Posts Tagged ‘Globalization’

To Outsource or to Insource, That is the Question

Published January 16th, 2013 by Trevor Miles @milesahead 3 Comments

A couple of weeks ago I came across a really interesting article titled “How Leaders Succeed in an Era of Volatility” in IndustryWeek by Mark Pearson of Accenture. Mark discusses how some US manufacturing companies have recovered more quickly than others by investing in talent and capacity. The interesting point he makes is that the companies that have recovered most quickly are those that invested in new capacity in areas with existing talent pools. Mark contrasts this with companies that have either increased or consolidated their capacity in areas of revenue growth.  Mark states that

When they relocated, leaders and non-leaders alike were motivated by the reduction of operating costs (100% versus 87%).
In opening new operations, leaders reported doing so not so much to reduce costs (47% to 61%), but to take advantage of unique skills in the new location (42% versus 10%). Non-leaders were more likely to say they opened a new facility to increase customer responsiveness (21% versus 39%).

Given the rapid increase in fuel costs this is somewhat counter intuitive. But, while lacking specifics, Mark concludes that

In an era of persistent volatility, the recovery leaders rose to the challenges. They focused on their business and investment objectives, made wise decisions in their physical networks and better maintained the appropriate resource/talent mix in their enterprises. As a result, today they find themselves aligned with a new business environment in a way that is allowing them to sprint more confidently into the future.

Reading this article sent me on a search of the web for articles that would support Mark’s point of view. There were many, including Deloitte’s 2012 Global Outsourcing and Insourcing Survey, which concludes that 

  • Current and future outsourcing: The outsourcing market continues to confuse outsourcing with offshoring. Many respondents still see the two processes as inseparable – even though many times outsourced work never leaves the originating country.
  • Contract performance and relationship management: Vendor management organizations, while highly competent at day-to-day activities, find themselves underutilized when it comes to driving strategic value.
  • Most recent outsourcing experience: Respondents list “underestimating scope by the vendor” as the largest contributor to deal dissatisfaction, and respondents use vendor communications and escalations most often to remedy deal dissatisfaction.
  • Cloud sourcing: Though often discussed and promoted, there continues to be a substantial amount of uncertainty about cloud-based outsourcing and its future adoption.

There is a lot I could comment on in the Deloitte conclusions, but the one I want to focus on is the manner in which we use outsourcing and offshoring interchangeably, especially given that we are also seeing the same confusion between insourcing and onshoring. This confusion can be seen in an article in The Atlantic titled “The Insourcing Boom” of which the first paragraph is

After years of offshore production, General Electric is moving much of its far-flung appliance-manufacturing operations back home. It is not alone. An exploration of the startling, sustainable, just-getting-started return of industry to the United States.

Notice the confusion.  I don’t know why The Atlantic didn’t refer to the phenomenon as onshoring, but they are not alone. Heck, even President Obama is confusing the terms using the term insourcing in his State of the Union address in 2012. Given the degree to which outsourcing has been coupled with offshoring this confusion is understandable.  But the President he can be forgiven for the confusion because from his perspective onshoring – bringing jobs back to the US – is synonymous with insourcing, but not for companies. True insourcing is, for example, GM’s intent to insource 90% of IT jobs. But even here the lines are blurred despite the fact that the author’s point is that “GM’s plan to grow its own payroll instead of handing the work to subcontractors.” Of course many of the jobs outsourced to their subcontractors were then offshored by the subcontractors.  That’s how they made their money.

While I applaud every manufacturing job that is repatriated, whether in the US or elsewhere in the West, I find the discussion rather quixotic, which defines as “extravagantly chivalrous or romantic; visionary, impractical, or impracticable.” Given that I have been in Barcelona the past week I couldn’t resist the reference to that ultimate example of a foolish quest by Don Quixote, who, according to Wikipedia, “…, dreams up a romantic ideal world which he believes to be real, and acts on this idealism, which most famously leads him into imaginary fights with windmills that he regards as giants.”

There is no doubt that some manufacturing and IT jobs will return to the US, and the West in general, because the pendulum swung too far, raising issues of supply chain responsiveness and inflexibility, not to mention the difficulty of managing volatile transportation costs and fluctuating exchange rates.

But I am firmly in the camp of George Stalk of Boston Consulting Group who wrote an article for the Harvard Business Review in June 2011 titled “What the West does not get about China”, in which he includes the diagram below.


The key point being that while from a labor perspective the discussion is correctly on offshoring versus onshoring, the real opportunity for the West is to develop products to satisfy the needs of the growing middle class in Asia, particularly China and India.  While only in my wildest personal fantasy can I be equated with George Stalk, this is something I have been writing about for several years. (Recession or Reset?, An Imminent Threat to Western Brands, and The Shifting Sands of World Economies.) As Stalk writes,

The rise of local competitors will happen faster than most multinationals expect. MNCs (multi-national companies) that hope to have strong market share in China in a few years need to establish themselves now.

