Due diligence enables European machinery company in China to address issues of compliance and corruption

The client is a leading machinery company from Europe, and has had an established subsidiary in China for around 10 years.

After internally reviewing the China subsidiary’s recent spend data based on purchases from headquarters, the senior management found that the purchasing volume has been decreasing while the sales remained the same level.

To further understand the situation at the subsidiary, the company has decided to investigate this using a third party consultant.

ARC Consulting was appointed to conduct an operational due-diligence project on purchasing spend of selected parts. The project’s goal was to identify any suspicious activities that might be occurring in the Chinese office.

Workings of a complex piece of machinery

The ERP systems for HQ and the subsidiary are not linked together, so remote management over the local subsidiary has not been easy.

Sales reporting is much clearer, however, headquarters has little visibility to the purchasing data, including volume and spend with local suppliers.

To help the client really understand the current status from the purchasing standpoint, ARC Consulting rolled out a project in the following steps:

ERP data analysis

In the first step, ARC Consulting visited the subsidiary and pulled out the purchasing data from ERP system. The data was then analyzed from several angles, including by part number, supplier and category. Trends were identified.

Local Supplier Visit

Second, ARC Consulting visited a few local suppliers as identified in Step 1 and approved by the client. The suppliers’ capabilities were evaluated and their certifications were checked on or after the visit.

ARC Consulting provided its independent opinions to advise the client throughout the project.

The final report contained detailed clarifications of the issues raised and provided specific recommendations on potential areas for improvement based on the supplier audit result.

ARC Consulting delivered an objective and impartial audit report, including a detailed analysis and evaluation of the suppliers’ facilities and operations. The report successfully assisted the client in obtaining a deeper understanding of the potential acquisition company’s organizational structure and the current status of its suppliers in China.

With the independent investigation result, the client achieved better visibility to the purchasing data and local supplier base in China. The risk in management has been greatly reduced, and several improvement ideas have been outlined by ARC Consulting and planned by the client for the future.

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