of standardised racks, measured by length, such as 20 or 30 feet, for
China Sourcing Group to display its products for a program. China Sourcing Group would
submit a planogram proposal, which is a diagram of fixtures and products that illustrates how
and where the products are to be displayed, the design of the display, the quantity to be
displayed and the quantity of each product program. Once the planogram proposal was
accepted, any changes would result in a penalty or would even cause China Sourcing Group

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to lose its customer if it did not inform the chain store at least 30 days before the shipment
arrived.

Shipment for the chain stores could be divided into two types: direct import (“DI”) and
domestic (“DOM”). DI goods were shipped directly to the customer and sold as soon as they
arrived in the United States. Meeting the delivery deadline for DI was critical, as late
shipment would leave the customer with empty racks to fill.

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If an empty rack occurs the penalty can be two or three times the cost of the
goods.
- Packaging Manager of China Sourcing Group’s Shanghai office

With DOM shipments, goods would be sent to China Sourcing Group’s US warehouses
where they would be kept in stock until the chain stores needed them. Hence the delivery
deadlines for DOM were less critical than that for DI. [see Exhibit 2].
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Causes of Late Delivery
Late delivery could be caused by many factors involving the customers, the Shanghai office
and the suppliers. For example, in early 2007, China Sourcing Group’s Shanghai office
produced a set-up program with more than 30 products for Kmart. Five merchandisers under
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the control of the merchandising team were in charge of the development, overseeing more
than 100 suppliers between parts and final assembly vendors. One month before the delivery
of the prototypes, five of the products had not even completed development. In a separate
case, the shipment of the set-up program was also delayed because the customer changed the
item number and UPC code for one item seven days before shipment. The Shanghai office
managed to ship on time only by having workers work overtime to apply stickers with the
new item number and UPC code to the finished goods. New-product development was a
major factor in causing late delivery, contributing to 60% of all late deliveries. Other factors
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included compliance problems, quality issues and parts shortages [see Exhibit 3 for the
percentage of late deliveries caused by various problems in the Shanghai office].

Compliance
Many countries had regulations to control the use of harmful materials in products, and
manufacturers had to comply with them in addition to the specific requirements of each
customer. Compliance covered not only the product itself but also the packaging. Late
delivery caused by compliance problems could be divided into downstream compliance
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demands and upstream compliance demands.

On the upstream, many customers required a vendor audit and certification before they would
take on a factory as a new supplier, a process that could be costly and time-consuming for
vendors. Wal-Mart, for instance, used a stringent “red, orange and green light” vendor audit
system for new suppliers:

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• Factories that received a “red light” on the audit had to submit an improvement proposal
within two weeks and pay for a re-audit by Wal-Mart, which would take place within 90

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days of the first one. Vendors who failed to pass the second audit would not get a third

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chance.
• Vendors who received an “orange light” had 120 days to improve their plant for a re-audit.
• Vendors who received a “green light” could get on Wal-Mart’s supplier list immediately
and would be re-audited on a yearly basis only.

The green light requirements covered working hour restrictions, working

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environment standards and also quality assurance. The buyer would check
the records for they require safety and security in the working area. For
quality assurance, if [the factory] was certified ISO9000 and if it followed the
ISO standard for the security, the auditor would still check if the fire exit was
blocked or not, and if the fire extinguisher was placed properly or not. The
working areas should be separated with very obvious marking for the
different areas. The working hours of the workers should not be longer than

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local requirements, and payment to workers should be up to standard.
- Packaging Manager of China Sourcing Group’s Shanghai office

While vendors might be able to meet the stringent product requirements of US chain stores,
many were reluctant to spend money on improving the factory to meet social audit
requirements. Many retailers engaged only with suppliers who could comply with their social
and ethical standards in areas such as working conditions, health and safety, working hours
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and disciplinary practices.

On the downstream, importing countries and individual customers had become increasingly
strict in the use of hazardous materials in their products due to the growth in environmental
consciousness. For instance, packaging for Wal-Mart products could contain no more than
100ppm of mercury, lead, cadmium and hexavalent chromium. All suppliers had to provide a
test report and compliance certificate for their shipments, without which the goods would not
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be accepted.

New Products
Time-to-market was critical for new products, and delay in any step along the new-product
development process could lead to late delivery. The new-product development process
within China Sourcing Group could be broken down as follows [see Exhibit 4]:
• China Sourcing Group’s US marketing team initiated product development and requested
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the design team to come up with new programs, which they would propose to the
customer.
• When the customer accepted the proposal, the US marketing team sent a bill of material,
listing the products in the program, to the merchandising team in Shanghai for
development. These products might be completely new or modified from existing
products in the market that the marketing team used as samples.
• The Shanghai sourcing team would solicit quotations from different vendors, consolidate
the quotations and send them to the US marketing team.
• The US marketing team provided the customer with a quotation for the program. When
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the customer accepted the quotation, the US marketing team placed the order with the
Shanghai office.
• The Shanghai office placed the order with the vendors, and the vendors would make a
prototype for compliance testing, the customer’s approval and finalising packaging.
• When the prototype passed compliance testing and received the customer’s approval on
the product and package, mass production of products could begin.

