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.

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!

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’s “The 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.

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.

• Strike Halts Honda’s Production in China
• Honda Offers Pay Raise to Chinese Strikers
• Honda’s Chinese Parts Plant Resumes Full Operations
• Honda Resumes Car Production at Two Assembly Plants in China
• Japan’s Brother Says Hit by China Strike
• Foxconn Gives China Workers Dramatic Wage Hike
• Microsoft Opens Probe after China Factory Report

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.

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Great article, Dan.

I liked your identification of the drivers, and wished that there had been more prediction of what the consequences would be.  For example, how will companies reconfigure their supply chain?  In this particular case, I think we only have to look at Apple and Cisco to see some direction.  Both of them outsource virtually all their production. And of course Apple, as you state in your article, is at the forefront of the “digitization” of the supply chain.

What really fascinates me is the rise of the brand owners in China and India.  I saw an article today in McKinsey Quarterly that China’s economy grew 8.9% in Q3 this year.  Even in the boom period before 2000, growth rates in the US fell short of this number.  Of course, this is even more startling when comparing the growth rate in China over a similar period.

I think we are missing the effect this will have on the Western brand owners such as Apple.  It might seem counter-intuitive given Apple’s record quarter and I have no idea of the product strategy, but I wonder how much they are designing products for the Western world and how much they are assuming the Eastern consumer needs are the same.

As you correctly point out, there will be huge impacts on “product design, pricing, logistics and much more.” I am fascinated by the growth of Eastern brand owners such as Acer, Lenovo, and Huawei.  We have weathered the storm of the Japanese companies in the 1980’s – Sony, Toshiba, Toyota, Matsushita, … but those were different economic times when those companies were designing products for a western market.

I am not yet convinced that Western brand owners are paying sufficient attention to the needs of Eastern markets.  These have been very Western focused, but I suspect as the pride in their countries economic performance grows, so will their confidence and demand for products to meet their specific needs.

We have a number of customers who are the forefront of the blurring of operational supply chain planning and execution.  Of the 10 things you identify, I think this is a consequence of many of the others. And you are correct, this blurring is reaching up into tactical planning too with more and more companies running S&OP on an as-needed basis.

The factors you identify, specifically reduced inventory levels and pervasive visibility, are driving this blurring.  We all know that inventory has been used as a buffer between the demand and supply chains.  Reduced inventory levels require a much more agile supply chain that is very responsive to change.  And of course the supply chains need to be reconfigured to be more responsive.

Dashboards are of course a necessary precursor to understanding whether or not one is on-track to meet future objectives and any deviations need to be addressed before they become “actuals” and appear in a scorecard.

Once again, thanks you for a great article.

During my 2-week visit to China last May, I got a sense of how the economic downturn is impacting the ‘awakened dragon’. After talking with several entrepreneurs, market experts, government representatives, University professors and multinational senior managers there, I realized that their hunger to grow hasn’t diminished and they are looking around to find alternatives to pick up the slack of a weaker export sector.

At the same time, Chinese citizens are becoming more educated and the consumer market is growing, with more consumers and higher incomes. Here are my thoughts on some particular changes:

Diversifying alliances: Tiananmen Square decorated with the national flags of China and Brazil to receive the Brazilian president.

• There is a high level of unmet domestic needs, especially given the internal mobility (people moving from country side to larger cities), so Chinese companies are turning internally to support growth. The economic crisis is only accelerating this process.
• China is also looking to expand partnerships and trading agreements with countries in Latin America and making inroads with other developing countries worldwide.
• The government wants to transform the country from a manufacturing hub to one of more value-added activities, like services and alternative energy (they are the #2 wind energy producer today).
• Chinese are giving more importance to development of their own brands rather than manufacturing goods for multinationals. See examples of Lenovo (“Global Company with Chinese heritage”, wants to be #1 international brand for computers) and Huawei.
• The market is demanding that Chinese manufacturers meet environmental, health, and safety standards (better quality and control from products made in China). American corporations that have supply chain ties to China want to keep and attract consumers with green awareness. For example, Wal Mart has announced that the top suppliers in China will need to become 20% more energy-efficient by 2012 (“Wal-Mart: Making Its Suppliers Go Green”, Business Week 14 May 2009). More educated Chinese citizens that are beginning to protest against pollution and environmentally unfriendly practices, which is also another factor to increase pressure in pro of the green mandate movement.

