China sourcing can be key differentiator

A trusty guide

17 February 2010 00:00  [Source: ICB]

With the help of a capable intermediary, Western chemical buyers can turn sourcing from China from a risky adventure into a key differentiator

Consultants' corner
Tony Chu and Michel Bulliard/Eastar Chemical

Rex Features

SOURCING CHEMICALS from China has lost some of its luster in the wake of serious problems with quality, purity and delivery, but it remains a key differentiator when implemented through a carefully considered strategy.

The cost advantage is not the only driver for sourcing from China. Geographic diversity is becoming important for manufacturers that want to remain in close proximity to their customers. China is one of the fastest-growing economies in the world, and many producers in a host of end-use markets have already built plants in the country or established joint ventures with domestic players. In China and other developing regions, too, there is access to a much larger pool of skilled workers than that available in the West.

To leverage these benefits, Western chemical buyers must overcome several challenges associated with sourcing materials from China. Most importantly, buyers must understand the full supply chain of any supplier to avoid the kinds of safety and environmental tragedies that have occurred in recent years, particularly when looking to buy higher-value materials.

Intellectual property (IP) concerns are being addressed to some extent by the Chinese government, but "buyer beware" remains the best approach with regard to IP.

Logistical issues, tax and regulatory compliance with local and national government rules and regulations and even communication with the supplier are other hurdles.

You can manage these issues with the careful selection of your sourcing partner. Even before taking that step, though, it is important to identify your particular needs in terms of the types of chemicals you require and the level of service and support you expect. Types of chemicals include basic/commodity materials, more complex building blocks or intermediates and active pharmaceutical ingredients (APIs) or novel products developed by the suppliers.

The purchasing of basic chemicals from China is well established and generally accomplished through a recognized trader located in the West who has relationships with sources in China. Only brokers who can demonstrate a track record of on-time delivery of on-spec materials should be selected. Chinese manufacturers providing such materials are generally using technology transferred from the West.

If your sourcing strategy includes purchase of more advanced specialty and fine chemicals in China, finding a reliable supplier is definitely more complex.

The strategy has been adopted more for specialty chemical producers and less for fine chemical manufacturers, but it can be equally beneficial for both. In addition, the technological capabilities of some Chinese manufacturers have developed to the point where many are now creating novel products and providing custom services based on unique chemistries, adding another dimension to the outsourcing paradigm.

Sourcing strategies for such materials are more sophisticated and require real interaction with the suppliers in China, which cannot be provided by traditional traders. But dealing directly with suppliers entails significant risk. For compounds that could be used for the synthesis of APIs, agrochemical actives, or ingredients for cosmetics or personal care products, it is imperative the buyer understands the regulatory and logistical environments in China and be fully aware of the complete supply chain. These two requirements also apply to companies looking to find custom-manufactured products.

The use of an intermediary that understands these issues is recommended. The intermediary should have locations in both the West and China, have the required technical capabilities - including chemical synthesis, analytical characterization and environment, health and safety (EH&S) compliance - and have demonstrated project management skills. Choosing the right intermediary or partner is critical in determining success or failure when sourcing advanced chemicals from China.

TECHNICAL CAPABILITIES
A sourcing partner needs to have a site in the West relatively close to your location, as well as facilities and certain technical capabilities in China. In addition, staffing will include both Chinese and Western professionals. These two requirements ensure effective communication throughout the sourcing process, from a physical as well as linguistic and cultural perspective. Along with the facilities should come a thorough understanding of the logistics process (best routes, application requirements, fees, timelines and other expectations) to be utilized to get the product from the plant in China to your door and the legal aspects (permitting, government procedures and so on) related to the manufacture and sale of chemicals in China. These capabilities will help eliminate many of the barriers that a Western buyer would face if attempting to purchase materials directly.

The intermediary must also have the technical capabilities to ensure that more complex molecules can be prepared on the required scale and in the specified period. The intermediary's primary role is the careful selection of production sites in China that are technically qualified, economically stable and also meet all other safety and environmental standards.

If looking to purchase APIs, the intermediary must also be able to confirm that current good manufacturing practices (cGMP) compliance requirements are adhered to wherever necessary in the supply chain. To do so, the company must be aware of the EH&S and cGMP compliance status and history of performance with regard to quality and timeliness of deliveries for all of its suppliers, and be able to provide supportive documentation, including relevant certifications and plant inspection/audit results (scheduled and unscheduled). An intermediary with local professionals well trained in the regulatory requirements of each industry is important, particularly for pharma, where it is critical to know the local health regulations as well as international compliance requirements. An effective intermediary should be able to convince you they have a secure and well-understood supply chain.

Ideally this process will include participation by the Western company looking to buy specialty and fine chemicals in China. The most effective intermediary will establish a true partnership with its customer in the West and involve it in the development and implementation of key controls designed to ensure that products not only come from a secure supply chain but that the suppliers will be able to consistently meet specifications and schedules.

Because quality and purity are such a critical issue, particularly for complex intermediates destined for use in pharma, agrochemicals or personal care products, it is desirable for the intermediary to have a state-of-the art quality assurance/quality control (QA/QC) team in China that is staffed with trained analytical chemists and compliance specialists who can communicate with Chinese suppliers and Western customers. Compliance specialists at supplier sites can train quality personnel, help implement effective QA programs and work with suppliers to ensure monitoring of raw materials and quality release of final product. Analysis of all materials in China to confirm that products meet specifications before they are shipped to the West avoids many of the problems that have recently made the news.

WESTERN NEEDS
To tie all of these capabilities together, the intermediary must have excellent project management skills and an understanding of the needs of Western customers. The best way to confirm such abilities, which include appropriate supplier selection, management of project flow, problem solving timeliness and development of established communication mechanisms with the customer, is through discussions with past customers.

There have been issues with outsourcing of materials from China, but it is possible, with the assistance of a well-equipped and well-organized intermediary, to implement sophisticated strategies to buy advanced specialty and fine chemicals, as well as novel and custom-manufactured products.

Tony Chu, president of Eastar Chemical, has more than 15 years of experience managing Chinese and US chemical and pharmaceutical companies.

Michel Bulliard, vice president of Eastar Pharmaceutical Products, has held senior management positions for major chemical and pharmaceutical companies including Pfizer, PPG Industries and Solvay Pharmaceuticals.

Author: Tony/Michel Chu/Bulliard

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