RSM Resources

Understanding complex supply chain is vital when considering sourcing from China

Typically, manufacturers that shift production to China see a substantial reduction in costs — usually 50 percent of direct material expenses. What many manufacturers fail to realize, however, is that making such a shift will fundamentally alter the way they manage their business.

If your organization decides to source from China, establishing an effective supply chain will become the highest management priority. And taking certain steps can, in many cases, dramatically improve logistics.

Transportation
A U.S.-based manufacturer sourcing domestically has transit times of three to four days. In China, transfer times can increase tenfold or more. 

For companies used to the ease of U.S. interstate commerce, the regulatory environment in China will be a rude surprise. Transportation is regulated at national, regional and local levels. And those regulations — and how strictly they’re enforced — can differ considerably from one jurisdiction to the next. 

The shipping framework is another issue. Although the Chinese government is making significant investments in infrastructure, burgeoning demand continues to stress Chinese road and rail networks. Rail transportation in China is particularly problematic. Long delays, security problems and damage to goods in transfer are common issues with rail shipments.

Challenges like these can lead to a more extensive and complex supply chain. Goods produced in China must be moved from the factory to the port — which almost always involves more than one transportation vendor. Currently, this usually takes about a week, but can take longer, depending largely on the number of hand-offs involved. Ocean shipment from China to the U.S. takes three to four weeks. Once wares arrive in the U.S., they must be sent to a warehouse or directly to clients. What took less than a week when products were produced domestically now takes well beyond a month.

Keep in mind that logistics is a two-way street. You not only have to get finished goods from your Chinese production bases to your customers, you also have to get raw materials and other supplies to your facilities. This process is likely to be as complicated as the delivery of your completed merchandise and may well involve a separate set of transportation vendors. 

Technology
Information technology plays an increasingly critical role in logistics management. But the IT foundation in China is less developed than in the U.S. and varies considerably from location to location. Since effective use of technology is a key tool to gaining visibility into — and control over — your supply chain, the hi-tech capabilities of your company, Chinese partners and your vendors should be significant considerations.

Inventory costs
It’s critical to take into account potential costs associated with a longer supply chain when considering operations in China.

You’ll likely have to carry more inventory. Businesses must have available stock sufficient to buffer longer delivery times and increased variability in distribution dates. Given the considerable rise in lead times, companies should contemplate how they will address possible changes in customer requirements while wares are in transit.  Managing this combination of expanded inventory expenses and possible reworked or obsolete orders will be important factors in determining how successful sourcing from China will be.

Location, location, location
Because of the inconsistent nature of infrastructure and regulation throughout China, choosing a location that minimizes variability will help reduce potential for supply chain glitches.

Certain industries have clustered in particular districts. Situating in a region that has a number of other companies producing similar products can enhance your in-bound and out-bound supply chain because well-established connections will already exist to and from that area. Remember, however, that supply-chain management is only one issue and site selection must take into account a range of concerns. For example, protection of intellectual property (IP) is a significant concern for many organizations. By settling in a section with businesses producing like goods, threat of IP, counterfeiting and piracy may be exacerbated. 

And not least
Selecting the right partners is also vital. Local partners with strong government connections can make a considerable difference in the effectiveness and cost of operating in China. 

Finally, companies need to take a good look at their activity-based costing capabilities in order to be able to truly understand their costs and profits. Accurately tracking costs by product line means being able to appropriately capture and assign all related logistics expenses. 

Low-cost sourcing has been a profitable strategy for many companies, but you must fully understand the costs and risks — including potential affect on your supply chain — when making this decision.

Dick Strojinc is a director with RSM McGladrey Consulting. For more information, contact him at dick.strojinc@rsmi.com.