All of these changes will have some impact on Supply Chain practices, including plenty of opportunities, whether you are operating in China or not:

• Multinationals have the opportunity to review their strategy to serve the Chinese market, but they need to understand its complex environment first
• Incentives for manufacturing might not be as attractive as in the past, unless it is in an industry in which China lacks knowledge and that the government is targeting for development (like energy and services)
• It’s becoming expensive to establish manufacturing in the more developed provinces; some companies are looking to relocate to more remote areas in the country
• Increasing competition will require Chinese companies to improve quality and productivity. In general, software systems are still not well developed and there are a lot of opportunities for software firms to sell to local companies (inventory control, manufacturing execution, supply chain management systems to name a few categories)
• In the short term, the “green mandate” may increase cost and force some companies to look for sourcing alternatives. Companies interested primarily in competitive prices may have to look for new suppliers. Could this benefit other countries, like Vietnam?

There are certainly many changes happening in China and although we don’t know what will happen given the number of variables, one thing is for sure: everyone has an opportunity to succeed. Others have already blogged here about the fact that outsourcing to China is not as easy decision as it used to be due to the rising costs over there, so I did not even include this other important change in this discussion. It’s important to be aware and reflect about how the local and macro changes are impacting China and your business – how are you reacting? What’s your bet?

• 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?

In a study just published by Boston Consulting Group (BCG) titled “Globally Advantaged Manufacturing – Winning in the Downturn and Beyond”, the authors point out that China, India and other rapidly developing economies (RDE’s) contributed only 25% of global GDP in 1990, compared with 51% for the G7 industrialized nations.  By 2007 the RDE’s share of global GDP grew to 42% and is projected to overtake that of the G7 by 2009, much of this driven by outsourcing and off-shoring by companies based in the G7. One caveat is that this analysis predates the current recession.  More importantly though is the surge in demand for goods and services in the RDE’s.  This is the tipping point.  As the BCG authors point out, “For many products, RDE demand already outstrips that of more developed markets in terms of volume”.  Perhaps the most telling remark in the article is that “Given the price sensitivity of RDE markets, products often must be designed and manufactured locally to meet the necessary price points.”  However, many brand owners in the West have outsourced manufacturing to RDE countries in order to reduce the cost of production of goods destined for markets in the West.  They don’t have the knowledge of local demand nor the manufacturing capabilities in RDE’s.

In another BCG study titled “The 2009 BCG 100 New Global Challengers” published in Jan 2009, the authors look at companies emerging from the RDE’s to not only take major market share in their countries of origin, but also in the Western economies.  Many of these are still in the “boiler room” and have not necessarily gained market presence in consumer markets, but this is only a matter of time.  We have only to look at the bankruptcy of Nortel and the emergence of Huawei in telecommunications equipment, and the purchase of the IBM PC division by Lenovo, a largely unknown PC manufacturer in the West with a dominant market presence in China.  Who in the West would have imagined in 2000 that Jaguar would be owned by an Indian company, or that Volvo’s car division might be bought by a Chinese company?  The authors point to some of the advantages these companies have, including “… privileged access to high-growth markets and resources, freedom from legacy assets in high-cost, slow growing countries, and access to low-cost labour pools”.  And of course the outsourcing of manufacturing to RDE’s by companies in the West has only served to develop a skilled labour pool in the RDE’s.  These companies are now looking for ways to expand into Western markets, and the recession has provided many ready opportunities for cash rich RDE companies.  Just as an aside, something very similar happened in the .com bust in 2000-2001 when much of the fiber-optic bandwidth was bought up by RDE companies, especially companies from India, when the likes of Worldcom filed for bankruptcy.

