Supply Chain Actions to Improve China Sourcing

Companies should revamp their supply chains in China to reduce operating costs and increase efficiency.by Steven H. GansterCompanies sourcing from China have been hit by a one-two punch over the last few years that has sent many of them reeling. In 2006, the renminbi (RMB) appreciated significantly, and China began to dismantle many of its tax benefits for China-based exporters. In response, US companies importing goods from China raised consumer prices, squeezed supplier pricing, and adjusted supplier portfolios. In some cases, companies have moved sourcing from China to other countries, such as Vietnam, and some even considered moving production or supply sources back to Mexico and the United States.

Most US importers and Chinese suppliers adjusted their operations to meet these challenges only to be hammered by the global economic recession. The downturn is driving companies all along the supply chain to cut costs. Lower demand for goods and intense competition are forcing companies to reevaluate their operations, with some leaving China altogether. Companies that aim to secure long-term profits by remaining invested in China should review their supply chain for ways to realign sourcing, improve transparency, and integrate high-tech solutions that enhance distribution efficiency.

Realign supply sources

The RMB’s appreciation, as well as the declining health and occasional exit of key suppliers, sparked an aggressive rethinking of supply sources that continues today. With rising China-based costs, many companies scrambled to Vietnam, India, and other markets, only to find that those markets lacked the infrastructure and capabilities to support logistics needs, as well as a host of other business challenges. But in most cases, companies sourcing large volumes from China found that they were invested too heavily there to exit.

Logistics (moving and storing goods) is the key to supply chain and business effectiveness. Developing more advanced logistics solutions in China is a strategic imperative if the benefits of longer supply chains are to outweigh the costs. In most cases, this means investing in people, processes, and technology. The total cost of logistics from origin to destination matters, as does the total time.

An American Chamber of Commerce in Shanghai China Manufacturing Competitiveness survey in 2008-09 notes that fewer companies—10 percent in 2008, down from 17 percent a year earlier—had concrete plans to relocate manufacturing sources outside of China, reflecting that China remains a competitive source for a wide range of products. Rather than leave China, foreign companies are exploring the benefits of working more closely with key suppliers and service providers there. In some cases, they are even investing in equity partnerships with domestic companies. A recent Tompkins Associates survey found that two-thirds of respondents are seeking new suppliers or rethinking their existing supplier portfolios. As the strategic importance of their China sourcing escalates, companies tend to invest more in sourcing and supply chain operations, moving from opportunistic to direct to strategic approaches, to gain more visibility of and control over the process, while streamlining costs and optimizing performance. This process sometimes leads to establishing a partnership with local suppliers or logistics service providers. For example, Rich Products Corp. formed a joint venture with Kangxin Logistics (Tianjin) Ltd. Co. in 2003 to gain access to local cold-chain supply chain facilities, skilled drivers, and on-the-ground expertise. In 2007, Fellowes, Inc. formed a joint venture with its main Chinese supplier, Jiangsu-based Jinsen Office Supplies Co., Ltd. The structures of such partnerships can be diverse, ranging from close contractual supply agreements to shared equity. The common goal is to improve cost and performance through closer and more strategic relationships. But establishing these partnerships is not easy and requires a shift in buyer thinking away from the prevalent vendor-management attitude held by many companies. To be successful, such partnerships also require financial and management investment.

China hubbing

Evidence of companies increasingly adopting advanced logistics solutions can be seen in their growing use of “China hubbing”—the process of bringing together products from multiple suppliers or origins to a central hub in China that can then reroute larger shipments to the final destination. Hubbing can be combined with bypassing the distribution center and direct-to-store transportation solutions to make logistics more efficient. Though such solutions reduce costs, they are often complex and require good processes and technology. The Tompkins survey found that more than half of the respondents have their products flow through a Chinese consolidation center before entering US deconsolidation or distribution centers. This is especially common for companies that import finished goods from China but less common for companies that import components, subassemblies, and raw materials.

