AMR Research recently published an article that about a study they have been working on which indicates that companies are starting to look near shore when making sourcing decisions. In the study, risk was one of the key drivers for this trend. Companies surveyed identified the following risks in dealing with China.
- Intellectual property infringement
- Product quality
- Regulatory compliance
- Supplier Failure
- Commodity price volatility
The article goes on to point out that many companies are planning to increase on shoring activity (an interesting shift from a few years ago!).
Supply chain risk isn’t the only issue driving this trend. Over at the IBF Blog, Tom Wallace, in a recent post, discussed a Business Week article that identified that the China price advantage has eroded from 22% to 5% cheaper at the port of entry. This is driven by the increase in prices China charges for their goods and increasing transportation costs. As Tom points out, higher risks in addition to the reduced savings makes it difficult to rationalize the other costs of doing business in China;
- Longer, more variable lead times (which drive the need for higher inventories)
- Quality concerns
- More complex engineering change logistics
In addition to Tom’s comments, what we’ve seen is that visibility and control over the supply chain can be a challenge and communication can be difficult due to language barriers. And let’s not forget the “green factor”. Moving goods around the globe simply isn’t environmentally friendly. Also, China’s record on environmental issues isn’t exactly stellar either.
I have to admit, as an “old manufacturing guy”, I would be happy to see the on shoring trend continue. While this may come with a slightly higher cost for our gadgets and clothes, I think it’s better for us, better for the environment and maybe even better for those living in China.
What do you think? Do you currently outsource to China? Have you been reviewing your outsourcing strategy?
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Tags: China, Outsourcing, Supply chain risk
Posted in Supply chain risk management
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Hello,
As a Chinese, I’m quite disappointed emotionally. However, I agreed somewhat!
So many companies subcontracted to China, by simply sending an order. It is risky of course!
I understand, even using an purchase agent may not good enough. Selection of purchase agent is risky also!
My suggest is to arrange your own staff there. Probably one expatiate with some locals.
Just my idea!
Larry
My company has outsourced a lot of items to the Far East including China, Korea, Japan, Singapore, and Malaysia. I am in charge of Supplier Engineering. What has worked well for us is to have a local contingent of engineers with no Expats. I manage these engineers directly and through a local manager in Shanghai.
By having local engineers dediacted to supplier performance, we overcome the distance and language problems. Without expats we keep our cost down and maintain good relations with our employees and our suppliers. With the engineers near the suppliers there is more time spent at the supplier and we get very quick response and continuous improvement.
I have found Chinese suppliers are willing to protect the environment in line with our goals. They need leadership from us to identify the best places to make the investment.
Regarding prices, you need to look at total landed cost versus value provided. Our products are large and incur high shipping costs. Since 70% of our customers are in Asia, it makes sense for us to manufacture in the region, taking advantage of low labor costs and lower logistical costs.
I am an old manufacctuing guy too, but the reality is we are all competing globally and we need low cost, high quality, and speedy delivery to compete. It is possible to get the total package with the right supply chain design and Supply Chain Managment orgainazation.
I agreed with Jim! Chinese style controlling measures is necessary here!
Although I’m logistics/SCM guy right now, I worked in manufacturer (invested by Japanese) over 20 years. I know well how they think. I witnessed how big the gap between foreigners and local on mantality, culture, value and logic.
Local Chinese tend to keep everything secure (but no privacy at all, so interesting situation). However, once you get close personal relationship (Guanxi) with you, they may disclose everything to you personally. It is so difficult to be understood by western.
Jim’s successful case is not many (even without an expat). It depends on how reliable your locals recruited. That’s why I suggested an expat is better to be there to provide guidance and steer their mantality, at least the initial period.
Having worked with Chinese sources for many years, my constant concern is product quality. Delivery delays are another constant concern. Price is not even in the picture if I can not get the quality and delivery I need. We have plants in China, both directly owned and JVs and expat quality folks overseeing operations and even with this kind of supervision, we still have issues. Some times it is materials related and at other times it is shift related. The variability drives us all crazy. I have been asked to put together a resourcing plan brining the goods back on shore (NAFTA) and do a total TCO evaluation. In my view, even a 5% higher cost would be worth the elimination of the ongoing problems. We have suffered through this now for 10 horrible years lost business due to these issues and in my view it is about time we kill this experiment.
