The Promise, Perils of the Asia-Pacific Supply Chain

By Andrew K. Reese

Sam Datta has some advice for mid-market companies looking to source goods in the Asia-Pacific market: Know your foreign suppliers' supply chains.

Datta is senior manager for business advisory services and Southeast region sourcing and procurement practice leader at business advisory firm Grant Thornton. His 18 years of industry experience include positions in manufacturing and distribution, including in the chief financial officer's chair.

In his current position on the consultancy side, Datta spends a good deal of time advising midsize firms on how to engage with global suppliers in the Asia-Pacific region. He says that while the region offers opportunities for mid-market companies to source low-cost goods and find new customers, Asia-Pac also is fraught with risks that may present greater danger for midsize companies than for the Fortune 500.

Supplier Risks

One problem that many midsize enterprises face, Datta says, is that they frequently do not have the human resources to devote to doing all the due diligence and other legwork necessary for "world-class" global sourcing. For this reason, these companies may have to rely on a local agent to facilitate relationships with suppliers in the region. Going through an agent can have many benefits, including providing access to local cultural and political expertise, and accelerating the process of identifying and qualifying suppliers. But using an agent does not alleviate a company of the ultimate responsibility for the business practices of its suppliers, and the potential damage to a company's reputation among consumers can be significant in cases, for example, where goods are found to have been produced by child labor or in sweatshop conditions.

Li & Fung Limited, Hong Kong's largest trading company and a partner to many of the largest consumer products companies sourcing in Asia, has attacked this problem by establishing its own compliance program. The company also trains its sourcing teams to raise awareness of compliance requirements, performs supplier audits and inspections, and provides vendor education. Datta notes, however, that supply chains within Asia are becoming increasingly complex, complicating buyers' efforts to understand the true origin of goods sourced in the region. "You might be buying a product from a factory in China, but some of the components might come from Taiwan," Datta says. "If you don't understand that supplier's supply chain, you're open to significant risk."

Supplier-related risks go beyond concerns about responsible sourcing and could include potential disruptions due to political unrest, adverse weather or geological events, or any number of other reasons. Moreover, suppliers based in Asia-Pac oftentimes themselves are pursuing the same cost efficiencies that attract global companies to the region. These suppliers may find it beneficial to pick up their operations in one country and move elsewhere when economic conditions so dictate. According to Datta, for example, many suppliers of castings in China moved their businesses to India over the past few years in search of better operating conditions, including laxer environmental laws and better access to power and utilities. Once India began tightening regulations governing the emissions of plants producing castings in that country, the suppliers started looking elsewhere to re-establish their operations in a more favorable — and less regulated — environment. Each time a supplier undertakes that kind of move, its customers must reorient their sourcing strategies to identify new sources of supply or adapt to doing business in the supplier's new home country. "You have to keep track of the supply base," Datta says, and again, mid-market companies may be challenged to stay abreast of the trends that drive such decisions within their suppliers.

More Challenges, But Some Opportunities

Technology, too, can be a barrier to entry for mid-market companies looking for sources of supply in Asia-Pac. Industry observers generally agree that operating an effective global supply chain requires the same high level of visibility necessary for a "domestic" supply network. Technology providers do offer a number of solutions to help buyers and logisticians better source goods in foreign markets, track goods in transit through the supply chain and otherwise manage a global supply chain. But mid-market companies with constrained IT budgets may be loath to invest in applications or services with uncertain paybacks. "It's a Catch-22," says Datta. "The mid-market companies know they need the technology to get the visibility so they can plan and source properly, but until they have the technology in place, they don't have the visibility they need to figure out whether they're going to get a return on the investment in the technology."

Naturally, many of the risks facing midsize companies sourcing from Asia-Pac are identical to those confronting large enterprises. In addition to the local political, economic, social, regulatory and legal environments in different countries, companies must be aware of potential hidden costs of doing business overseas. Those costs can include increased transaction costs, changes in currency valuations or tax/tariff regimes, higher inventory carrying costs due to increased lead times, and higher logistics costs. In addition, both large and midsize enterprises must take steps to ensure that they are protected against the loss of trade secrets or proprietary information when working with suppliers in countries with less stringent intellectual property environments than are typically found in the West.

The news is not all bad, of course, since the Asia-Pacific market does offer opportunities for mid-market companies, too. Datta believes that, in some ways, midsize companies can be more agile in their sourcing or in how they operate their supply chains than large enterprises, giving them the ability to adapt more rapidly to changes in the various local markets and move more quickly to take advantage of new opportunities as they arise. Moreover, the entrepreneurial mindset that often drives mid-market companies may find fertile ground in the developing Asia-Pacific countries. China alone is projected to have 149 million middle-income households earning incomes of greater than $20,000 by 2010, according to figures from Chris Holling of Global Insight reported in Newsweek last year.

Bottom line: Whether sourcing or selling in the East, research is the name of the game, Datta says. "In the mid-market, we often see a significant gap in education about the opportunities and risks in the Asia-Pacific region," he says. "Many times they're afraid to do anything, or they have done something without doing all the due diligence, so they got burned later on. And once they get burned, they don't want to go back. But if they don't go back, they're losing a competitive edge in the marketplace, because someone else is going to come in and get the cost advantage."

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