Category Archives: China

What’s the Real ‘China Price’

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

the doctor asked me to look at an article over on Supply Chain Brain titled “What’s the Real ‘China Price’“. I, somewhat grudgingly, decided to look at it. I say grudgingly because I thought it was going to just be another article listing all the additional and surprise costs that people incur when the buy from another country. I used to get them all the time when I was at HP. My role then was to set up overseas sourcing offices to make it easier to work with low cost suppliers. Believe it or not, HP was insular in the late 80s and subscribed to the American Honda philosophy of keeping your suppliers nearby. Obviously, they have moved away from that philosophy. So has Honda.

This article wasn’t too bad. The more primitive versions say things like “cost of letters of credit” and “six week shipping time.” It didn’t do that. But it was very vague and general. It mentioned some overseas sourcing projects that didn’t go well. It didn’t mention domestic projects that didn’t go well. The big message was here:

Having jumped on the China bandwagon, a manufacturer finds its risk factors soaring. Suddenly, it’s a lot more difficult to cover up for glitches in the supply chain. Safety stock levels begin to rise, canceling out the savings that were realized through just-in-time supply strategies. High-priced airfreight becomes a frequent fall-back position. And managers “spend countless hours in business-contingency exercises that are about as valuable as the binders they sit in,” said Jim Miller (a VP at Sanmina-SCI).

And the conclusion was:

“Offshoring is not simple — and quite frankly, it’s not always the right answer“.

Well, of course it’s not simple and it’s not always the right answer. A long distance flexible supply chain using ocean freight isn’t possible. However, when it is the right answer, those who can handle the complexities successfully will have a big advantage over those who can’t. “It’s too hard” isn’t a formula for success. To be self-serving here, could I suggest some training?

To leave generalities for a minute, how did we handle this reluctance at HP? Here’s what we did in the sourcing stages when looking for suppliers.

1. Eliminate potential suppliers who we didn’t think would meet our quality and on time delivery requirements (and other standards such as labor practices and environmental stewardship). Every purchasing company has a level of late deliveries and supplier quality failures that they know how to handle. The good ones tighten their standards continuously. Bringing in a substandard supplier is a non-starter. But don’t tell me that there are no suppliers in low cost countries who produce good quality.

2. The best looking surviving suppliers were given a rigorous landed cost analysis. It had about twenty line items in it.

3. The top suppliers on landed cost were given a risk analysis. That would compare the lowest landed cost supplier to the landed cost of a not-quite-so-low cost supplier and see how much had to go wrong before the choice of the low cost supplier would turn out to be the wrong decision. Exactly how much would have to go by premium freight? How much would a currency have to appreciate? How much extra procurement overhead would be required? And, never forget, something could go wrong with the second best supplier too. The main purpose was to bring risks out into the open and look to see if it was realistic for them to happen.

So, bottom line, it’s an OK article. It really doesn’t get as specific as it should but it doesn’t perpetuate a bunch of nonsensical myths either. Worth a read.

Dick Locke, Global Procurement Group and Global Supply Training.

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Was it Nearshoring? Or Bullwhip Effect?

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

China’s exports in February were up 45% from last February. (LA Times)

My opinion: the rapid decline and unsustainable increase in Chinese exports were from the bullwhip effect of a long supply chain. A small change in final demand can cause huge swings in upstream supply.

This mainly applies to those using ships to transport from China. If you can use air, China isn’t much further (in hours) than Mexico.

Dick Locke, Global Procurement Group and Global Supply Training.

The Tiger is Beginning to Roar … but the Eagle is beginning to Snore!

I was appalled to see this recent headline on the SSON site asking “2010: The Year For Outsourced Thinking?” (membership required) as well as the statement that organizations are increasing willing to outsource complex, higher value-added pieces of the “end-to-end” process.

