Increasing Cost Pressures in China Shed Light on Dynamic Nature of Supply Chain

Understanding the total costs – and benefits – of a global supply chain


Operations in the west of China and in many low-cost alternative countries are shaped by the supply chain landscape. For example, Laos, a landlocked country that experienced export growth of 50 percent year-over-year in 2006 requires transportation through multiple countries to reach the nearest port. Local logistics influence direct and indirect costs. Inventory holding costs may be lower based on overhead and labor, yet a critical question becomes lead time.

Building on these foundational components, inventory management is clearly an important component. Raw material procurement, especially in alternative sourcing destinations, is different from China. For Vietnam, raw material is often imported, increasing costs. This often creates lower in-transit efficiency. Demand-production synchronization becomes integral through analytical planning.

Another consideration is capacity and utilization. China continues to invest in significant manufacturing, storage and transportation infrastructure. Vietnam is in an earlier stage of development. Smaller geographic and industry sizes, in addition to competition, will impact the capacity and supplier base for localized operations. This influences potential bottlenecks in all four types of inventory.

Assessing Production Location in the Supply Chain Model

With worldwide expansion, companies are only now beginning to consider their supply chain model. This involves production and inventory location. For example, one challenge remaining in China is quality variability. Moving tier-one component inventory closer to finished goods production in another country may be an optimal decision. Major considerations, however, include the relative power of suppliers. For industry leaders, flexibility is key. Strategic balancing between China and overseas production may be utilized to fulfill adjustments in lead time and service level. It is these scenarios where total cost models can best be assessed.

In other examples, companies continue to move farther inland in China. Intel's recent transition to Chengdu, in Sichuan province, is just one example. These decisions are primarily based on lower labor and overhead costs, along with tax incentives. Production and inventory placement is again of primary concern. How do these location transitions affect upstream, downstream and the overall service level?

Assessing Inventory in the Supply Chain Model

Few industries actively concern themselves with minimizing inventory, the automotive and electronics industries historically being classic examples. In China, as well as other low-cost alternatives, the costs of holding inventory greatly influence upstream profitability. Inventory management knowledge is still in an early stage of development.

For all companies, the cost of poor supplier inventory management is tangible. Product recalls, for example, are often a result of material input substitution. If a manufacture faces a stock-out, they will select a supplier that can fulfill the order based on cost. If the component is used without testing, the result may be a recall. The reality remains, when you buy a product, you buy the supply chain.

As with production location, the positioning of inventory is critical. How many companies actually track the inventory levels of their supplier's suppliers? In the case of China or alternative sourcing locations, upstream inventory placement is an influential determinant in lead time and service level. Production delays may result from such conditions in the supplier operations.

The challenge becomes more involved as we map a company's global operations. When a new supplier or warehouse is added, how is global inventory readjusted both upstream and downstream? If a reduction in capacity occurs, how does the lead time and inventory placement change? Unfortunately, software solutions cannot foresee such variables. Inventory is often an afterthought, yet these costs significantly impact profit and cash flow.

Trade Off Between Visibility and Flexibility

An interrelated and important discussion must be addressed as it concerns visibility and flexibility. Visibility is commonly associated with technology-assisted material flow monitoring. In China, as with other developing countries, such technology at the supplier level is limited. Complete visibility requires more traditional methods, namely communication.

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