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

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


In an effort to increase visibility, companies implement software systems to assert control over critical locations. Once manufacturing and distribution locations are fixed, it is difficult to influence change. This significantly limits flexibility to make inventory placement adjustments, which may lead to lost opportunities for cost savings. This is often where local competitors gain a competitive advantage.

Companies in China are currently assessing this balance. In many cases, it is here where investment is being funneled. For some, the growth of localized and decentralized operations during China's exponential growth has led to limited visibility. There are clear opportunities for consolidation, which will reduce redundant costs and the environmental impact. For many, high visibility and control has led to conceded market share. These companies are now reengineering their supply chain framework to localize less-critical operations.

Building a World-class Global Supply Chain

In order to remain nimble yet efficient, companies must integrate simulated models that account for the supply chain architecture within which they operate. These models should account for not only demand and production shifts, but also forecast inventory flexibility as key components of the supply chain change. With the further expansion of global supply chains, cost influences can change dramatically and quickly, influencing inventory holding costs, in-transit logistics, lead time and the service levels. Creating such dynamic coordination is critical to long-term sustainability.

With alternative sourcing locations, "low-cost" hopping and expanding supplier networks, the complexities increase. For some specific products, profitability will be impacted marginally by such transitions. For others, total cost models may show cash flow to be negative. Strategic tools that do not account for such variables can create significant inefficiencies in the supply chain design – the results of which may only be realized when it is too late.

Recent trends in the automotive sector clearly indicate the need for increased flexibility and coordination in production, capacity and inventory. Numerous automotive companies suspended production in reaction to demand slowdowns. A forced line stoppage is a reactive measure. In a clear signal of continuous improvement, Toyota, a symbol of the just-in-time (JIT) model, is moving away from its roots to reposition inventory due to such circumstances.

In order to remain flexible under such situations, all contributors in the supply chain must be informed by scenario planning to appropriately prepare their operations. Without proper management, upstream contributors face the immediate cost of holding excess inventory, which inhibits cash flow. The reverse bullwhip often takes place following such an event, influencing greater delays and downstream costs once production resumes.

With the economic downturn comes an important signal that flexibility and coordination must improve to further reduce operational inefficiencies and unnecessary costs. This importantly includes the entire global network from Kunshan, China, to Reno, Nevada. Those that focus on these key factors now will undoubtedly enjoy a stronger position when the global economy regains momentum and continues to expand.

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