Posts Tagged ‘China’

Inventory Gluts: Avoiding butter mountains and wine lakes

Published September 17th, 2012 by Jenny Tyrrell 0 Comments

In the 1980’s, Europe had what was colloquially known as butter mountains and wine lakes. Farmers in the EU under capitation grants were being paid to produce product for which there was no market. The overhang was enormous, and this inventory glut of unsold butter and wine went on to impact the price industry could command for these products. Europe is still paying the price with what is now known as decapitation, effectively paying farmers to leave land fallow in order to try and manage the supply demand imbalance.

China, and more widely the Asian region, is not immune to the global economic downturn despite growth figures their western counterparts envy. Europe & the US are still struggling. China’s input and output figures released for August are lower than expected. They have also reduced expected growth rates for 2001/2012 by 1/5 to 1 %. The upshot of this to a regular consumer is quite staggering, and to business worldwide. China is a country of production. If we, and in we, I mean all of us, don’t buy, or more accurately can’t buy, where does all of the production stuff go? Into warehouses. And that’s when the problems really begin. Building inventory mountains is a major problem. Masking the problems and creating falsified growth make it much more difficult to manage. So, what can you do to avoid it, and if not avoid it completely, best manage it?Inventory Gluts: Avoiding butter mountains and wine lakes

The moral to the story is this: Know your inventory. Here is the key:

Make inventory management a direct part of S&OP, not a by-product of the process. There is a difference.

With the trend of outsourcing still strong, inventory planners cannot go down to an inventory floor and visually see what they are managing. Your CM’s contractual obligations can also be negatively impacting you. Harsh sale or return clauses on VMI (Vendor Managed Inventory) can negatively impact your bottom line. And depending on your forecasting model, you could be contributing to the problem.
Having, and managing key inventory metrics are key to knowing your position, and enabling you to react. Often, S&OP can be implemented with inventory falling out as a by-product of S&OP policy, not as an integral part of it. Linking dynamic inventory management to S&OP is the key.

Maintaining strong E&O (Excess & Obsolete) reporting, measuring DoS (Days of Stock) and ToR (Turns of Ratio), reviewing contractual VMI clauses, and closely monitoring forecast accuracy is the best way to keep your inventory glut to a minimum.

Forecasting accuracy is the bugbear of the supply chain. With business building to forecast as opposed to real demand, this is shortening lead-times and enabling responsiveness. All good. But, and it’s a big but, it only works if you closely monitor forecast consumption and adjust your horizon accordingly. Use market trends to help determine the right statistical model to use. Regardless, historical trends should be an indicator, but not the only consideration. Given economic instability, what was in the past, may not be the future and determining the weight you apply to historical is key.

This nicely segues into VMI. Depending on your contractual obligations to your CM— normally a 60 day sale or return policy— you could end up with a large inventory bill on your P&L statement that few companies have the luxury to absorb easily. Ensure your figures look like they should.

Trending DoS and ToR of your inventory will allow for intelligent analysis. If the numbers are rising for DoS and lowering for ToR, this should be reflected by your CM’s figures and is an indicator of forecast consumption.

Growing inventory mountains bring bad news. It reduces product value, negatively effects employment therefore reducing consumer spending power, and floods the market with cheap goods. It is crucial that inventory management is treated within the S&OP process as an integral part of planning strategy, and not a by-product.

Posted in Demand management, Supply chain collaboration, Supply chain management

Rising Labor Costs in China and Their Impact on the Supply Chain

Published April 12th, 2012 by Jenny Tyrrell 0 Comments

laborIn October 2011, Simon Rabinovitch of the Financial Times published an article entitled “China labor cost soars as wages surge by 22%.” This figure is an average across the breadth of the country, with Shenzen and Beijing named as the costliest locations to do business. This trend has been covered extensively by the media in recent months, including Supply Chain Digest last month.

Rabinovitch’s article is interesting, and he listed a number of factors influencing this trend. Chinese inflation and local municipal policy on raising the minimum wage are the primary factors. Rabinovitch also talked of this being a direct policy of the Chinese government, driving municipal action, to move activity in the region further up the value chain. We now see contract manufacturers offering managed services, Celestica being a prime example. It is simply a case of margin. CMs build to low margin and high volume. Margin jumps significantly when they move into professional services.

It is incumbent upon the supply chain to ask if this is a positive move or a negative move.

