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Focus on China: Success Beckons, but Pitfalls Remain for Manufacturers

With Chinese imports into the U.S. running at more than US$25 billion a month in the first half of 2007, China is poised to surpass last year's record setting pace of US$288 billion. The cost advantages that lie behind numbers like these are expected to encourage manufacturers to retain China as a go-to global supply partner in the quest for global competitiveness.

Unfortunately, just extending the supply chain to China doesn't guarantee success. The strategy is filled with potential problems, ranging from gaps in deliveries to poor quality control. "Companies have really learned some of these lessons the hard way," says Mickey North Rizza, research director with AMR Research.

Supply Chain Challenges
For manufacturers seeking efficient supply chains, problems include difficulties in accurately managing inventories. "Manufacturers have to lengthen out their lead times to account for the longer time it takes from when the product ships to when they receive it," Rizza explains.

"If companies don't make some adjustments, including perhaps having a secondary near-shore or onshore supplier, then they're not considering reliability issues," she says. Missed deadlines, she adds, could eliminate the anticipated cost reductions of partnering with offshore suppliers.

Poor visibility into supply-chain performance is another stumbling block, one that makes it difficult to estimate the true costs of supplies shipped from Chinese sources. "Manufacturers get very frustrated if they can't roll up all the cost elements from Chinese suppliers," Rizza says.

Knowledge Is Supply Chain Success
How can manufacturers address these challenges? Supply chain management (SCM) applications can help, as a growing number of companies are discovering. The SCM applications market grew 7 percent last year to $6 billion in total revenues, with a continued expansion of 5 percent expected for this year, according to a recent Supply Chain Management Market Sizing Report from AMR. The business drivers for this growth include market dynamics that are spurring manufacturers to become more demand driven, efficient, and competitive in the global marketplace, AMR adds.

SCM applications provide essential supply-chain visibility so manufacturers know what's in the pipeline and when the goods will arrive, as well as letting offshore suppliers know exactly which products they need to produce. The applications also manage the necessary documentation for logistics, quality control, and customs to help global supply chains avoid schedule-busting bottlenecks.

Aside from installing the right technology, Rizza advises manufacturers to also consider the following best practices:

• Nail down lead times and create "what if" scenarios to address disruptions if any supply-network component goes down.
• Analyze the total costs of near- or onshore suppliers versus offshore sources to estimate the financial impact of a change. Pay particular attention to hidden costs related to different cultures. "You need somebody on the ground to help when problems arise," Rizza says. An in-country representative will also mitigate the 12- to 13-hour time difference, she adds.
• Don't look for immediate ROIs. Although returns vary depending on the extensiveness of the offshoring effort, manufacturers should be prepared to wait 6 to 12 months for returns from the relatively simple strategy of establishing new supplier agreements. A more ambitious plan involving new suppliers and the move of a domestic manufacturing operation to China will require a year or more before returns appear, Rizza says.