Questions & Answers Section Given in HKICPA Seminar on 23 Jun 2012

Question 5:
When a few suppliers drop out of the supply chain the buyers will get very nervous, and will come into the factories or the Hong Kong offices and insist on going through the financials, see the banking facilities and the owner's assets for backup to ensure that no more suppliers will drop out of the supply chain otherwise the buy has nothing to source. So they get very nervous, in fact it’s very much an open book thing.

This was a case of a buyer who had six suppliers and two of them closed down unexpectedly. From the view of the UK buyer, if two more close down then the remaining suppliers would not have the capacity to supply the total buying order to be filled.

Will buyers do this at the beginning? – No because when some of the suppliers close down the buyers enter the panic state. Two more suppliers closing down – we have nothing to sell overseas.

In this case, we advise our clients that it's a good opportunity to raise prices because if your margin is too low you run the risk of closing down than if you had a higher margin. On the other side, buyers have the responsibility to communicate with suppliers to assure them that they will continue to receive orders from the buyer in the future to help with the suppliers planning. The suppliers don’t always trust that the buyer will be there next year or the year after.

The UK buyers tend to be more open with suppliers on the development of new product line etc. so that the suppliers tend to get more assurances that both parties will continue to work together.