In previous blogs, I have written about the move toward the Asia-Pacific labor market in the mid to late 90s, primarily driven by low-cost manufacturing, low corporate rates, power services, and inexpensive labor. So, the question is, how does this impact change of cost in the region, impact global companies and their manufacturing base, and ultimately, the cost for the consumer?

This is where the discussion becomes interesting. Do we move out of the Asia sphere, or is this actually a where supply chain needs to be positioned—close to an emerging market? Why would you disregard a market of this size  and continue to view this portion of the globe as an export-driven manufacturing base to support western consumerism? We need to be cautious about a knee-jerk reaction here and move bases out of China to lower cost bases in the APJ region or elsewhere. This reaction may well turn out to be a case of kicking the can down the road, as this wage trend is playing out across all of APJ.

So instead of looking at the negative, the supply chain should look at this as a potential growth and consumer market as well as a manufacturing base.

So initially, the base margin is being squeezed. The upshot of this trend, however, is that a large technology-hungry population has expendable income for “luxury goods.”

Take China alone. Chinas population exceeds 1.3 billion. With an average workforce of 900 million, this is an astonishing large consumer market. If the working population has money to spend, then, the demand chain needs to rise to the occasion and deliver. As a profession, the demand chain is becoming just as much of a buzz word as the supply chain.

So looking at the whole picture, reducing baseline margin, and placing the money into consumer hands will drive the “demand chain,” and ultimately drive sale of goods. Volume will ultimately win out over margin.

Companies need to get “smarter” at managing their supply chains. Labor is only one cost factor in margin as discussed in previous blogs. Technology and people create a lean supply chain. Give people the tools required to react to the market, and the supply chain will find its own margin, and adjust accordingly. So the discussion becomes market size versus market margin.

Posted in Products, Supply chain management, Supply chain risk management

The Shifting Sands of World Economies

Published March 28th, 2012 by Trevor Miles 2 Comments

It is amazing to me that there are many in the West that continue to hope—dare I say, pray—that the shift in the world economies over the past 5-10 years is an aberration, and soon we will be back to the heady dayseconomiesof the mid-2000s. Every day I read stories about how manufacturing is going to return to North America. Sure some if it will, but we are trying to close the stable door after the horse has bolted. For one thing, the global economy has changed, and people are simply not interested in some of the products we produced “back then.” Even if wages in China and India double, it will only mean that products are more expensive in the West, not that it will be cheaper to produce in the West.

I know this sounds harsh and uncaring, especially stated from my ivory tower position in a software company that is doing very well, thank you. I don’t mean to be harsh, but I am impatient because we are trying to fix the wrong problem. And I admit that it is easier to point out problems than it is to devise solutions, but without an agreement on the problem at hand, there is little opportunity to reach consensus on the manner in which to resolve the issue. I wish I had a crystal ball that would tell me how to turn things around, but I don’t. But I know it isn’t by sitting around hoping for the world to right itself. The horse has bolted, and closing the stable door isn’t going to keep it in.

Here’s why.

In June 2009 I wrote a blog titled “Recession or Reset?” in which I quoted the following passage from a article:

The real question: Can China pump up domestic demand soon enough? Chinese private consumption’s share of GDP fell steadily over the last decade to around 35%, meaning it may have a long way to go to pick up the slack of the export sector and export-oriented investment.

While this is still a real risk, there is other evidence that China is emerging as a major consumer market, such as the ZDNet report “China on track to be top smartphone market in 2012, says IDC.”

Commenting on “Rising Chinese Wages a Headache for U.S. Firms” in Industry Week, Andrew Beatty of Agence France-Presse states that:

Last week, Nike reported it had made even more profit than it did the quarter before, yet its stock sank. Investors hacked about $1 billion off the company’s value on March 23 because of a reference to “declining gross margin” stashed in the firm’s quarterly report. The details are complicated, but Nike’s jargon in part referred to rising wages in places like China taking a chunk out of profits. Indeed, the details show rising wagesalong with some other factors like higher material costscaused Nike’s margins to fall two percent in just one year.


Andrew goes on to state:

That leaves U.S. manufacturers with only a handful of options: accept lower profits, pass the cost on to consumers or lower labor costs some other way.

But that is a very U.S.-focused perspective.  What does this look like from China? Commenting in The China Daily in 2004, Xin Zhigang says that:

The Chinese Academy of Social Sciences (CASS) released a report earlier this year that suggested China’s “middle class” accounted for 19 per cent of the country’s 1.3 billion population by 2003.

Based on an annual growth of one percentage point, the “middle class” people in China is expected to make up for 40 per cent of the total population in 2020, the academy report said.