Looking closer at the US economy specifically, Steven Hansen, in his blog Seeking Alpha, wrote an article titled “This Recession Is a Reset to a New Normal” in which he states that “We will exit this Great Recession in the New Normal. It will be a world of overcapacity in many sectors of the economy, poor employment conditions, abandoning of innovation, and credit abuse.” The graphs in Steven’s article were particularly startling and revealing given the long period over which the data is plotted, although as a semi-skilled applied statistician I think some of the trend lines are suspect.  Nevertheless what is apparent from the graph is that growth in both capacity and output from US based manufacturing has dropped markedly since 1999.  Perhaps more importantly the gap between capacity and output has increased.  Clearly this is a result of the outsourcing and off-shoring of manufacturing to RDE’s, which in turn has led to the emergence of a middle class and hence a consumer market in the RDE’s, the very point that BCG is making.

Yet there are quite a few voices that paint a different story.  In an article titled “The BRICs: An Analysis” in Nouriel Roubini’s blog on Forbes.com, he points out that “… India and China are net commodity importers, while Russia and, to a lesser extent, Brazil depend on commodity exports” .  Commenting on each of the BRIC countries, Nouriel makes the following observations:

• Brazil – “The expansion of the middle class and strength of the nascent housing sector require large investments in infrastructure and education and adequate micro-planning. The expansion of potential growth will only take place if this appropriate framework is built.”
• India – “Increasing the potential growth rate from the current level will therefore require raising infrastructure and energy investments, agriculture yields, government savings, education spending and implementing labor law reforms. But most of these reforms are politically challenging and will happen at a snail’s pace in the coming years.”
• China – “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.”  

These are all true statements.  While the GDP of the RDE’s has grown rapidly, much of this has been through outsourcing by Western companies to satisfy Western demand. The consumer demand in the RDE’s has not begun to reach the levels required to sustain the growth rates experienced in the RDE’s over the past decade.  However, as pointed out by BCG, this is less of a problem for RDE based companies because of their lower cost base, and a major issue for Western companies used to designing products for affluent consumers.

In his blog, “Supply Chain Matters”, Bob Ferrari writes about US based auto suppliers struggling to find new markets, in which he refers to an article in the Wall Street Journal titled “Auto Suppliers Attempt Reinvention”.  The central point in Bob’s article is that addressing new markets is not a trivial matter, specifically that companies “… may well have the design and production capabilities related to product technology, but the other open question is whether you have the supply chain business process capabilities to compete with other existing players in your new industry venture.”  While much of Bob’s article is focussed on auto suppliers satisfying local demand from OEM’s, many of the points he makes can be readily applied to Western companies trying to address the needs of the consumers in the RDE’s.  In a separate article, Bob refers to a book “Poorly Made in China”, and analyses many of the issues that arise from outsourcing manufacturing to one of the RDE’s in which legislation and social norms are very different from those to which the which the Western based companies are accustomed.  The lessons to be learned on the supply side are only a precursor for the knowledge that needs to be gained to design, market, and sell products in the RDE’s.

The other day I came across a case study on Nirma that exemplifies for me the way in which Western manufacturers need to respond to the challengers of adapting to the new normal.  Many Western-based washing powder manufacturers have been marketing and selling their products in India for many years, largely to the more affluent city dwellers.  The manner in which the products where packaged and sold was very similar to that used to Western consumers: Large, half-empty boxes with at least 500g (1lb) of washing powder.  In many cases, even the formulation of the washing powder was the same, despite the fact that much of the washing is done by hand and not in washing machines.  The rural poor were not a target market for the Western based companies because the concepts of packaging and distribution and margins available were deemed not to be profitable.  An Indian company, with much greater knowledge of the local market, particularly the rural poor, started selling washing powder to the rural poor in small paper packets of about 25g through local merchants.  The financial outlay for each purchase was much lower and the packets were much easier to transport than the bulky boxes of other products.  In no time at all they had gained a large market share, not only amongst the rural poor, but also amongst the urban poor.  And the company was making a profit too.  Hindustan Lever, an Indian division of Lever Brothers, studied Nirma’s approach for some time, including studying ways to reduce their own cost base in order not only to sell to the poor in India, but to do so profitably. Hindustan Lever has been able to claw back market share from Nirma and now both have approximately 40% of the washing powder market.  I have heard the Procter & Gamble also studied Nirma and brought the practice of selling much smaller quantities in compact packaging back to the US to address the “seniors” and “empty nesters” markets more appropriately.

