“Surviving the China riptide.”

Is the title of an absolute must read article by George Stalk, Jr. from Supply Chain Management Review. The article is a month old, but I only just recently discovered it. The article strongly advocates a “look-before-you-leap” process when deciding whether to go into China and suggests that all companies should take a good luck at their supply chain strategy.

Surface freight from Asia to the West Coast of North America is growing at a rapid (and, by historical standards, explosive) rate. Port and surface-transport capacities, however, are not. North American ports and rail systems are beginning to choke, and delays and uncertainties are increasing. Freight demand on North America’s West Coast has been growing at a rate equivalent to one Port of Vancouver per year, and a rapid expansion of port and rail capacity would be difficult given political pressures and formidable environmental resistance. In fact, the situations we describe in this article are going to get far worse before they start getting better. Nor is the problem limited to North America, Europe will soon experience similar challenges.

The supply chain bottleneck is beginning to affect the performance of manufacturing and retailing companies that rely on surface logistics to get their goods from Asia to the heartlands of North America. But few executives in retail or durable-goods companies understand the magnitude of the challenge. Even fewer are investing against the phenomenon to reduce costs, improve profitability, and create competitive advantage.
We strongly believe that by focusing on reducing time and variability in the China-anchored supply chains serving North America and Europe, companies can reduce their costs dramatically, improve their margins, and build competitive advantage. We believe that such performance improvements will dwarf the more conventional profit-improvement efforts now under way in most companies.

The author suggests that for companies to remain competitive:

– They can aggressively manage their China-based supply chain, looking for ways to squeeze time from it that competitors haven’t identified or exploited.
– They can explore alternatives that will minimize adverse effects on the supply chain. These alternatives may include options—such as increased use of air freight—that appear costly but may actually result in lower overall expenditure by reducing hidden costs.
– They can invest in premiums and capabilities. Premiums are the extra payments required to get preferred treatment from ground, sea, and air shippers, port services, and other suppliers. Investments in capabilities enable companies to be better than competitors at managing their business in spite of the problems on the West Coast. These initiatives can include cross-docking, facilitated portside handling, and “track and trace” capabilities to keep boxes moving.

Companies that make creative investments like these will benefit enormously, change the dynamics of their industry, and open a competitive gap that will complement and enhance advantages founded on merchandising and store management. Many companies, however, are not dealing explicitly with the China riptide challenge because they are underestimating the importance of fast, effective supply chains. Most know that supply chain management is important. But rarely do executives think of supply chain investments as an outright source of competitive advantage. They underestimate the magnitude—and the impact on profitability—of the hidden costs of longer supply chains, reduced flexibility, and lost gross margin from missed sales and write-downs.

He then goes on to analyze the hidden costs of a product that arise from fluctuations and challenges in the supply chain. His analysis is very technical and lengthy but is an excellent example of how companies who optimize their supply chain, integrating information flows and cutting cycle times, will have the advantage over their competitors. What I found extremely interesting and illuminating was the results of the analysis comparing a domestic supply chain to a China-based supply chain, clearly illustrating that a domestic supply chain that could optimize their information flows and cycle times would have a substantial operating margin advantage over the China-based supply chain. The author readily concedes that “…the competitive dynamic might continue with the China-based chain becoming integrated and also cutting its cycle time in half. In that case, the advantage returns to the China-based chain because of its lower UPC.”

But he goes on to explain that “…the world we live in isn’t evolving in a way that would permit these improvements for the China-based chain. “ Why not?

As noted, the surface freight situation in North America and Europe is seriously challenged. Backlogs at ports and on railroads are at all-time highs. With freight volumes increasing faster than the ports can handle them, the situation will only worsen. Some Asian ships are too big to go through the Panama Canal to less busy ports on the Atlantic coast. Even some of those that can fit through the canal must offload and reload containers to meet the canal’s pilot-visibility rules. The offloaded containers are sent by rail across the isthmus to be reloaded on the other side, adding even more transit time. And while shifting to East Coast ports might improve the predictability of shipping times, it certainly won’t shorten them.
Because of the problems on the North American West Coast and in Europe, the cycle times of the China supply chains are going up, not down.

But that’s not all. The cycle times of surface shipments (from China to Chicago, for example) are not only increasing—they are also becoming more variable. About 50 percent of the containers at one shipping company are offloaded within two weeks of their scheduled dates, and these are considered to be on time. The other 50 percent are even less predictable!

So what should companies with a China-based supply chain do?

First, they need to be very aggressive in managing their China-based supply chains, looking for ways to squeeze time from them that competitors haven’t identified. For companies that haven’t yet sourced from China, we recommend the following steps:
• Reduce minimum-production-order quantities and reduce cycle times as quickly and as much as possible.
• Don’t source or manufacture in China until management fully understands the dynamics of the supply chains.
• Create an integrated or a semi-integrated information flow within the company’s existing supply chain.
• Conduct in-depth examinations of buying practices and supplier relationships management at all levels of the supply chain. Then identify and prevent potential hidden costs.
• Segment the demand chain on the basis of order predictability and demand volatility so that components with the highest gross margins and the most volatile demand get the fastest handling.
If a company does decide to source from or manufacture in China, it should explore alternatives that will minimize adverse supply chain effects. These alternatives may include options that appear costly but actually result in overall lower costs. For example:
• Using air freight for products with the highest margins and volatility.
• Insisting on point-to-point ocean shipping. To reduce costs, shipping companies build larger and larger container carriers, which must then be scheduled to call on multiple ports. Shipping products on a vessel that has your destination as its last port of call can add weeks—and great variability—to transit times.
• Developing better relationships with transportation providers. This could mean paying the shipping company for preferential treatment. In “hot hatching,” for example, you offer a premium to a shipping company that will load your goods onto its vessel last and unload them first. Another option is to work with the few shipping companies able to offload containers directly onto rail cars that are then expressed east—cutting days and sometimes weeks out of the supply chain.

(All emphasis in the quotes above is ours)

This is one of the best articles on supply chain management I have read in quite a while. Anyone thinking of going into China or currently in China owes it to themselves to read the article in its entirety. I also highly recommend it for domestic companies looking to take advantage of competitors with China-based supply chains.

About The Author: Co-Contributor

  • China Law Blog June 15, 2006, 9:39 pm

    Great post. I’m definitely going to be linking back.

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