Category Archives: Supply Chain

Is Low Cost Country Sourcing to China Really Innovative?

Since I haven’t been to China, and haven’t been involved in Chinese outsourcing (after all, software technology outsourcing was dominated by India firms during my software career), I’ve been hesitant to post on this topic. However, after readingLow Cost Country Sourcing in a Flattened World by Brad Blonkvist and John Kamauff in Chief Supply Chain Officer magazine, I just couldn’t hold back anymore. It finally pointed out the solid facts behind the anecdotal basis of my fears – China just does not have the physical infrastructure to maintain its current growth rate (despite the fact they are building 4.2B railways).

In order to scale up production, you need a certain amount of infrastructure. First of all, you need qualified engineers to staff your factories, plants, or service centers. On a per capita basis, China has only 8.6 students for every 1000 residents, as compared to 56.2 for the US. Furthermore, the studies that claim China graduates considerably more engineers and scientists each year are false. Consider the recent report Framing the Engineering Outsourcing Debate: Placing the United States on a Level Playing Field with China and India , by researchers Gary Gereffi, director of the Center on Globalization, Governance, and Competitiveness at Duke University, and Vivek Wadhwa, executive in residence at Duke’s Pratt School of Engineering, as summarized by the National Science Teachers Association (NSTA) on the NSTA WebNews Digest. Even though media reports in 2004 indicated that China produced 600,000 engineers compared to the 70,000 produced by the United States, the study found that more than 290,000 of the Chinese degrees were subbaccalaureate. After all, since the Chinese figures consist of data from different provinces that have no standard definition of engineering and include “the equivalent of motor mechanics and industrial technicians”, its clear that the actual numbers of graduates with US and EU equivalent degrees is much less then advertised. The Washington Post also ran a good article on this topic.

Furthermore, studies by organizations such as the McKinsey Global Institute have indicated that multinationals find that less then 25 percent of the graduates are employable. When you add the considerable language barrier into the picture, this indicates that the number of qualified engineers in China is considerably less then what many firms believe, and despite China’s large population, probably less then the number of qualified engineers in the US. Furthermore, it costs a lot of money to turn those who are qualified into productive workers. In Outsourcing to China, a special report from the Economist, the article points out that foreign companies in China are spending a small fortune “subsidizing China’s education system”. As an example, it points out that Fujitsu‘s Mr Noshiro has put some 40 Chinese workers through intensive training in Japan, at a cost of $30,000 a year each. “They need two years of full-time training just to become a middle-level engineer and four years to get to be a project manager.” Furthermore, even after three years of training “only 10-20% of programmers ever get to a really good level and can become an architect. China has so many colleges and so many graduates, but the degrees are not as good as they sound.”

Secondly, you need raw materials to build and run your plants. China is already importing more then its fair share of raw materials on a global basis. In addition to currently being the world’s largest importer of steel, it is importing 47% of cement, 21% of aluminum, 37% of cotton, and 30% of processed coal on a global basis. How much higher can these numbers go and be sustainable?

Thirdly, you need an infrastructure to get your raw materials in and your finished products out. Dozens of articles have been pointing out the infrastructure shortcomings in terms of paved roads and highways in India for a while now, but outside of a few big cities and central areas, China’s infrastructure is actually much worse. This shouldn’t be surprising as China only has 7 cars per capita compared to the 481 of the US. In addition, China has less then 150 airports compared to the 19,000 in the US.

Fourthly, you need energy to operate your plants – and this is where the numbers get really, really scary. Up to 30% of factories in China are periodically idle for weeks at a time due to power outages. According to the article, Northeast China is expected to exhaust power generation capacity by 2010! But if the rate of outsourcing to China continues to increase, I would predict that this could happen by 2008 – which is only 2 years away! After all, the actual increase in energy usage last year was 15%, not the 5% that was predicted. As it stands, China’s energy needs are expected to double by 2020 at the latest!

Fifthly, you have to protect yourself … but IP protection in China is almost nonexistent. I’ve read and heard too many stories of company X outsourcing product W to company Y who turns around and sells cheap knock-off Z in China which is undifferentiable from your product to the average buyer.

