From supply chain issues to material shortages and everything in between, it’s more important than ever for manufacturers to be focusing on ways to lower the cost of goods sold (COGS) and demonstrate their value to consumers.
Steve Feniger, a Blackford Capital Operating Partner, has worked in sourcing, manufacturing and retailing for over three decades. A resident of Hong Kong since 1996, he literally wrote the book on how to develop or optimize sourcing products in China.
Feniger brings together executives from the Blackford portfolio companies (PCs) through regular meetings to support their various sourcing needs, including internally auditing their processes, reviewing best practices and information sharing. Recently, our communications team interviewed him to learn and share a little more about how we’re assisting PCs to take advantage of the slowdown of the Chinese economy and its impacts around the globe.
Tell me about your role in supporting portfolio companies.
I help our PCs to navigate sourcing relationships throughout multiple countries in Asia. Now having worked in this field for 30 years, across 17 counties, I’m grateful to have established a strong understanding and forged many relationships in the region. These position me to help our PCs to cut out middlemen as they source their products, ensuring more reliable supplies and a reduction in COGS. Early on, I often help in the due diligence process to identify what cost-cutting opportunities exist related to vendors and processes. I also work with each of the PCs to implement best practices and help them see savings immediately.
What are some things you do during your regular meetings with PC user groups?
Through our regular meetings, we’ve begun making changes that will lead to long term gains that dramatically drive down the COGS, add higher value to customers and help the companies scale more quickly. My goal is to help their teams develop new ways to use sourcing as a strategic weapon to unlock significantly higher margins. Our meetups also create a space for the PCs to share their successes and identify areas of future opportunity.
There are a variety of strategies we implement to see cost reductions, even ones that may seem impossible at first glance. For example, while there are some incredibly specific products that may seem difficult to counter-source initially, we can frequently cut out the middleman, and in a recent case saw savings of nearly 40% by doing so.
I start with a simple formula:
- Analyze the tariff scenarios to optimize the “Landed Duty Paid” price once in US.
- Understand the geopolitical tensions between China and US to balance risk vs. reward.
- Dissect & understand the Bill of Material (this itemizes the individual cost elements of each product).
- Introduce competitive tension by always getting quotes from three different sources for every product.
- Negotiate only with the factory owner, and in their language, and on site where possible for maximum leverage.
- Remember, negotiations are a two-way street. You are selling your company as a perfect channel to market at the same time as the vendor is selling their factory as your best supplier.
With these considerations, we can help PC’s uncover many ways to reduce COGs.
What are some of the “wins” that portfolio companies have had as a result of your strategic sourcing group?
While the scales of “wins” may vary, I can’t think of a single case where we were unable to make a significant impact on the COGS. In another recent situation, we were able to source an alternative vendor with competitive sourcing and see 25% savings, greatly improving the profitability of one of our PCs.
However, we typically see even greater successes by investing in relationships with our suppliers and partner organizations. With COVID-19 impacting the production landscape for the last three years, many companies aren’t as actively engaged with their suppliers and often don’t know who is producing their product or performing quality control checks.
This is why we encourage our portfolio companies to have a representative from their company working in the area where their product is manufactured that advocates on behalf of your organization and aligns with your vision. If that’s not an option, I recommend at a minimum that someone from the leadership team pays a visit to the manufacturers to meet with them and get a better scope of what they do. This creates a stronger understanding around the scale of opportunities and creates trust among both teams. Where clients make these kinds of investment in relationships, we have seen savings of anywhere from 10%-45%, and the payment terms greatly improve from the US customers’ perspective.
What ramifications do you see on the horizon as a result of the downturn in the Chinese economy?
While I do encourage a diversified sourcing strategy, it’s hard to deny the incredible role China plays in the infrastructure of the sourcing industry. The world is very interconnected and impacts on the economy of a nation with such a prominent manufacturing industry have ripple effects that extend to all corners of the planet.
One clear picture of the change in consumer demand can be seen in the cost of shipping containers. While the average cost to ship a container from Shanghai to Los Angeles is $2,000 now, it peaked last year at $28,000, signifying the scale of decrease in consumer demand (the reason for this is multifaceted, but one contributing factor is the change in consumer demand away from goods and more toward experiences with travel and tourism on the rise post-pandemic).
Of course, the pendulum will swing back, but it will take another year or so before we go back to the environment of 2019. In the meantime, China is caught in the middle as most factories are running below capacity and demand throughout the US and EU has dipped, leaving its economy weaker. This, combined with Chinese property price collapse, is suppressing domestic consumption in the near term.
Despite these challenges, this creates an opportunity for companies to negotiate for lower sourcing costs, leading to increased margins and profitability. That’s where we as operating partners step in, to help facilitate those conversations with manufacturers throughout Asia and see savings on the COGS for our portfolio companies.
Steve Feniger is an internationally experienced CEO who has led an IPO on the HK Stock Exchange and works with western brands and retailers to professionalize their buying and sourcing operations in Asia. Steve has over 30 years international experience in sourcing, manufacturing and retailing, the majority based in Hong Kong & Shanghai.