Just so we understand what this means, the projected population of China in 2020 will be about 1.4B people, so the middle class will be about 500M. The total population of the United States in 2020 is projected to be about 305M. And the total population of the EU in 2020 will be about 460M. I’m a visual person, so here is what it looks like in a graph extracted from a study titled “Global Growth and Distribution: Are China and India Reshaping the World?” published by the Korea Capital Markets Institute.

The issue for the West has shifted from how much can we buy from China, to how much can we sell to China. That’s my opinion anyway. We’ve got to shift our focus from outsourcing to marketing and sales. How are we going to capture as much of the Chinese market as possible? That is the question that should beat the top of every Western CEO’s mind.

But we need to get on our bikes. Now.

Much of the comment in the West is about how, as wages rise in China, manufacturing will move to Vietnam, amongst others. In an article titled “Selling to China & India’s Middle Class – It’s a Vietnam Manufacturing Play” Chris Devon-Ellis of Dezan Shira & Associates makes the observation that:

While rising labor costs may make many grumble in China about the costs of staff, another benefit occurs. That increasingly wealthy and prosperous worker can now afford to buy more goods.


Vietnam, then, is starting to stand up as an important regional player when it comes to servicing markets in Asia, especially so for those wishing to take advantage of new opportunities in selling to the growing Chinese and Indian middle class markets. The role of ASEAN, and the free trade and double tax agreements it holds with China, India and other nations now need to be evaluated as the global race to sell to Asia begins in earnest. Establishing a manufacturing operation in Vietnam may well be a strategy that will hold up well in order to consecutively sell to China and India–and ASEAN.

In other words, even as Western companies try to satisfy the markets in China and India, it is unlikely that manufacturing will return to the West. So let’s move on. I will leave larger social policy discussion to others that are much better informed and knowledgeable in this area. But from a supply chain perspective, the discussion has to move from “how do we get goods to the West from China” to “how do we design, market, and manufacture goods to satisfy demand in China and India?”

Anything else is a race to the bottom.

Posted in Milesahead, Supply chain management

Did the Japan earthquake impact your supply chain? What if something similar happens in China?

Published January 10th, 2012 by John Westerveld 2 Comments

We have all been awestruck by the human impact the quake and tsunami had (and is still having) on the good people of Japan. The impact of the quake is also financial, however, and impacts people and companies around the world.  Toyota cites the quake as being responsible for a drop in earnings for 2011.  As a photography enthusiast, I watched as Nikon and Canon both stopped production after the quake.   The quake didn’t just impact companies based in Japan, it also impacted manufacturing companies that source from Japan.

I thought that from a supply chain perspective, the quake in Japan was bad.  Really bad. Until, that is, I came across this post from the @risk blog.  The post highlights a study from commercial/industrial insurance company FM Global.  The study examines how reliant the companies involved in the study were on China for some or all of their manufacturing and supply.  Some interesting points from the study;

  • 86 percent of companies surveyed are more reliant on China than Japan for key product lines
  • 83 percent of companies surveyed think supply chain disruption is a moderate or higher risk to the financial wellbeing of their companies
  • 94 percent of companies surveyed are concerned about natural disasters in China as a result of the Japan earthquake
  • Over 60 percent of companies surveyed are evaluating their supply chain risk in China as a result of the Japan earthquake

The study goes on to suggest you assess your resiliency to a disaster in China by asking the following questions;

  1. Does your senior management view resiliency as a competitive advantage and has it made the necessary commitment?
  2. Has your organization examined how it can mitigate risk within its products and processes?
  3. How well does your company collaborate with its suppliers to assess and mitigate risk?
  4. Does your corporation have appropriate business continuity and disaster recovery plans for supply chain disruptions emanating from emerging markets such as China?

A significant earthquake in China is going to happen.  China shares many Geologic features with Japan and a quick Google search shows significant seismic activity including earthquakes over the last several years (2011, 2010, 2009). So, the question is when (not if) will an earthquake hit a major manufacturing center?  When this happens, it doesn’t take a doctorate in supply chain to see that the impact to unprepared businesses will be devastating.  Do you agree this is a concern? What steps are you taking to mitigate the impact of an event like this?  Comment back and let us know.