I believe it will be a long time before demand in the West returns to 2006 levels, so Western companies have little option to regain revenue other than to address the demand in RDE’s. Much has been written about how outsourcing and off-shoring of manufacturing by Western companies has made supply chains a lot more complex, but this body of work has focussed on getting products to Western markets, not on addressing global demand, much of it in RDE’s. The concept of the long-tail, focussed on providing a wide range of products specific to as many market segments as possible, exacerbates the issue of supply chain complexity even further, and adding geographical dispersion of demand across country and cultural boundaries adds even more complexity.  As pointed out by Bob Ferrari in the case of the auto suppliers, moving into new markets requires a lot of study and learning to be successful.

While there are many strategic issues to be addressed, companies will need many of the tools and capabilities being used to address the lack of visibility and coordination caused by outsourcing. Top on the list is visibility into their operations on a global basis, especially demand, to monitor their financial and operational performance, and the ability detect and respond to changes very rapidly.  This is especially true if the company is used shared manufacturing capacity in the RDE’s to satisfy both Westerns and RDE market demand.  Without the ability to balance demand and supply on a global basis, and to respond to changes in a rapid and effective manner, the risks of addressing RDE consumer demand are enormous.

** My comment **

Good comments.  To me, the key takeaway was that Supply Chain Risk Management is something that no company can afford to ignore.  Of course, I couldn’t agree more.  However, while Bob’s focus was on quality, I want to make sure that we also focus on the flow of materials within the supply chain.  Not having any product to ship due to a supply chain problem will also have a negative impact on your company.  Let’s take a look at some of the events over the last little while;

• This year, the Olympics were held in Beijing.  The Chinese government put extremely strict limits on factories and on transportation in and around Beijing running up to the 2008 Olympics in an attempt to reduce the air pollution in that region.  If that region was part of your supply chain, you would have been impacted
• Earlier this year, there was a significant Earthquake in China.   While less important than the loss of life and the pain and suffering brought about by that event, several factories were destroyed.  Along with those factories sections of several supply chains were also destroyed
• In March of this year, the LG Chem factory in Ochang, South Korea burned, causing laptop battery shortages for Dell and HP
• In February of this year, year, the Lite-On LCD factory in Dongguan, China burned, impacting Dell, HP and Lenovo amongst others
• There are many other examples, some of which may have impacted you.

In addition to these catastrophic events, strikes, business closures, extreme weather and global shortages (and excesses) can all impact your supply chain.

So how do you identify and manage the risks in your supply chain?�
It starts with visibility.  You need to be able to see what suppliers contribute to your end product (and how much).  You need to be able to identify which suppliers supply unique components – components you can’t get from any other supplier.

Then you need to have analytic tools.   You need to be able to model your entire supply chain.  You need to be able to report results in ways that are relevant to your business.

Next you need to be able to simulate supply chain events.  What would be the impact if this supplier cut production by 50%?  What if I couldn’t get any of these components?  What impact would this have on my corporate metrics.  What would be the impact of a 10% downside? What would that do to my inventory position What about a 15% upside?  Could my supply chain cope?

Finally you need to be able to simulate potential solutions.  How long would it take to bring on another supplier? What parts could be substituted if I couldn’t get this part? What alternate routes could be leveraged to transport these goods?

I’ll leave you with this thought.  The difference between those companies that are significantly impacted by supply chain events and those that can ride them out is the extent to which they have anticipated and planned for the possibility of these things happening.  Which will you be?