Our cover story on Asian supply chains stresses a point we’ve been making for several years now: reaping the sourcing and manufacturing benefits created by the low labour costs of this area requires a sound supply chain management strategy. Those who rush into it – and, judging by the available statistics, there are many who have – can expect to stumble, frequently and at considerable cost.
Low-cost country sourcing is considered to be of strategic importance to almost three quarters of Canadian firms, according to an Industry Canada-SCL report published before the recession. No doubt this is even more so during our weak recovery, as stagnant US and European economies cause Canadian importers and exporters to cast their sights further afield than their traditional markets. Yet the report also found significant issues with on-time performance and total landed costs for companies employing low-cost country sourcing strategies.
Managing international logistics is not like managing an extended domestic supply chain; it’s fundamentally a multi-party process fraught with greater unpredictability in quality, lead times, costs and risks. Industry Canada’s Philippe Richer pointed that out in his very insightful cross-country tour with SCL supporting the report back then and it’s even more true today, particularly when dealing with China.
I have always been concerned with how much of a shell game low-cost country sourcing seems to be. There is considerable attention paid to the port-to-port or airport-to-airport move, with an emphasis on attaining the lowest possible sea and air rates. But what happens on the way to the port of origin, and the level of service available on the way there, doesn’t get the same consideration. Origin and destination costs often get buried in the cost of goods sold, thus not providing a true representation of total supply chain costs.
Such oversights leading to inefficient supply chain practices are about to become much riskier. Here’s why:
First, the China we’ve come to know as “the factory to the world” is changing. The Chinese believe the strategy that turned their country into the premier producer of low/mid-value commodities over the past 20 years is not sustainable over the next 20. Pay for factory workers in China, for example, soared by 69% between 2005 and 2010. Already it’s cheaper to produce certain goods in Mexico that used to be staples for Chinese manufacturing just five years ago.
The change that’s coming is evident in the 12th Five-Year Plan adopted in January. China is shifting its manufacturing focus in its developed and infrastructure advanced eastern and southern regions to higher-end, higher margin products. It is also placing greater emphasis on green technologies and products. There are immense new opportunities here, but as Michael A. Zakkour of Tompkins International argues in his recently published paper China 2.0 – What the New Reality in China Means to You, to take advantage of such new opportunities, companies need a new way of thinking about sourcing, manufacturing and other key supply chain processes in China.
For example, companies that now count on China to source simple components, parts, and accessories could soon be looking to China for much higher-end products such as computer chips, GPS systems and fuel injectors. But as Zakkour points out: “These higher, value-added finished goods will have more complex internal and external supply chains, similar to those in North America and Europe, and yet different because they must be moulded to the business and political environment in China.” The current sourcing strategy and supporting supply chain practice that is so heavily focused on sheer margin improvement would fall short in this new reality.
China’s new Five-Year Plan also calls for wealth and opportunities to be distributed more equally across the country. There will be tax, land and investment incentives for business – both the remnants of low-margin manufacturing and new high-tech manufacturing – to move into China’s much less developed western regions. Total production costs in cities such as Chengdu and Chongqing can be 25-35% lower than in the traditional manufacturing centres of Guangzhou, Shenzhen, and Shanghai.
But the western regions present significant transportation challenges. As Zakkour points out: “Moving a product from a Guangzhou factory to port is a relatively simple endeavour. Moving those products 1,500 miles east from factory to port is a much greater challenge. River transit can be slow, rail is not fully developed, and trucking through several provinces with their own individual laws, duties and checks can be daunting.”
As before, China and much of the Asian region presents considerable opportunity, but only with the right supply chain management strategy in place.