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Posted in Supply chain risk management

People don’t see the distinction between the company that owns the brand and the company that makes the product

Published August 3rd, 2011 by John Westerveld 0 Comments

The headline in this Reuters article jumped out at me. “Big-name brands sourcing from polluting China firms”. Wow. I would hate to be those guys. Why? Because people don’t see the distinction between the company that owns the brand and the company that makes the product. The article named several major companies including Adidas, Nike, Puma, Calvin Klein, Lacoste, Abercrombie and Fitch whose products are sourced through one of two major textile suppliers; the Youngor Textile Complex in Ningbo and the Well Dyeing Factory in the Pearl River Delta. Both of these companies have been accused of polluting waterways with “toxic, hormone-disrupting chemicals banned in Europe and elsewhere” according to Greenpeace.

This incident hammers home the point that the companies we contract to build our products become extensions of our brand. If the company does something unethical, illegal or environmentally damaging, the brand owner is mired by the contractor’s actions. The problem is that as a brand owner you may feel that you have limited influence on your subcontractor as they are a separate corporate entity.

Let’s look at how you can address this;

1) It’s more than just price – Look beyond the price point and consider the total cost of contracting with this company. If they are the lowest cost, perhaps there is a reason. Perhaps they achieve their low cost through shoddy quality, through unethical business practices or through irresponsible environmental behavior.

2) Hold the contract manufacturer to the same standards that you hold yourself. Remember, they are an extension of your brand. If you have environmental or ethical policies, make sure that your contract spells out that they are expected to follow these policies. Further, stipulate that failure to follow these policies would be considered a breach of contract.

3) If you are holding your contract manufacturers to your standards, make sure that you do periodic audits to ensure that they really are adhering to the standards you’ve set. At a minimum, go to the place where your product is being made and observe how things are done.

4) If there are environmental standards or certifications applicable to your industry, look for contractors that have achieved those certifications. This can make life much simpler as the certifying organization is now responsible for auditing.

When we close our factories and have product made for us by another company, we are giving up a lot of control. If you partner with the wrong company, it’s not just cost and delivery that can be hurt; it’s your company’s hard won reputation.

How do you ensure that your contract manufacturer is protecting the image of your brand? Comment back and let us know!

Posted in Best practices, Supply chain management

Observations from a trip around the world – Part 2: Are we ready for the China ‘tsunami’?

Published April 15th, 2011 by Trevor Miles 3 Comments

I am fascinated by the social and cultural changes taking place throughout the world, driven largely by the emergence of the so-called BRIC countries, and hastened by the predominantly Western recession in 2008. I used to love the fact that only certain products were available only in certain countries and regions. When I write ‘used to’ I don’t mean that I now no longer love this, but rather that the distinctions and uniqueness’s are no longer available. We can buy Nutella in Canada now, no need for my kids to visit my in-laws in Germany to get one of their favorite bread spreads.

I was boarding a plane in Frankfurt to fly to the UK, surrounded by a bunch of kids from the Culham European School, about which I know nothing. But while boarding, some of the boys were making the usual boorish comments English people reserve for German. Nothing unusual in that except four of the boys then swapped into French, and with French accents to boot, while just a second before they were talking English with middle class English accents. It turns out that they are French, attending a school near Oxford. Well, when last have you heard a French person speaking English with an English accent?  I think the French accent is something to cherish and to enjoy. I love the differences that make up cultures, warts and all.  I much regret the homogenization of cultures. But times, they are a-changing.

Having struggled for a week with, and been embarrassed by, my non-existent Mandarin, I am happy to report that I did see the future at the Shanghai airport while checking in for my flight to Frankfurt. Next to me was a 25-30 year-old German speaking in what I can only assume to be fluent Mandarin. I wish I could report that he was speaking Mandarin with a German accent, but I regret to say that I could not tell.  He was the first Westerner I had come across in my week in China who did not speak Mandarin like I speak French: With more hope than expectation of being understood. This reminded me of a guy I worked with in the mid-1990′s who now has a pretty fancy title with SAP in China. Nice guy, but not one that would have been chosen to be very successful in his yearbook. Turns out that he studied Mandarin at university in the early 1990′s. I wish I had his foresight, and that I had not underestimated him.

During the two day conference in Shanghai there was only one presentation in Mandarin; the rest were all in English. Based upon the simultaneous translation, it was a fantastic presentation by Haier.

I couldn’t understand the slides since they were in Chinese script, but wish I could have at least got the basics. According to OneSource Haier’s revenue in 2010 was about $14B, and likely to become the largest white goods manufacturer in the world in 2011 in terms of revenue.  They are already the largest in terms of units shipped. I had at least heard of them. One of my colleagues had not even heard of them. My point isn’t to pick on my colleague’s lack of knowledge, but rather to point out that in general there is a woeful lack of knowledge in the West of what is truly happening in China.

