Jun 13, 2007
In the last post – Surviving the China Rip Tide – How to profit from the Supply Chain Bottleneck, I reviewed a report (BCG Report : Surviving the China Rip Tide – How to profit from the Supply Chain Bottleneck) by BCG about certain problems that are cropping up in the China centric supply chain.
In this post, I want to get into the recommendations aspect of that report – What to do about this? The authors of the report advise on how to change this problem into an opportunity. So what kind of opportunities are available? And more importantly, for whom?
First, let me succinctly summarize the current situation:
- Long lead-time supply chains originating from china based sourcing.
- Port congestion at the point of import i.e. US ports
As the authors contend, this is a problem because the lead-times for sourcing from China through congested port infrastructure either on the West coast or East coast of the US are going up. The authors note that,
A leading discount retailer is building distribution centers near the ports of Savannah, GA and Houston, TX in anticipation of the need to redirect its containers from congested west-coast ports.
I agree because in my past role I have executed a number of studies for supply chain network modeling that identified secondary ports and locating distribution centers in relation to these secondary ports that made sense from a distribution point of view. Their recommendations for companies that have yet to go the global sourcing route are as follows:
Reduce minimum production order quantities and reduce cycle times as quickly and as much as possible
In other words, stop batching already and compete on the basis of speed. Thus, produce to demand or transition to a pull model.
Refrain from sourcing or manufacturing in China until management fully understands the dynamics of supply chains.
Or don’t listen to accountants. Get a handle on total supply chain costs rather than unit costs.
Create an integrated or semi-integrated information flow within the company’s existing supply chain
Cutting out layers of intermediaries and associated inventories and trying to get as close to the customer as possible is one way to factor not only speed into the producer-customer relationship but also responsiveness. And an information system is an invaluable medium. The question as always is how a firm uses its IT resources over acquiring it.
Segment the demand chain on the basis of order predictability and demand volatility so that components with the highest gross margins and the most volatile demand get the fastest handling.
Order predictability and demand volatility are completely different beasts. Where order predictability exists, it would seem that sourcing over longer lead times is bound to be an acceptable solution. Moreover, demand volatility and a pull model of production is quite compatible and one would expect that producers can demand higher margins for responding to the market.
For European companies, carefully evaluate the unique opportunity to source from CEE, where labor savings are almost as significant as in China and the supply chain penalty is relatively small.
In other words, reduce the supply chain lead time wherever possible.
For firms that have already gone the route of sourcing from China, the authors recommend the exploration
of alternatives that will minimize adverse supply-chain effects, including options that might appear costly at first but may result in overall lower costs.
Then, they explore largely transportation related options which are fine and dandy but the inescapable scenario is that those firms that are hell bent on trying to meet their customer’s demand from far away sourcing locations are going to either default on their promises to their customers or surrender their margins. As costly options go, I’d think that it would be better to carefully dissect their demand chains and decide what parts of their supply chains (the higher margin components) they’re going to bring back to their home countries. In the long run, that might be the better option indeed.