In June 20111 China already ranked first in consumer spending in five categories and second in another 5 categories. And already there are Asian brands in these categories that are bigger than Western brands and which are largely unknown in the West, Huawei and Haier as key examples.  Interestingly Unilever has found that brands they buy in Asia are doing better than Western brands they try to establish in China.


Where this rise in the consumer buying power in Asia coincides with the question of onshoring of manufacturing jobs in the West is when Asian brands take share from Western brands in Asia, but more particularly when they gain market share in the West. And they will. A few of us are old enough to remember the furious backlash to the rise of Japan in the US during the 1990s. I see the same rhetoric being replayed in the 2000s in regard to China for manufacturing and India for IT services.

With the utmost humbleness I submit that by focusing on insourcing/onshoring we are addressing the wrong problem.  It may bring short-term relief, and I applaud Obama for closing loopholes that give incentives to companies to offshore, but let’s focus most of our energies on the product innovation that will capture market share in Asia instead. Let’s stop thinking that designing products in the West and selling them in China is the way to go.  Let’s learn from how the Japanese established design centers in the US, particularly for cars, and now enjoy the greatest market share in luxury brands. Stalk comments that

Western companies need to understand that Chinese consumers have very different needs than consumers in their home markets. Chinese households don’t want cappuccino machines; they want water filters, air filters, and soy milk makers (at the moment, one of the hotter consumer categories in China—and one with no foreign competition). The classic example involves automakers, which had to learn that many Chinese who can afford cars like to employ drivers—so backseat features are very important to them.

These are all thoughts echoed in a recent book (The USD 10 Trillion Prize: Captivating the Newly Affluent in China and India) published by a number of BCG people.  The book is based on a study in which they find that consumers in India and China are expected to spend nearly $10T on goods and services a year by 2020.  To put this into perspective, below are the household final consumption expenditure numbers of the top 11 countries in 2009, in which the combined HFCE for China and India was about $2.5T, or a 290% growth over 11 years, averaging out to 26% annually, or 13.1% CAGR.


The authors make two important and related observations or predictions

  • We are at a turning point in history where relative wealth will shift from the West to China and India, but absolute wealth, including in the West, should increase.
  • It is not a zero-sum game. But Western businesses and individuals wishing to gain share need to act now. They must choose to be contenders, and remake their dreams for a new world in which China and India play a much larger role – but where the West can still prosper. That’s the real lesson of The USD 10 Trillion Prize.

I admit that I would hate to be in Detroit in my early 50s with over 30 years of automotive experience and no education beyond high school. So while this is not a zero-sum situation, let us not mortgage the future of our children for the expediency of the present.  Structural changes are required, and these are always painful, especially for the people who bear the brunt of the restructuring.

Posted in Milesahead, 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 @milesahead 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

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

An imminent threat to Western brand owners

Published April 23rd, 2010 by Trevor Miles @milesahead 0 Comments

It is always good to have one’s ideas validated.  It is fantastic when the validation comes from no less than the Economist.  I wrote a blog  in June 2009 titled “Recession or Reset?” in which I explored what the new normal would look like after the recession.  It is always easier to analyze, and a lot more tricky to predict.  However I felt secure in the use of the Nirma case study to bring out 2 key points:

  • There is a huge consumer market in the rapidly developing economies (these being principally the BRIC countries) largely untapped by companies in the developed economies.
  • To reach the consumers in these markets will require a different type of innovation, exemplified by the Nirma case study, focused on product simplicity (and price) and distribution effectiveness.

In their April 15th, 2010 edition, the Economist ran a special report called “The new master’s of management” (subscription may be required) in which the authors state

“Emerging countries are no longer content to be sources of cheap hands and low-cost brains. Instead they too are becoming hotbeds of innovation, producing breakthroughs in everything from telecoms to carmaking to health care. They are redesigning products to reduce costs not just by 10%, but by up to 90%. They are redesigning entire business processes to do things better and faster than their rivals in the West. Forget about flat—the world of business is turning upside down.”  They go on to say “the rich world is losing its leadership in the sort of breakthrough ideas that transform industries.”

In a supplemental report “The world turned upside down”, the Economist states that

“They (the BRIC countries) are coming up with new products and services that are dramatically cheaper than their Western equivalents: $3,000 cars, $300 computers and $30 mobile phones that provide nationwide service for just 2 cents a minute. They are reinventing systems of production and distribution, and they are experimenting with entirely new business models. All the elements of modern business, from supply-chain management to recruitment and retention, are being rejigged or reinvented in one emerging market or another.”

