Examining the role of China in the supply chain
Over the last few months, I have seen an increasing number of companies taking a hard look at the role China plays in their supply chains. For a variety of reasons, many companies have already begun moving certain manufacturing and supply chain activities out of China and back to the U.S. For example, last year Sleek Audio moved 100% of its operations from Guangdong, China to the U.S. citing concerns about quality and process control. American handbag manufacturer Coach also recently moved a significant portion of its operations out of China to escape rising labor costs. Unlike Sleek Audio, however, Coach moved these activities not to the U.S. but to India, Vietnam and the Philippines. Plenty of analysts are seeing this as a more likely trend. This article makes the case that while manufacturing may shift away from China, it will most likely move to lower-cost countries as opposed to the U.S. or the U.K.
When companies look at their supply chains and re-evaluate which activities they perform in China, there are five primary factors they must consider.
- Labor costs in China are rising. Recently wages have risen by 15 to 20 percent per year. Whether they will continue to increase at this rate is questionable, but a continued increase is a near certainty.
- The value of the Renminbi against the dollar is increasing. If this trend continues, as it has over the last 18 months, doing business in China will become increasingly expensive for American companies.
- Performing supply chain activities closer to consumer markets can improve responsiveness to shifting customer preference.
- Protection of intellectual property is a top concern for many companies, particularly those in highly competitive markets. Companies must be able to establish processes and select partners that will ensure their IP is safe.
- Many supply chain costs are difficult to predict or model. For example, predicting how often an unexpected rework or engineering change will occur can be difficult, even when historical data is available. Supply chain design decisions will have a significant impact on the cost of these kinds of events when they do occur. In some cases, these costs can be so significant that they offset any expected savings by moving activities from a higher cost location close to consumers to a lower cost location that is much more distant.
It is impossible to say with any degree of certainty what is likely to happen in the future, but there is plenty of evidence suggesting companies will be re-evaluating how China impacts supply chain performance. I think the companies that are able to evaluate their supply chains – building in flexibility – on an ongoing basis will be in the best position to make changes when it is appropriate to do so.
Have you seen companies taking a closer look at the role of China in their supply chains? If so, what conclusions have you seen them reach? Please share your thoughts in the comments section.