The consumer retail market in the West, which has been hardest hit by the downturn, reveals some interesting hubbing approaches. An increasing number of retailers are using cross docking—a process that eliminates long-term storage—to enhance the flow of their supply chains, and retailers and suppliers are stocking less inventory. Some retailers are also reducing the number of shipments per week to each store to save logistics costs.

Competing with the sourcing scale and sophistication of Wal-Mart Stores, Inc. is a concern for nearly every other retailer in the market. One third-party, start-up logistics provider, Hong-Kong based Swan Logistics (China) Ltd., is promoting the concept of store-ready delivery, which seeks to level the playing field for retailers. Swan’s idea, which is a good example of hubbing taken to an extreme, aims to take time and cost out of the supply chain for Asian-sourced products by using web-based management tools that provide end-to-end visibility and by delivering store-ready shipments to destination-country distribution centers. Firms that take an integrated view of the supply chain—measuring all costs in both cost of goods sold and selling, general, and administrative expenses—will be most successful in using these types of process changes to achieve lowest total delivered cost.

Look for ways to improve supply chain transparency

Supply chain visibility is a top priority for all companies, especially those that operate in China. For most products, many entities are involved in the transport and storage of goods from origin to destination, making transparency throughout the supply chain difficult to achieve. Companies need timely, accurate information at multiple points in their supply chain to respond quickly to market trends and distribution problems, yet many are not getting this information. Most companies want a higher level of visibility at an earlier point in the cycle than they have today.

To achieve a high level of transparency, companies need on-the-ground intelligence, rigorous information requirements, and close cooperation with everyone involved in a product’s supply chain. As logistics capabilities have improved, large US-based companies have changed—or are in the process of changing—the terms of sale to take control of their goods at the supplier’s dock as a way to gain visibility and reduce logistics costs. Companies that serve China’s domestic market want more supply chain visibility too. Technology now makes it possible for computers and databases to talk to each other. Companies must work with—and share information with—suppliers, service providers, and transport carriers so that the ultimate customer has end-to-end visibility.

Closely related to supply chain transparency is the question of total delivered cost. Most companies underestimate the total costs of moving goods and products in global supply chains, and it is often difficult to estimate distribution costs in China, where transport infrastructure varies considerably from region to region. Guidelines used by the Institute of Management Accountants provide companies with information on what the true costs will be, including the time and expense of logistics, management time, quality control, capital efficiency, and technology support. Once the true costs are estimated and budgeted, companies can use knowledge gained through supply chain visibility to reduce them.

Use global trade management systems…

Industry players generally agree that the level of sophistication of supply chain skills, processes, and technologies for managing global supply chains has remained low relative to equivalents for supply chains within the industrialized economies. This is especially true in China, where many companies have rushed to market their products in the past 5 to 10 years. Realizing the significant gains to be had by addressing low efficiency, organizations have begun to improve their global trade operations in a systematic manner.

Global trade management (GTM), a term used to describe the processes to support cross-border transactions, uses information technology (IT) software applications that automate international documentation and customs compliance. GTM systems have evolved to enable supply chain processes that support decisions about the routing of goods, total costs, and trade financing, and they offer information about customs in up to 150 countries and related taxes. Leading applications include TradeBeam, Inc.; GT Nexus, Inc.; and Management Dynamics, Inc., as well as larger enterprise resource-planning companies such as SAP AG and Oracle Corp.

Intelligent uses of GTM have saved many companies millions of dollars in international logistics costs by reducing the amount of time that staff need to research logistics issues and the inherent costs in how goods are routed and financed. A recent, year-long study managed by stanford university and TradeBeam found that companies could benefit significantly from the application of readily available IT and the corresponding skills and process enhancements, which would help them improve their global trade processes and look at global trade in a strategic manner (see Optimize Your Supply Chain with Information Technology).