A few weeks ago, we had a visit from a friend who is a bigwig in the music industry and travels frequently to China looking for Classical talent. His opinion is that if items cost as much in China as they do in the West there would be much greater parity between China’s GDP and that of the US. He thinks China is already the world’s defacto leading economy and that we in the West are simply uninformed or have our heads in the sand. After this trip, I agree, even though the World Bank numbers indicate otherwise.

What is interesting in my friend’s statement and consistent with the Haier story is the emergence of China as a market, not just some place where nearly everything in the West is produced. Many companies, like Haier, are building brands little known in the West. There was also a presentation by Siemens, the giant German engineering company, on how much they have not only shifted manufacturing to China, but how much R&D they are doing in China, and how big a market China is for Siemens. What I see emerging is brands headquartered in the West with the majority of their sales, R&D, and operations in China. How long will it be before the HQ is deemed to be out of touch and moves to China?

I picked up Vinnie Merchandani’s book “The New Polymath” before I started on my journey. I wouldn’t put it into the same category as Tom Friedman’sThe World is Flat“, perhaps only because “The World is Flat” came first, but also because Vinnie is actually writing about something else than the emergence of the BRIC countries. But there are some fascinating sections on the manner in which competition from China and India is going to change how Western companies will do business. No, I don’t mean securing business as Siemens and other western companies did in the 2000′s through bribery but rather how they will need to win and deliver business through superior execution. He writes about how a factory in China, with living quarters for the workers above the factory floor, was designed in less than a week and how the contractor submitted a quote for construction in less than 24 hours. I am sure many readers will immediately smirk about safety standards and quality of build. Perhaps some of that’s warranted, but it also misses the point about the speed of business, and the associated costs. No Western company I know of could compete in the design and build business at this speed. We can question government regulation and oversight as much as we want, the reality is that this is the speed and flexibility required to do business in this area. Thankfully, Chinese software companies will likely have more business in China than they know what to do with for the next 10 years, giving us in the West some time to adapt. But as I reflect on my trip I cannot but wonder about the software companies in China and India about which I know nothing, and whose products may already be competitive with products from the West. Have you heard on the ERP system called Kingdee? Look it up.

Some months ago I was interviewed by our Marketing team. One of the questions was what advice would I give to young people entering the supply chain market, to which I replied “Go East young man”. I’d like to revise that to “Go East young man. Go NOW.”

I am not naive enough to think a week-long trip to China makes me an expert. There are real political, environmental, cultural, and economic issues that must be addressed in China. A Western education is still a prized possession in China, especially a graduate degree.  It is simply that I am staggered by how much I am out of touch with reality despite reading a lot about the rise of the BRIC countries, and China in particular. The wave isn’t coming, it is here, and it is a tsunami.

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Posted in Milesahead

Counterfeit merchandise: Keeping it real

Published September 9th, 2010 by John Westerveld 4 Comments

Here are two Microprocessors.  They look the same.  They have the same part number.  One will work fine.  The other?

The other, while it appears to be the exact same part is a cheaply made counterfeit.   If you’re lucky, it will fail as soon as you put it in.  If you are unlucky, it will fail as it is being used by your customer.  Depending on what this chip does, the failure could simply result in a return and an unsatisfied customer.  However, it doesn’t take much of an imagination to see that if this chip is part of a critical component in an aircraft, automobile or healthcare product, the failure could result in injury or death.

As I started to look into this subject, I came to the realization that it is HUGE.  To help me keep things straight, I’ve broken counterfeiting down into two broad categories;  Counterfeit retail products  and counterfeit components.  Both have different risks associated with them and have different mitigation strategies that should be considered.

We’ll look at retail products first.    People have been selling cheap knockoffs for as long as I can remember; clothes, purses, shoes and jewellery ($10 Rolex anyone?), and more recently, DVDs and video games.  If counterfeit watches and DVD’s aren’t enough, we are starting to see counterfeit medication too.  Everything from Tamilflu to Viagra have been counterfeited and sold as the real product…at significant risk to the person using the drug.

Ominously, counterfeit products and components are making their way through the military as well.  Counterfeit components are finding their way into missile systems, fighter jets and nuclear submarines.  Recently, the FBI discovered 400 routers in use in military installations were counterfeit and likely have been used for espionage.

From the brand owner’s perspective, counterfeit products are very damaging;  they impact sales, they drive up costs, they impact your good name, and they can harm your customers.