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China Sourcing Group’s US design team generated designs and artwork. If the design team
was late in sending out information to the Shanghai office, it put pressure on the sourcing and

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merchandising team to complete the new development process in time and could ultimately

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lead to late shipment. Designers and customers changing the design during the product
development process also affected the product development schedule.

When the initial sample came out, it would be presented to the buyer. The
buyer might give some new ideas or comments on the sample and it had to be
improved, and that took time. It would delay the time for the finished product

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or the final sample to come out. And usually the package could not be
designed until the final product or final sample came out.
- Packaging Manager of China Sourcing Group’s Shanghai office

Time-to-market for new products was also challenging because it frequently involved new
vendors and processes.

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Company statistics showed that about 30% of China Sourcing Group’s late delivery of new
products was caused by late arrival of artwork or designs, 30% by late customer approval or
the US marketing team, and the rest mostly by vendors’ delays. For example, when China
Sourcing Group developed a range of Hello Kitty products, each product bearing the Hello
Kitty image had to receive approval from Japan-based Sanrio, owner of the Hello Kitty brand.
Sanrio’s working procedures required 10 working days for approval, and China Sourcing
Group had to factor this approval time, as well as the possibility of rejection from Sanrio and
the resulting need to rework, into its critical path for product development.
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QC Rejections
Quality control (“QC”) inspection was standard procedure before goods were shipped.
Quality inspection could be carried out internally by China Sourcing Group’s own QC team,
or in cases of customers such as Target or Wal-Mart, the quality inspection was to be
conducted by a designated third party. Shipping dates would be delayed if the goods were
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found to be defective or improperly packaged and corrections had to be made.

Parts Shortages
China Sourcing Group ordered parts from vendors and used assembly vendors to put them
together, package the products in accordance with the Group’s requirements and ship the
products to their destination. If the parts were faulty or delivered to the assembly vendor late,
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the assembly vendor would not be able to finish the final products on time, resulting in late or
partial shipment.

Communication Problems
China Sourcing Group had no comprehensive IT platform for information sharing or
communication between the US headquarters and the Shanghai office or the Shanghai office
and vendors. Information was frequently compartmentalised within individual departments,
making tracking information a time-consuming process.
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Epilogue
The establishment of China Sourcing Group’s Shanghai office for sourcing and
merchandising in Asia had contributed considerably to the Group’s business. But the issue of
on-time delivery emerged during the annual management review in 2009, and the whole
management team agreed that improving on-time delivery was critical for the effectiveness

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Permissions@hbsp.harvard.edu or 617.783.7860
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and efficiency of the office. Now the management team had to decide what kind of measures
to implement and set the target for improving the office’s on-time delivery.

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EXHIBIT 1: CHINA SOURCING GROUP’S SALES REVENUES FROM 2004 TO 2008

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180
160
140
120

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100
80
60
40
20

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0
2004 2005 2006 2007 2008

Sales in Millions of US…

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No
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EXHIBIT 2: DIAGRAM OF SUPPLY CHAIN FOR CHINA SOURCING GROUP

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Direct Import

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Customer’s
Vendors Transportation Distribution Chain Store
Centre

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Vendors Transportation
China Sourcing Chain Stores
Group’s
Warehouse
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EXHIBIT 3: LATE DELIVERY DATA FOR 2007

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% Occurrences of Total

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Deliveries
DI DOM
Causes of late delivery
(Direct Import) (Domestic)
Less than Less than
Tolerance
7 days 20 days
Order cancellation due to

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5% -
potential late delivery
Late delivery 5% 10%
Call back due to compliance
0.5% 0.5%
issue
Call back due to other quality
0.1% 0.1%
issues

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No
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Permissions@hbsp.harvard.edu or 617.783.7860
 11/495C For the exclusive use
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EXHIBIT 4: NEW-PRODUCT DEVELOPMENT PROCESS

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Location Team Step

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US Marketing team Initiates new-product development
US Design team Comes up with new program
US Marketing team Presents new program to customers, gets items picked by
buyers
US Marketing team Sends bill of material to Shanghai merchandising team
Shanghai Merchandising Sources vendors

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team
Shanghai Merchandising Sends quotation to US marketing team
team
US Marketing team Seeks quotation approval from customers
US Marketing team Places order with Shanghai office
Shanghai Merchandising Places order with vendors
team
China or Vendors Prepares product prototype for compliance testing and

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Asia customer approval

Shanghai Merchandising Sends prototype to US marketing team for customer

team approval, package design
US Design team Finalises the packaging

US Marketing team Gets customer’s approval on products and package

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US Marketing team Informs Shanghai merchandising team of customer
feedback and approval
Shanghai Merchandising Releases mass production
team
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No
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This document is authorized for educator review use only by Miguel Angel Moreno Miguez Universidad Panamericana until August 2013. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860