The China Syndrome

By smartly and aggressively managing your global supply chain, you can turn the China threat into an opportunity.

By George Stalk Jr. -- Supply Chain Management Review, 4/1/2007

If supply chain professionals want to see their biggest challenge and opportunity, they should look East—or more specifically, to China. The country’s booming economy and surging exports are leading to clogged ports and costly supply chain problems that may offset the benefits of low-cost manufacturing. Smart companies will act now to reduce the impact of this potential problem—and leverage the situation to gain a competitive edge.

Container traffic from China to North America is growing by 7 to 12 percent per year, severely straining the ports and rail systems. In Western Europe, the major ports are running at 90 to 95 percent capacity, leaving little margin for variability. In the summer of 2004, a spike in demand resulted in long delays in unloading containers. Some ships were even turned away. Similarly, in the run-up to Christmas of 2004, gridlock hit the Los Angeles-Long Beach ports, the entry point for almost half the goods coming into the U.S. Nearly 100 cargo ships floated at anchor waiting to be unloaded, a process that took up to twice as long as normal.

Delays such as these wreak havoc on companies that rely on outsourced goods. The costs are substantial: excess inventories, over- and under-production, and inventory write-downs. The cost of not having what’s selling—or of having too much of what’s not selling—can hurt margins by 20 to 80 percent. These costs will increase as China-anchored supply chains become longer, more variable in performance, and more difficult to manage reliably. With freight volumes growing faster than port capacity in North America and Europe, the situation will only worsen.

Companies that haven’t yet begun sourcing from China can hold off until the cost dynamics are fully understood—and can compete with a different set of economics. But if your company is already anchored in China, you can take steps to minimize the impact of the problem, improve supply chain performance, and gain an edge against competitors that haven’t addressed the issue:

1. Explore other ways to ship goods that may add costs up front, but can reduce costs overall. Use airfreight for products with the highest margins and volatility. Insist on point-to-point shipping so your destination isn’t the last point of call, which can lengthen transit times and add variability to your supply chain. Be willing to pay for preferential treatment—such as unloading your goods first—to further cut transit times.
2. Consider reworking your logistics network or even retreating from China. Many U.S.-based companies are building regional warehouses, redirecting imports through northern Californian or Mexican ports, bringing some production back to North America, or sourcing from Mexico, Central, or South America, where costs are still relatively low. Many European companies are starting to source from Central and Eastern Europe, where labor costs are almost as low as China’s but the supply chain is shorter and more flexible.
3. Drive time, cost, and inefficiency out of the end-to-end supply chain. Integrate the information flow, reduce production size where possible, and cut cycle times throughout the chain. Analyze your buying practices, with an eye toward finding the hidden costs. Finally, segment your demand chain so that goods with the highest margins and most volatile demand get the fastest handling.

By aggressively managing your China-based supply chain, you can get a jump on the companies that haven’t yet identified or addressed the problem—and turn the threat into a major opportunity.