It seems that protecting yourself from counterfeiters is devilishly difficult.  Options include;

  • Holographic labels (like you have on  your credit card)
  • Micro-print (I’ve seen these on cheques)
  • Unique / obscure marks (small dot on a label)
  • Serial numbers
  • RFID tags.

Unfortunately, counterfeiters keep coming up with ways of fooling the unsuspecting public. However scientists and engineers are also working to find ways to identify the real thing and have developed new ideas like  nano-artwork.

Let’s look at the supply chain side now.   Counterfeit components can range from relabeling of components (from a generic brand to a known brand), to a replacement of good parts with non-functioning mock-ups. A few months ago, NewEgg discovered that they had been shipping new Intel I7 processors that were in fact clever reproductions of packages that contained non-functioning models of the processor.  I’ve talked about counterfeit components of a different nature in an earlier blog post that talked about components manufactured on a ghost shift.

From the supply chain perspective, counterfeit components are a disaster waiting to happen. This disaster can occur at many levels;  counterfeit components intercepted and identified as part of incoming inspections has the least impact on your company.  If the counterfeit component is caught before your product leaves the factory, you have also been lucky.  Once the product containing counterfeit components gets into  your customer’s hands, failure of the component is your fault in the customer’s eyes.  A more distressing problem is what will happen when that component fails?  Will it just go pop?  Or will it burn like a poorly made lithium ion battery?

To avoid counterfeit parts, here are some ideas

  • Beware of prices well below market values
  • Know your suppliers
  • Test your components often.  Ensure your testers are well versed in counterfeit detection practices including x-ray imaging, solvent body softening, component de-lidding and jet or plasma etching (these methods allow you to see below the surface of a chip and compare to a known good item)
  • China is one of the leading sources of counterfeit electronic components.  While it’s difficult to avoid sourcing from China, be aware of the counterfeit risks.

Additional information on avoiding counterfeits can be found here, here and here.

Do you have a counterfeit story?  Do you have advice on how to avoid falling prey to counterfeit components or products? Comment and let us know.

Posted in Supply chain risk management

China…times they are a changin’!

Published June 23rd, 2010 by John Westerveld 5 Comments

I’ve recently been noticing a number of articles in Industry Week dealing with labor disputes and issues in China;

Foxconn, Honda, Brother have all been the target of labor disruptions driving higher labor costs.   Foxconn and Microsoft are both mired in reports of poor working conditions.  While China’s communist government doesn’t officially allow unions, they seem to turn their head at labor protests – so long as the protest doesn’t appear to be critical of government policies.  

Is it any wonder that this is happening?  Prices for electronics have been pressured downwards continuously over the past several years.  Just look at the cost of a laptop today compared to a few years ago.  Almost a 1/3 the cost.  While some of these reductions are due to economies of scale and improved manufacturing techniques, much of the savings is because of the low cost of labor.  Even still, factory wages are significantly more than a typical Chinese worker could make farming or as a laborer in the rural parts of the country, and so workers flocked to the factory towns.  As a result, China’s workers started having a disposable income.  Money for televisions, cell phones, bicycles and automobiles.  The same desire that drives consumption in the West, is starting to permeate life in China.  The Chinese worker wants the same things that you and I want.   Can you blame them?

So what do these changes mean for us?  To a certain extent, we will need to accept that things will get more expensive (in the case of electronics, the downward price trend will slow and perhaps even reverse).  Chinese workers will continue to demand fair wages and better working conditions (as they should!). But these changes can continue only to a certain point.  At some point (as it did in North America, Europe and Japan), the wage pressures are going to increase to the point that the advantages of doing manufacturing in China will start to disappear and China will transition from being a low cost supplier of goods to a net consumer of goods.   At this point work will be moved to the next hub of low cost labour (India?  Africa?). 

My advice for companies with manufacturing in China?  First and foremost, take notice of the working conditions in the factories.   It doesn’t matter that the contract manufacturer is a separate company with their own policies, it is your company name and brand that is attached to the product. Have a plan in place in case your manufacturing source (or their supplier) goes on strike.   Also, (and I’m sure this is something that you are doing already),  closely monitor the costs from your manufacturing operations.  At some point, costs will rise to the point where you will need to start looking at other sources. The sooner you recognize that point, the better off your company will be.  

Before looking for another low cost offshore location to manufacture your goods, consider bringing your manufacturing back to North America.  While labor costs would be undeniably higher, these additional costs might just be offset by reduced lead time, reduced transportation costs, improved quality, reduced risk and improved goodwill.   Just a thought.

Posted in Supply chain management