Company Seven – gift promotion items
Introduction
This case study is to research the outsourcing of gift promotion items to China. It will focus on the company’s inter-firm business problems and solutions, as well as its business success factors. Information from a questionnaire and an interview with the managing director of the company is analysed together with data gathered from the company website as follows:
Background information
Company Seven was established in 1981, an import company that sources many of its products in China. The company is located in Melbourne, has 30 years of company business history and currently employs ten people. Its primary services include developing business promotional concepts and sourcing promotional products for customers’ product management. The company business aims to offer the best service for customers’ promotional products. The promotional products
include reward and incentive items, and brand culture products. For logo promotion products, some techniques of decoration include embroidery, laser engraving and embossing. The company imports a variety of promotional items and then resells them to companies in Australia. Company Seven’s customers then use the products for promotional purposes.
The products that Company Seven sources offshore and imports include about 5000 different small promotional gifts. Items include sporting goods (for example, footballs), clothing, toys, electrical, stationery, and household items. Some successful examples include the Zofran neck-pen holders, Subaru compact disc cases, Monash education’s slinky and the Allied Pickfords’ toy trucks. The company has a large showroom displaying the available products that can be custom made. For example, corporate logos may be printed on the promotional gift items. Company Seven’s business philosophy is to provide the best service as the customers’ extension of their marketing departments, and make the promotional products best suited to their needs. The mission of the company is to exceed customers’ expectations by developing prosperous business partnerships through innovative solutions, experience and creativity.
Outsourcing to China
The majority of the products that Company Seven has are imported from China with a few items such as handbags imported from other countries or areas, including India and Taiwan. The company has imported from suppliers in China for 15 years. It has been found that the Chinese personnel are easy to work with, understand the designs and needs, correctly pre-produce samples and adjust the differences between designs and samples. The quality of products is satisfactory most of the time, and shipments are made on time once the suppliers receive full payment. However, because Chinese manufacturers are competing with each other on low-price production in export markets in recent years, the quality of production has declined due to the cost-cutting measures. In addition, because the volumes of orders from Company Seven compared to some large companies from the USA or elsewhere are small, suppliers usually do not want to spend enough care and time on the products. This generates the risks of quality and on-time performance.
In initiating import procedures the company first asks its suppliers to make pre- production samples, for example, printing corporate logos on small footballs and small plastic moneyboxes. On satisfaction with the samples, the company seals the samples, and signs the envelopes and contracts; paying 30 per cent of total payments before the production starts. Company Seven does not use letters of credit. It only uses telegraphic transfers. After the products are made the suppliers advise Company Seven and request full payment. Company Seven then pays in full when products are ready for shipment.
Each purchasing contract is worth from one to three thousand US dollars. The company has about 50 suppliers in China with a broad product range, importing labour intensive promotional gifts of low value and low-to-middle level technologies. For example, these include clothing, soft toys, coffee mugs and sport bags as well as some electronic products including MP4s, digital photo frames, and USBs.
Business problems
Company Seven does not have excessive control over its suppliers, but relies on trust. However, in the past three years the company has increasingly faced quality problems and difficulties of import processing. The quality problems have included a high rate of defective products such as logos not being printed on the centre of footballs, some moneyboxes are broken and there are incorrect colours on T-shirts. These have resulted in the company’s customers coming in and physically testing each item in the warehouse before accepting them in order to ensure the quality of products. In the last four shipments, defective items exceeded 25 per cent of the total, and were deemed unacceptable to Company Seven, which indicated that the quality control of its suppliers had failed to reach Company Seven’s standards. As a result, the company contacted its suppliers to seek solutions. However, the suppliers declined to accept responsibility, refused to replace the defective items, used avoidance tactics such as saying that the person in charge was away and that their current working staff could not speak enough English to deal with this problem. In addition, on-time performance is another problem, as the company cannot get every shipment out on time.
Apparently, Chinese suppliers operate under the misunderstanding that promotional items are only give-away products and therefore quality is not important. Company Seven believes that this misunderstanding results from cultural differences. For the company, those promotional items are not free as the company has to pay for them, and resells them to their customers for profit. The customers may give away the promotional items to others, but this affects people’s satisfaction and improvement of corporate value, with the quality of the promotional items making a difference to both Company Seven and its customers’ reputations. The company therefore looks to solutions to the problems.
Prior to the financial crisis in 2008, if the company was not satisfied with some of its suppliers, it could easily change suppliers because there were many choices in China. With the significant decrease in export demand during 2008–2010, some suppliers in China have gone out of business. As a result, the company has fewer choices of supplier and has to find other solutions.
When the company did business in Hong Kong, it used to have an inspection agent for quality control at a reasonable price for his service, and the company was able to contact the trade commission of the Hong Kong government with respect to quality problems on export products. However, a different business environment exists in Mainland China, and it is difficult to get government help. It is also difficult for a small foreign company to have business networks in that environment. As a result, the company has not yet been able to find a suitable inspection agent. As a small business the company has no leverage with most suppliers in China, and has to rely on trust. Furthermore, it is not worthwhile to hire a lawyer for the problems as each shipment is worth only one to three thousand US dollars. Small businesses cannot afford the time and costs for lawyers, international courts, or arbitration.
Solutions to the problems
Because of the limited legal protection in Mainland China, Company Seven now plans to withhold between ten to twenty per cent of final payments to suppliers in cases of problems of quality. Final full payments will be made on receipt of satisfactory products. If there are defective products, the related amounts will be deducted from final payments. The company will also use inspection agents in
China to examine and ensure the quality of products. In addition, the company proposes to change suppliers in China, or source from other countries. The final goal of these solutions is to find reliable suppliers to ensure the quality of products.
Business success factors and future plans
One plan is to conduct quality control before production. More detailed terms on new contracts will be made. For example, the defective rate cannot be higher than 5 per cent. Payment will not be made for defective items. In this way, the company hopes for improvement from the suppliers, otherwise the company will change suppliers within China. If there are better sources in other countries, for example, in India, the company will also consider changing outsourcing locations. In future, the company hopes that the Australian Government will have some level of involvement in small business international trade, and assist in ensuring legitimate negotiation with foreign suppliers. The company also wants the Chinese government to regulate quality control on export products more rigidly.
Analysis and summary
Company Seven has been located in Melbourne since 1981 with the primary services of developing business promotional concepts and sourcing for customers’ product management to offer the best service to customers for their promotional products. The mission of the company is to exceed all expectations by developing prosperous business partnerships through innovative solutions now and in the future through experience and creativity.
Most of Company Seven’s products are imported from China. As a small business, the company does not have excessive control over its suppliers but relies on trust. However, the company has increasingly faced quality problems including a high rate of defective products and the difficulties of import processing.
Company Seven has to contact its suppliers to seek solutions and believes that this misunderstanding results from cultural differences. As a result, the company withholds some final payments in the event of quality problems. Final payments are made only on receipt of quality, satisfactory products. The company also intends to use inspection agents in China. In addition, the company keeps pressing its
suppliers for on-time performance. Furthermore, it proposes to change suppliers in China, or source from other countries. The company also hopes that the Australian and Chinese governments will have some level of involvement in small international trade business.