In other words, China, an emerging economy, is about to face a number of very significant problems simultaneously in a very short time frame – problems that the US, an established world superpower, has been battling for years with only limited success (think about the California or NorthEast energy grids, the fact that most major cities now have five and ten year plans just to alleviate current levels of traffic congestion, and the significant amounts of imports the US already requires). And I just can’t envision China coming up with a miracle to prevent the abrupt halt that is in its near future if outsourcing to China continues to increase at an exponential rate.

Now I know China is working on their infrastructure, but they are still concerned with connecting remote provinces by road and rail in efforts to integrate their people into one culture. Furthermore, as illuminated in Train to the Roof of the World, in their efforts to achieve these goals, they are taking considerable risks. For example, in their efforts to connect Tibet, and its capital Lhasa, to the rest of China, they are building a railroad over permafrost that could melt in the near future, especially considering global warming, which is not a myth and happening now. After all, concentrations of greenhouse gases such as methane and carbon dioxide today are the highest seen (40% higher than the highest concentrations measured) in the last 440,000 years, as determined by ice core research, which has removed cores 1.8 miles deep in the Antarctic.

But then again, as I’ve stated above, I’m not an expert, nor have I been to China. So I’m going to invite thought leader Jason Busch of Spend Matters who has been there and is a strong believer that the best is yet to come*  in outsourcing to China to use his open mic as soon as he crawls back online* and tell me why I’m wrong and how China is going to solve these problems that have plagued the US and its northern neighbor for years – and do so to a sufficient degree in the next three years before the impending energy crisis begins what could be a quick, and massive, collapse.

* Link(s) no longer available.  All posts pre-2012 were eliminated in the site revamp in June 2023.

Build to Order (Supply Chain Management)

Recently, on Procurement Central (WayBackMachine), Dave Stephens indicated that he saw “a growing link between “Long Tail” thinking (excelling in variety vs. going for the homogenous blockbuster) & demand-driven supply chains” and indicated that he would like to see a fellow blogger tie the threads together. Although I might not be entirely sure how to wind them up with spring-loaded precision , I’m pretty sure how to connect them. And the first answer is “Boeing” and its 787. Specifically, instead of building a complete aircraft from a bill of materials, Boeing will instead attach fully completed subassemblies from its suppliers.

So how does this tie “long-tail” and demand-driven? The answer is the sub-assembly. By switching to this model, Boeing is indirectly engaging more suppliers as its tier 1 suppliers will need to engage more suppliers to build the subassemblies. Furthermore, by reducing its assembly time, it can essentially build its aircraft on demand. Thus, we have a connection.

Of course, the big question is how do they intertwine? Hard to answer, but we get another connection if we look at Dell. Dell is now using a number of suppliers for many components, long-tail. Furthermore, it builds computers, and orders components, based on user demand, demand driven.

So now that we have connected the threads, how do we begin to twine the two threads? I could be wrong, but I believe the answer is, as the title of this post suggests, “build to order”. What do I mean by this? Design your products not as integrated wholes, but interconnections of components. Furthermore, make sure the connectors are standard, then you can switch out subcomponents, just like PC enthusiasts can switch out memory chips, video cards, and even processors. Then work with a number of suppliers capable of providing different versions of the components (long tail), order components based upon continually updated forecasts (demand driven), and assemble the final product to customer specifications (build to order).

I’ll admit its not the whole answer, but I think it’s a good, innovative, start. Feel free to share your views or e-mail me.

Think The Good Ol’ Products Were Better? You’re Damn Right They Were!

Originally published on August 17, 2026 on Supply Chain Matters, your #1 source for supply chain insights!

Good Ol’ Products

For those of you of the older set who liked your old cars, your old appliances, and your old green screen software because they were better, you were right.

Good ol’ American made analog cars with no electronics that you could jack up and fix in your garage and keep on the road for a million miles. If you could get the parts they were better than modern electric with semi-autonomous driving that doesn’t work as advertised, with batteries that explode in intense heat, and doors that lock you in when the software auto-reboots for reasons beyond your control.