On the issue of reaching the broad consumer market the Economist goes on to state that

“It is not enough to concentrate on the Gucci and Mercedes crowd; they have to learn how to appeal to the billions of people who live outside Shanghai and Bangalore, from the rising middle classes in second-tier cities to the farmers in isolated villages. That means rethinking everything from products to distribution systems.” (My emphasis.)

And then there is Apple, with record sales into the BRIC countries confusing the issue.  A Wall Street Journal article in September 2009 titled “Apple Rides Recent Growth in Asia to Earn Top Honors” states that “Apple held just a 1.6% share of the personal-computer market in Asia in the second quarter of this year, and a 0.6% sliver of the region’s mobile-phone market, according to technology market-research firm IDC.”  It is Apple’s latest results that are startling.  Shipment of iPhone units grew 474% in Asia Pacific, 183% in Japan, and 133% in Europe. Total revenue from iPhones was $5.45 billion, and China accounted for $1.3 billion, up 200% following the iPhone’s launch at China Unicom.  I am not sure what this means in terms of market share growth, but the unit growth is impressive.

I must say I consider Apple’s results to be the exception rather than the norm.  I think Nokia’s approach is a safer bet for most Western companies that do not have the “trendiness” of Apple, even though Nokia’s stock price has plummeted on the back of Apple’s gains.  Focus on bringing innovation to large populations, not the elites in the BRIC countries.  Work out how to get your products to the “last mile” in countries that do not have the most sophisticated infrastructure.  On the other hand, perhaps Apple’s approach is correct because of the huge increase in disposable income in the BRIC countries.

Whatever your approach, I think it is absolutely necessary for Western companies to place a lot of emphasis on their growth in the BRIC countries.  Many of the large companies are doing this already.  What about the mid-sized companies that employ the bulk of the people in the Western countries?  What are they doing in terms of supply chain innovation to reduce costs?  I’d really like to hear your stories and opinions.

Posted in Milesahead, Supply chain management

Supply chain 2015 – the blurring of operational supply chain planning and execution

Published October 27th, 2009 by Trevor Miles @milesahead 1 Comment

Dan Gilmour of Supply Chain Digest  in his newsletter for Oct 22, 2009 published a list of “things” that will change in supply chains by 2015.  There were a number of things that Dan identified that really boil down to the blurring of operational supply chain planning and execution.  We have been seeing this trend for some time, driven by the volatility of demand and outsourcing, which in turn drive the need for greater responsiveness.  My full response to Dan’s article is below.  I would welcome your comments.


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.

Posted in Milesahead, Sales and operations planning (S&OP), Supply chain management

The soft side of the supplier-customer relationship

Published October 19th, 2009 by Francini Ortiz 2 Comments

I just finished reading a paper on Supplier Collaboration, where the key message is that collaboration with suppliers needs to be far beyond tactical exchange of data. It defends a more mature and trusting relationship with key suppliers, where there is sharing of business strategies, joint work on investigation of risks, threats, and opportunities and where partners develop and link plans and targets.

As economies in low cost regions improve, labor costs will increase and work may have to shift elsewhere. Whether the latest trend will lead companies to continue outsourcing their operations to foreign countries or bring them back home, these decisions seem to be cyclical (almost like in fashion, these trends come and go). The truth of the matter is that independent of where your suppliers (and customers) are, no company is self-sufficient, but rather they depend on a complex chain of value added operations that need to be well synchronized to optimize the flow of products and services.

With the recent discussions involving global warming and the need for ‘green’ operations, we’ve been forced to learn and think more about total systemic cost. With that, there is more interest about what happens in the operation before or after ours in the chain. I think that the new way of doing business to satisfy green requirements will help approximate companies and enhance relationships.

This is because in order to improve efficiencies and supply chain coordination, companies will have to start seeing themselves as part of a complex chain of value added activities, and spend time studying the appropriate management of complicated networks of companies and markets. The fact is that leading companies don’t act as standalone firms.

Flexibility and agility don’t come solely from well designed and implemented supply chains – as the paper mentions, they are highly influenced by the quality of the collaboration process. The technology to collaborate and manage information and transactions is available. What needs improvement is the ‘soft’ side of the relationship: built based on trust and integrity so that companies can follow those leading enterprises which strive to ‘define mutually beneficial strategy and cross-enterprise processes’.

Posted in Supply chain collaboration

What’s your bet on China?

Published September 2nd, 2009 by Francini Ortiz 2 Comments

China is such an interesting subject! There is so much going on out there, so following the recent news about its stock market instability, I decided to share my thoughts on some developments.

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.
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?

Posted in Supply chain management