Can your supply chain handle the risks of sourcing from China? (September 01, 2006)

In our cover story “Dancing with the Dragon” in the September issue of CT&L we report on the fantastic growth in China-Canada trade. The People’s Republic of China – the world’s sixth largest economy and the third largest trading nation – , is an economic dragon with a voracious appetite. It is buying Canadian products at a record pace that is changing traditional shipping partners, patterns and destinations. And North American manufacturers are proving just as voracious in their appetite to source from China in an attempt to find lower product costs. About a quarter of Canadian supply chain managers now have responsibilities for managing product shipments in and/or out of mainland Asia, our own research indicates.

Imports from China have increased by more than 500% since 1995 and serve as the major driving force behind the considerable growth in international container traffic in Canada over this period. During the same period the drop in the US share of Canadian imports has been unprecedented in the history of Canada-US trade. US imports made up only 56.6% of our total imports in 2005, the lowest level since the 1930s, according to Statistics Canada data.

But dancing with a dragon can be a risky business. In their rush to source from China are many companies blindly walking into a strategic trap? So contends George Stalk Jr., senior vice president and director in the Toronto office of The Boston Consulting Group.

In a well-argued submission to the respected Supply Chain Management Review Stalk Jr. explains that the trap is thinking that sourcing from China will result in lower product costs when, in reality, the supply chain dynamics will drive up overall costs and reduce profitability. Numerous studies in recent years have found that logistics costs are considerably higher in China than in most developed countries and we detail why this is so in our report.

The low unit product cost that attracts companies to source from China is only one part of a very complex equation and must be considered against the direct, indirect and hidden costs of longer and more complicated supply lines. (Direct and indirect costs include shipping, nesting and de-nesting of containers at both ends of the ocean freight move, inventory storage, handling, procurement, insurance and financing). Hidden costs are more difficult to pinpoint but, according to Stalk Jr., include the costs associated with the fact that as supply chains lengthen, they also tend to take more time to move product. And the longer a supply chain requires to move product from origin to destination, the more difficult it becomes to manage without fluctuations, which create cost.

Of course, those low unit product costs from sourcing in China are a difficult enticement to pass up for companies scrambling for every competitive edge they can find. So if a company does decide it must dance with the dragon, how can it best prepare itself? By aggressively managing its China-based supply chain to reduce time and variability, argues Stalk Jr.

He points to several options which at first glance may appear costly but he contends will actually result in overall lower costs. For example:

*Opting to move products with the highest margins and volatility by air

*Insisting on point-to-point ocean shipping. Shipping products on a vessel that has your destination as its last port of call can add weeks and great variability to transit times, he points out.

*Developing better relationships with transportation providers. While this could mean paying extra to receive preferential treatment for example, paying a premium so that the carrier will load your goods onto its vessel last and unload them first, or paying extra to have your containers onto railcars that are then expressed east can cut days and sometimes weeks out the supply chain.

Of course, such initiatives require a willingness to pay premiums or to invest in capabilities that accelerate the flows and interpretation of information; developing designs that push final assembly closer to the point of final demand; learning how to source, manufacture, launch and withdraw products more effectively; and exploiting new concepts for faster freight movements.

Admittedly these may be difficult concepts to sell to management if the executive does not view supply chain investments as an outright source of competitive advantage. Yet it will be worth the effort. Stalk Jr. is convinced that by focusing on reducing time and variability in the China-anchored supply chains serving North America, companies can reduce their costs dramatically, improve their margins, and build competitive advantage.

In his own words: “We believe that such performance improvements will dwarf the more conventional profit-improvement efforts now under way in most companies.”

WORTH REPEATING
“There is no shortage of new risks in any global supply chain.” — Mark Crone, director supply chain planning, Limited Brands Inc.