Good ol’ American made fridges, stoves, and washing machines that didn’t glitz out when they lost internet connectivity, break down regularly, and provide you with an unrepairable problem as only factory certified repair people not in your area could fix them.

Legacy Software

Most importantly, good ol’ green screen software that literally kept your supply chains working for decades without fail, compared to modern software suites that usually takes years to fully deploy and integrate. They don’t do half of what the vendor claims, and, by the time all the additional module upgrades, change orders, integrations, and service-based consulting engagements (as you try to figure out and get value from the software) are added up, fails to deliver on most of the promised value.

Before the rise of SaaS in the mid 2000s, big corporations often ran the same legacy MRP/ERP software for decades. They kept supply chains running smooth and rarely had the very-public supply chain disasters we’ve been seeing for the past 20 years.

Since most greybeards from that era have retired, few remember this.

We may not have had Procurement as a separate software category until FreeMarkets launched BidWare in ’95, but companies still did it with ERP/MRP software.

And up until they retired, many procurement and supply chain pros still preferred the old green screen software (and cried when they had to say bye, bye monochrome UIs because, while the new SaaS software was slick, the functionality was minimal, the integration was shoddy, and the process was disconnected).

This last point is the important one. This is why, for those of us who are Gen-X age (or older), everything new is fundamentally cr@p, even if it’s pretty good and we use it everyday.

When you create something to execute part of a process from a disconnected viewpoint, it never quite works.

It might work super well at its task, but when it typically does so at the expense of the rest of the process, it just makes everything worse for the organization overall.

Outsourcing to a low-cost country saves big on unit costs (due to currency exchange, low labour cost, etc.), but puts logistics costs through the roof as well as increasing disruption, reducing quality, and increasing management complexity. That lesson was really brought home during the global wide Covid pandemic in 2020 and 2021.

Optimizing network structure and re-allocating warehouses and shipping lanes to historical buys and then locking in long-term contracts reduces costs in the short term, but as the supply base evolves, lanes need to change, and carriers go out of business. It just greatly increases costs in the long run as warehouses sit half empty, volume is not met for FTL rates and discounts, and new warehouses need to be rented on different routes. And so on.

Your fully controlled supply chain goes from source to sink — from the source of the product you are buying to the customer you are delivering to, and the full supply chain for a product starts at the raw material and ends at the end consumer or business user. If you don’t at least consider your fully controlled supply chain end-to-end on every buy, you are making an ill-informed inferior decision.

That’s why, before this new age of fancy (Gen-AI) SaaS, companies did just fine on monochrome UI and old-style MRP and ERP. They didn’t have optimization, real-time visibility, or AI, but considering that forecasting algorithms haven’t improved much since the late 70s, they knew how to model costs and negotiate, and how to properly advise the organization on pricing consumers could pay and could keep them in business.

Back in the days of functional integration, everything worked … and there were few surprises.

Today, without it, everything works, but it doesn’t, and the supply chain doesn’t flow without expensive surprises that must be resolved daily.

The railroad barons had it right — if you want it to work, you need (vertical) integration. However, it doesn’t have to be real world vertical integration. You don’t need to own everything, form your own Zaibatsu, or even practice Keiretsu since that integration today can be on the virtual source-to-sink supply chain twin, and not the physical one.

You just need applications that can analyze the impact at least across your fully controlled supply chain before you make a decision and ensure the decision you make is the optimal one for the organization, not just any specific task or function. You must move beyond the business and supply chain functional siloes and consequent islands of data that did not have an overall process context.

And in our world, that means Procurement needs to fold back into supply chain end-to-end decision making, taking a leadership role — not stand apart and make bad decisions that logistics and operations need to deal with later.

If you want to know how that should happen, read our joint series on Direct Sourcing that Bob Ferrari and I penned here on how Standard Sourcing Solution’s Don’t Work for Direct.

And, for those who want good products again, this lack of functional integration is why today’s products are sub-optimal. Doug Smock made that clear in his classic Straight to the Bottom Line post here on Sourcing Innovation. Go back and have a read.