Companies continue to leverage savings in various functions and processes in low-cost regions in the world, where they can be conducted at lower cost, either by third parties or by their own efforts. And they are doing so aggressively.

Yet as they rush to source from China, companies in North America and Europe could be walking into a strategic trap with higher overall costs and reduced profitability, according to a recent report, entitled Surviving the China Rip Tide: How to Profit from the Supply Chain Bottleneck, from the Boston Consulting Group earlier this year.

In sourcing from China, businesses have to anticipate a number of common hurdles. For one, as the report aptly pointed out, gridlock has hit the major ports of the world in recent years, resulting in companies trying to stay ahead of the competition by ordering earlier, carrying more inventory and planning further in advance. The usual hurdles are unusually longer lead times and order quantities, which pushes businesses strapped for cash to carry unnecessary inventory and incur connected costs.

In North America, the supply chain bottleneck caused by an imbalance of supply and demand, import and export, is beginning to affect the performance of manufacturing and retailing companies that rely on surface logistics to get their goods from Asia to the heartland. Unfortunately, many leaders at retail or durable-goods companies fail to approach -- or even understand -- the magnitude of the challenge being forced on them.

So what can companies do?

Say the authors of the BCG:

We believe strongly that a firm focus on reducing time and variability in the China-anchored supply chains serving North America and Europe can help companies dramatically improve their margins, and build competitive advantage. We believe that such performance improvement will dwarf the more conventional profit-improvement efforts now under way at most of the companies we are familiar with.

The Boston Consulting Group recommends the following for supply chain professionals who want to be creative and competitive:

1) They can aggressively manage their China-based supply chain, squeezing time from it in ways competitors haven't identified or exploited.

2) They can explore alternatives that will minimize adverse supply-chain effects, including options — such as increased use of air freight — that may appear costly but may actually lower overall expenditures by reducing hidden costs.

3) They can invest in premiums and capabilities. Premiums are extra payments for substantially enhanced performance by means of preferred treatment from suppliers such as ground, sea and air shippers and port services. Investments in capabilities that enable companies to be better than competitors at managing their business in spite of crowded ports include cross-docking, facilitated port-side handling, and "track and trace" capabilities to keep boxes moving.

4) They can diversify supply with multiple suppliers and supply points or produce critical components and products domestically, accepting higher production costs as a tradeoff for lower stockouts and supply-chain costs.

"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," says BCG. "The China rip tide presents a major strategic challenge that many companies are not dealing with explicitly because they underestimate the importance of fast, effective supply chains."

Nothing particularly new being said here. Considering common reports of prices 10 percent to 35 percent to 50 percent lower than domestic sources, as well as the only-fractional added costs in building a global supply chain, it is no wonder that global sourcing has become so highly attractive. However, in their rush to source from China, many companies face a major strategic challenge many are not dealing with explicitly because they underestimate the importance of fast, effective supply chains. And in many cases, the supply chain dynamics of sourcing from China will drive up overall costs and reduce profitability.

Earlier recommended: Making Global Sourcing Work in 5 Phases

Resource

Surviving the China Rip Tide: How to Profit from the Supply Chain Bottleneck
by George Stalk, Jr. and Kevin Waddell
Boston Consulting Group, April 30, 2007