Procurement Intelligence Unit

I think it's fair to say that Chinese tastes differ from US tastes. While a US businessman is likely devouring a bowl of cereal or a donut over his morning coffee, his Chinese counterpart is sipping Oolong tea and tucking into a bowl of congee to start his day. These nuances in consumer preference don't end with food; the need to customise product offerings has become an integral part of any successful foreign market entry strategy.

Earlier this year I chaired a roundtable discussion in Shanghai that brought together senior supply chain professionals from leading multinationals operating in China. The aim of the discussion was to determine what megatrends would impact on the procurement function over the coming years. This issue of product diversification and moulding offerings to meet changing consumer demand in emerging markets continued to drive debate among attendees.

While there was an understanding that products would need to change to suit foreign (in this discussion, largely Chinese) tastes, what remained to be seen was the way in which procurement fits into this equation. After all, doesn't altering product lines fly in the face of the traditional procurement mantras of consolidation, standardisation and volume production?

In order to highlight the potential supply chain challenges and indeed the potential rewards of modifying product offerings, I wish to discuss a well-know China strategy case, that of fast food giant, KFC.

Since it opened its first restaurant back in 1987 KFC has been the poster boy of the Chinese fast food market and a guide stick against which the success of an organisation's Chinese market strategy can be measured. A great deal of this success can be attributed to the fact that rather than offering a western-style dining experience (as McDonalds and Popeye Chicken initially did), KFC chose to make modifications to its menus to take into account local preferences and tastes. The organisation even went as far as to diversify its product offering within China to ensure that provincial tastebuds were satisfied. Items such as egg tarts, shrimp burger and fried dough sticks all found their way onto the menu at KFC stores across the country. KFC quickly became a household name and as it began hiring and developing a significant number of Chinese university graduates, it also became a valued employer of skilled Chinese workers.

By offering a product that appealed to the Chinese market, hiring and allocating significant resources to train local managers, and making concessions to source the majority of its purchases from local suppliers, KFC established itself as a member of the local community, rather than the Chinese arm of a US multinational. As a result of this community affiliation, the company's growth in China has been nothing short of astounding. According to the Harvard Business Review, there are over "3,000 KFC stores, in 650 cities (across China), with one new restaurant opened a day".

It sounds simple, right? Customise your product and you'll be an instant success in foreign markets. Well… not quite. Disregarding the fact that products designed by western companies have been developed and modified for decades in order to meet the nuances of consumer preferences in the west, and that gaining an insightful understanding of Chinese culture and consumer behaviour is about as easy as learning Mandarin overnight, there are also significant supply chain and procurement hurdles to overcome.

KFC highlighted that it faced great challenges in order to come good on its promise to source local Chinese products. These challenges were due in large to the hugely fragmented supplier market in China. Traditionally, in the West, KFC would sign a high-volume deal with a national supplier for the provision of a product over a huge geographic, in many cases national, area. These national providers simply do not exist in the Chinese market. The Chinese market for food (and most other goods) is characterised by a vast array of small suppliers that service a market within close geographic proximity to their operations. KFC also faced challenges regarding food safety in China - an area of huge potential risk for an organisation looking to protect its global brand image.

In order to secure supply and alleviate concerns over food safety, KFC elected to build its own supply chain from the ground up. China Division Chairman and CEO Sam Su said that KFC "worked with its suppliers to build their capabilities. We stress the importance of knowledge transfer, and even arrange for them to go overseas to learn". By following these steps and making contributions towards developing and nurturing suppliers until they meet KFC's standards, the organisation essentially ensured the stability of its own supply chain in what was a particularly volatile environment.

Perhaps the learning to take away from the KFC case study is that similar to the way in which Chinese consumer preferences differ from those in the west, so do Chinese supplier markets, and any decision to modify product ranges or commit to local supplier agreements needs to be made with an acceptance that the supply chain that the organisation is signing up to in an emerging market may look very different to what the organisation is accustomed to at home.