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.)

In yesterday’s post I discussed how I’d just read the umpteenth recent article saying that buying from China is on its way out and that, like all of its predecessors, the article had a grain of truth but suffered badly by being far too general. The reality is that China was never the right place for some purchases and will be the right place for others for a long time to come.

In order to understand what purchases from China make sense, and what purchases don’t, one needs a framework. The framework I use is based on forecastability, which divides products into functional and innovative products, and economic density. Given these two dimensions, one can derive the following two by two matrix.

As indicated in yesterday’s post, the best country and logistics selection strategy depends on which quadrant one finds oneself in.

In quadrant 1, you could afford air transport but you won’t often need it. You should plan around surface transport and expect to occasionally have to use some emergency air freight. Here you should go for the world’s best suppliers. “Best” means lowest total landed cost, among other criteria such as quality and environmental aspects.

In quadrant 2, you must to use air freight for flexibility. Again, you should look for the world’s best suppliers. As long as there is a big international airport near you and the supplier, no place in the world is more than a day or two from your operation. “Best” still includes landed cost and the other criteria but now includes supplier flexibility.

In quadrant 3, you can’t afford air freight, so goods will move by ocean or some other surface method. You should look for the lowest landed cost suppliers but will probably find that freight costs will constrain your decision to relatively nearby suppliers.

In quadrant 4, you should stay close to home. You can’t afford air freight and you lose too much flexibility using ocean freight. These are the products that never should have been purchased from China in the first place. They include fashion goods and goods with a high degree of seasonality such as Christmas gifts. “Close to home” may not mean in your own country, of course. For example, the entire country of Mexico is closer to Chicago than San Francisco is. This is where the “nearshoring” makes sense.

Finally, what will not leave China soon? For one thing, electronic assembly work will be there a long time. The quest for best suppliers has led to a concentration that only China has and perhaps only India can equal. Foxconn alone has more than a million employees in China. To put that in perspective, the CIA World Factbook says that Vietnam has a labor force of 48 million people. Of that, 15% work in “industry.” That’s about 7.5 million industrial employees. Just to resource to Vietnam Foxconn would require employing 13% of Vietnam’s current industrial labor force. That’s not going to happen anytime soon.

Thanks, Dick.

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.)

I’ve just read the umpteenth recent article saying that buying from China is on its way out. All the articles I’ve read have a grain of truth in them but suffer badly by being far too general. As I see it, China was never the right place for some purchases and will be the right place for others for a long time to come.

The articles need a framework to differentiate between types of purchases. Here’s mine.

I divide purchased goods two ways. The first way is by forecastability. Here I use the terminology originated by Marshall Fisher in his classic analysis “What is the right supply chain for your product?” (HBR) He divides the products your company sells into two categories. One category he calls “functional” products. Those are easily forecastable and change relatively little from year to year. He uses bleach as an example. The second category he calls “innovative” products. Those are new products being brought to market. There is no competition (a good thing for sellers) but they are essentially unforecastable … a bad thing for buyers trying to support that product. Examples are fashion goods, some innovative cars and newer computers.

His point is that buyers need different supplier selection criteria for the different categories. For innovative products, he believes flexibility is more important than cost. If you can’t ramp up quickly you lose highly profitable sales. If you can’t ramp down quickly you write off a lot of inventory. And, you can’t afford a long transit time.

The second way I divide purchased goods is by what I call “economic density.” Simply put, what is the value of the purchased goods per kilogram? You can afford to fly high economic density goods but low density goods have to move by surface transport, usually ocean. One thing to keep in mind here is that there is a concept called “dimensional weight” where the freight costs of some goods is based on their physical volume, not weight. That’s the reason why laptop computers move by air from China to the US but desktops are usually assembled in North America.

Putting those two methods of division together gets the consultant’s favorite graphic: a two by two matrix. The best country and logistics selection strategy depends on which quadrant you are in.

Each quadrant requires a different strategy if an organization is to extract maximum value from its supply chain. Tomorrow’s post will discuss each quadrant in detail.

Thanks, Dick.