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Optimize Your Supply Chain with Information Technology

Stanford University, together with TradeBeam, a global trade management software provider with operations in China and the United States, recently completed a year-long study of how enterprises and their trading partners can benefit by applying information technology (IT) to their global supply chains. The study focused on China-to-US trade and was based on interviews from supply chain experts in both countries who helped define a new global trade process model, the Stanford Global Trade Process Model.

The study found that companies can benefit significantly from the application of readily available IT, along with corresponding skills and process enhancements. Under reasonably conservative scenarios, IT-enabled global trade management is estimated to

• Cut costs by 1.7 percent of annual sales for exporters;
• Cut costs by 1.4 percent of annual sales for importers;
• Increase profits by 28 percent for exporters; and
• Increase profits by 23 percent for importers.

In addition, benefits are estimated to equal 3 percent of annual revenue from a representative client for export supply chain intermediaries, such as forwarders, brokers, and carriers, and more than 5 percent from a representative client for similar import intermediaries. Companies that want to take full advantage of these gains can use the Stanford Global Trade Process Model as a framework, following traditional process improvement methodologies.

—Alex Thompson

Alex Thompson is chief architect and vice president of Market Strategy at TradeBeam, a global trade management software provider. He is coauthor of the joint Stanford University-TradeBeam report, How Enterprises and Trading Partners Gain from Global Trade Management: A New Process Model for the China-to-US Trade Lane.[/box]

…and logistics service providers

As supply chains have gone more global, so have the capabilities of logistics service providers (LSPs). Larger firms such as APL Ltd., Deutsche Post AG (DHL), and UPS have the capabilities to move goods faster and more cheaply than ever before. Any company that sources, distributes, produces, or sells globally without engaging an LSP risks spending more on logistics than it should. In addition, the larger LSPs can bring best practices, technology, and even innovation to their customers’ supply chains.

Regardless of company size, the Tompkins’ survey showed that about half of the companies use a combination of direct sourcing and sourcing through a trade partner. Also, most companies surveyed use an LSP for at least some of their logistics activity. LSPs almost always build full container loads, which typically head to a US distribution or deconsolidation center. These LSPs provide other services as well, such as labeling, shrink-wrapping, and kitting.

Merger-and-acquisition activity in China has risen over the past few years as many LSPs followed their clients and entered the market by partnering with a local company or acquiring the capabilities to provide the end-to-end solutions they advertise. Ryder System, Inc.; Menlo Ventures; Schneider Electric SA; Werner Enterprises, Inc.; and YRC Worldwide, Inc. have all increased their presence in China. A.P. Møller-Mærsk A/S, APL, and NYK logistics have expanded their China consolidation capabilities and partnered with US trucking companies, sharpening their focus on promoting end-to-end solutions. This is good news for companies that import goods from China and for those that look to China’s domestic market to spur future growth for their products.

Logistics capabilities in China are evolving. Companies should explore all available options to enhance their logistics operations and coordinate their efforts with partners all along the supply chain. They should out-think and out-maneuver opponents by looking for performance improvements in their global supply chains. These actions work, and companies should carefully consider how to apply them to their supply chain.

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Five Ways to Improve Your Supply Chain

1. Explore the benefits of getting closer to sources and consider creative ways to work more closely with key suppliers and service providers, even to the point of taking an equity share.
2. Consider ways to move distribution activities and assets from high-cost markets, such as the United States, to a lower-cost region or source country.
3. Work with suppliers, service providers, and transport carriers to improve visibility of products and materials that flow from China to the final destination. Then act on this knowledge to reduce costs and times to market.
4. Use information technology to manage supply chain operations.
5. Explore options for optimizing the supply chain and work with partners to achieve the best results.

—Steven H. Ganster[/box]

[author]Steven H. Ganster is senior vice president Asia, Tompkins International, and CEO of Shanghai-based Technomic Asia, a wholly owned subsidiary of Tompkins International. Technomic Asia provides business and supply chain strategy assistance for Western firms operating in China and other parts of Asia.[/author]