Viewpoint -- China's Evolving Supply Chain

When companies first entered China nearly 30 years ago, cost was the primary driver. In one sense this hasn't changed. A large number of companies still compete on price. Many soon realized quality was increasingly important in work environment and production, so the advantage shifted. Now quality is a topic of current consideration that manufacturers continues to develop. As the gap quickly closed between these two differentiators however, the focus evolved, this time to machinery investment, and internationally recognized certifications such as ISO and Six Sigma. A fundamental adaptation had occurred, but today, this gap is closing as well. The advantage is nearly gone. So where to turn next? Today, companies must further explore process improvement paying particular attention to the China supply chain itself. But what does it really look like?

Supply Chain Management in China

When you discuss manufacturing in China today, it is hard to escape a conversation without hearing the phrase "supply chain". Dig below the surface and you find very few companies actually apply this material flow concept in their daily operations. Partly this is because cost and quality remain the priority. It is the independent operator model at its finest. It is also a result of the increasing gap for supply chain knowledge, execution and talent.

Take inventory management, for example. Inventory management policies vary widely in China. Some companies have moved to JIT models without transitioning their supplier base. Other companies cannot maintain appropriate finished inventory levels because of the demand explosion. Those that do, can't tell you how much product they have on-hand. Companies also face inventory stockouts due to replenishment procedures and downstream operations. What is consistent are both local and foreign companies feel these effects upstream.

Consider now the link between lead time and inventory. When most consider lead times from and within China their expectations are based almost solely on transportation. Think about the assumption here, finished product must already be produced. In China, due to the mismanagement of work-in-process, in-transit and safety stock inventory, lead time must include both manufacturing and transportation lead time. If the supplier does not have adequate inventory, downstream supplier's production lead time can be added as well. Now we are looking at the complete supply chain. Delays, as a result, become clearer.

So is it a downstream human resource issue? Possibly, but the current context must be understood. Few companies in China are developing an actual internal supply chain function. In the majority of Chinese companies, more focus is currently on logistic development. The gap in talent is astounding though. By 2010, it is estimated 400,000 logistics professionals will be required to service this booming industry, while university programs only graduate roughly 10,000 students per year (Logistics Management, July 2007). Many of these degrees only began 5 or so years ago. Supply chain management in relation is even further underdeveloped. This means education and knowledge sharing must come from within the supply chain.

The Logistics Network

Let's look closer at intra-China logistics. What would you say if I told you that currently there are over 700,000 logistics providers registered in China with an average fleet size of less than 3 trucks? Inter-provincial logistics is a reality most supply chains must deal with, especially as the downstream extends further West. Without a national centralized system, consolidated logistics operations are a difficulty that must be overcome within the supply chain model. Again, go back to the supply of qualified professionals and add to that the issue of experience.

What does the logistics network further tell us? With so many providers, creating a profit means overcapacity truckloads. In many cases, this influences quality. Still trying figure out why your product arrived damaged? In considering the supply chain, overcapacity increases the cost of in-transit inventory. This negatively impacts the profit potential for the product, yet these are necessary strategies for companies to stay in business.

Service Level in the Chinese Context

To really understand the downstream, we must consider service level from the perspective of Chinese manufacturing. Today, this means order fulfillment and maximization. With such large volume demand both locally and globally, competition has increased and the name of the game is now market size. Companies therefore only consider maximizing output to maximize revenue. That is it. Again, we see why quality in some cases remains an issue.

In the supply chain context, service level takes into account cost factors such as stockout, lead time, batch size, inventory and transportation cost. This piece of the equation has yet to transfer. Here, the cause is limited pressure and influence to improve coupled with the factors noted above. When we incorporate these costs, supply chain profits could actually increase by over 20%. You still think you are getting a good deal?

With its sheer size and population, Chinese manufacturing will survive. As China's geographic location is optimal for distribution in Asia, an increasing number of supply chains will traverse the Eastern hemisphere. Many of these roads will lead through China. How and where Chinese manufacturing can create new competitive advantages is the key. By further developing a supply chain and procedural mindset, we may witness a true great leap forward rapidly approaching.

Bradley A. Feuling is the CEO of Kong and Allan, LLC, based in Shanghai, China. Kong and Allan is a consulting firm specializing in supply chain operations and corporate expansion. http://www.kongandallan.com