I work for a Taiwanese company that has factories in Taiwan, China and Mexico as well as other places. I agree with the cost of doing business in China is going up and the supply chain is very long and sometimes unpredictable.
A great alternative that we have done is to locate one of our factories in Juarez Mexico. The cost here is a little more expensive than in China for labor but the quality and OTD is great. Located on the US border with El Paso Texas we can cross shipments to and from the US within about 4 hours maximum from time of shipment from US or to the US. We have direct Fed-Ex pick up for deliveries from our factory so our shipments can be in customers hands within 24hrs of pick up if overnight shipment is needed. It is also almost centrally located within close proximity to large population areas of the US.
There is a great pool of both skilled and unskilled labor force here. There is also great tax savings because of NAFTA. All in all I would recommend this area is considering going near shore.
We are also actively recruiting new business as our factory is not a full capacity at this time due to the economy. We are a full service supplier that is ISO certified in the EMS area.
Some great and insightful comments. One thought I’d like to pick-up on is from Jim about regional manufacturing. I think this is a great concept: manufacture your goods where your customers are. If the volume supports it, smaller regional manufacturing centers can be cheaper overall than one mega-factory that requires you to ship goods around the world. Some benefits of regional factories;
- reduced lead time
- reduced shipping costs
- reduced carbon footprint for shipping (is this offset by duplicated resources for multiple factories?)
- improved communication between customer and manufacturer (doesn’t eliminate communication issues – there can be many different languages and dialects in a small region)
Are there others?
I think the risk elements identified in my post still apply, but as has been pointed out, these can be managed if companies are willing to make the investment.
What do you think? Does distributed, regional manufacturing make sense (given a reasonable volume)?
As a United States manufacturer, I am equally against foreign outsourcing and appreciative of what the added competition has done for our company.
If we had never outsourced, there would probably have never been the necessity for American manufacturers to rehab our operations. The corporate exercise provided by two Chinese companies entering our market has improved efficiency and customer dedication exponentially. Of course, it came with the great heart ache of several of our customers switching to these foreign businesses.
I am undoubtedly pleased that prices are rising for Chinese products and have recently been the shoulder local customers have cried on concerning inconsistent and delayed delivery.
Of course, I can’t get cocky as there are many strategists in China more brilliant than I will ever be working tirelessly to address these problems. If anything, they’ll be keeping me on my toes
I think it is all come down to Accountability and Partnership.
There are so many examples that United States do business with other countries in the past has the same issues at the begining. It is always starts with building the foundation, processes, infrastructure, and most important trust. There is no one else you want to blame except to yourself. Be involved, and be accountable with what you set out to do. Do a better research before you jump into a mess. There is always successful side of the story. Don’t be stereotypes.
Here is the perspective of another old manufacturing guy (42 years of experience):
1. There are categories of work that make the most sense to be manufactured in each country if the end user is in the U.S. Criteria for U.S. manufacture include: high mix/low volume, frequency of design change, regulatory issues, variable demand by a JIT assembly plant, component size, etc. For more details, see my 6/25/09 NPE presentation at: http://us.gfac.com/company/careers/swot.cfm
2. I am working with 3 of the national manufacturing associations to organize a 2010 event to be called something like: “Import Substitution Fair” or “Let’s Bring the Work Back Fair.” We will be asking OEMs to bring out work that makes some sense to bring back. U.S. machine shops and toolmakers will review the work and compete to “bring the work back.” I would love to hear from any OEMs or shops that would like to participate. Contact Harry Moser of GF AgieCharmilles via LinkedIn.
All all business strategies go, outsourcing has its setbacks as well. It all boils down to selecting the right outsource company to handle the data processes of your business. Obviously, if you neglect to do background checks and ask for portfolios, then you might end up with a bad deal. On the other hand, choosing a great outsource company will allow you to take full advantage of its benefits.