Why? Because we’ve outsourced everything else. Raw material collection? Check. Processing? Check. Product Manufacturing? Check. Distribution? Check. Value-added services? Check. If we outsource thinking, and innovation, what’s left? Nothing of value! So while we should take advantage of reverse innovation at every opportunity, and partner with talent where we can find it, we should never, ever, outsource thinking. Because then all we have left is sales and marketing, which are totally useless if you don’t have a consumer base to market and sell to … which we won’t have if there are no jobs left — and there won’t be any jobs if we outsource the last few jobs we have! So unless you want to see an economy where the majority of us are unemployed while the remaining few are selling and marketing junk no one wants to each other, I’d make it a point to keep using our brain cells to their full potential. Otherwise, I predict that the 22nd century will see North America become the new third world.

The short story is that it doesn’t take long for a civilization to fall. The Egyptians, Greeks, Romans, Teoithuacans, Mayans, Incans, Aztecs, Vikings, Byzantine, and early Chinese Dynasties [Sui, Yuan, Qing] all fell in less than a century, and some in half a century or less. If we stop thinking, I can’t see us lasting very long at all.

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The Tiger is Only Beginning to Roar

Earlier this year I told that that this is the year of the tiger … and China is going to roar as it is on track to overtake Japan as the 2nd largest global producer of GDP. But this is just the beginning. China is expected to become the global leader in scientific research in a mere 10 years (Financial Times [FT]) and the global leader in GDP within 25 years (The Economics Journal).

According to the FT article, Thomson Reuters, which indexes scientific papers from over 10.5K journals, analyzed the performance of the BRIC over the past 30 years and found that China outperformed every other nation with a 64-fold increase in peer-reviewed scientific papers, with a particular strength in chemistry and materials science. And although quality varies, China has also become more collaborative, with almost 10% of papers originating in China having at least one US-based co-author.

And the research pace isn’t expected to slow down. When you combine the government’s enormous investment in research (with funding increases consistently far above the inflation rate), an organized flow of knowledge from basic science to commercial applications, and the efficient, but flexible, way in which China taps the expertise of its extensive scientific diaspora in North America and Europe, drawing mid-career scientists back home with deals that allow them to spend part of the year working in the West, the productivity should only increase. And this, in turn, is going to continue to drive their economy upward and onward.

Now if only we’d take a lesson from China and investment the same amount of money into research and infrastructure. Maybe we could hold on just a little bit longer …

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Are You Ready For The Next China?

A recent article over on the Harvard Business Review on “China Myths, China Facts” reminded me how China is starting to change and how my advice in my recent post on overcoming cultural differences in international trade with China to take time to get to know the people you will be dealing with because their behaviour may be nothing like the usual behaviour of the country in which they reside is becoming truer and truer by the day in some parts of China (that deal regularly with the west).

According to the article, which isn’t entirely accurate (just ask our resident Global Trade expert) the following are myths:

  1. Collectivism
    According the article, Individualism is the reality. While this is becoming true of the emerging “New China”, especially in the urban middle class, the “Old China”, which still makes up the majority of China, is still collectively oriented and, as the article points out, decisions, particularly in the business world, are still made in groups.
  2. Long-term Deliberation
    According to the article, real-time reaction is the reality. While the “New China” that has been dealing with the west for the last two decades (or so) has learned to “react” at western speeds, there is still a lot of deliberation that goes on behind the scenes, and quick decisions are often the result of policies that were decided as the result of long-term deliberations.
  3. Risk Aversion
    According to the article, risk tolerance is the norm. Well, this one is half true. The reality is that the Chinese are neither risk-averse or risk-tolerance. They are what I’d call “risk-comfortable”. You have to remember that China is one of the oldest civilizations on the planet. They can trace their history back millennia, while we struggle to trace ours back a few centuries. They are more aware of risk and used to dealing with it than we could ever imagine. It’s just another part of everyday life to them … that sometimes comes and goes in waves. They know that some risks can never be completely mitigated and that others can never be predicted. As a result, they don’t feel the need to needlessly analyze something to the nth degree when they know nothing will be gained from the exercise. So they make a decision, execute, and accept what comes. We could learn a thing or two from them.

What’s happening is that, just like Japan transformed itself from the “Old Japan” to the “New Japan” over the last few decades, China is in the process of transforming itself from the “Current China” to the “Next China”. This will happen over the next few decades as it claws its way back to global supremacy. So, are you ready?

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