We call reader attention to a recently released research study from AlixPartners, that firm’s Manufacturing-Sourcing Outlook. This is the third consecutive year of publication of this report.
It warrants a read from supply chain, product management and sourcing leaders.
The report concludes that the United States has reached parity with Mexico as a preferred nearshoring location and that the U.S. is on-track to achieve cost-parity with China by 2015. There are, of course, important caveats to surround the assumptions of these conclusions. The latter conclusion is consistent with the well cited 2011 research report by the Boston Consulting Group. After reviewing all of them, Supply Chain Matters believes that they are reasonable and pragmatic including considerations for China’s wage inflation rates and sourcing switching costs. One of the other more important criteria are assumptions related to the cost of transportation, which AlixPartners viewed as currently favorable to outsourcing. As we have noted in previous commentaries, international ocean container and air freight carriers are awash in excess capacity and need to recover eroding revenue streams by cutting capacity or service.
Some of the other important takeaways from this report are:
- Decisions related to nearshoring are now very top-of-mind; the report states that 84 percent of respondents indicate that these decisions are important, up from 53 percent last year.
- The majority of executive respondents surveyed expect to reduce total landed costs in the range of 5 to 20 percent. An editorial sidelight, when this author led research 8 years ago related to decisions to source production in China, this same bandwidth of cost savings was cited. Thus, thresholds of cost savings opportunities remain consistent.
- The cost gap concerning China and the U.S. has been closed, on average by 70 percent in specific product categories that AlixPartners analyzed, which included fabricated parts, assemblies and consumer products.
- A caution that China still maintains an advantage of scale, and will aggressively protect its existing manufacturing capabilities. We would add the caveat that protection should be assumed in defined strategic industries within the current five year plan for China. That includes growth industries such as high tech and consumer electronics, alternative energy, medical and healthcare products and other strategic industries.
As we have also pointed out in our recurring commentaries, supply chain teams should expect more leveraged use of robotics and factory automation across China as it responds to these current global economic shifts.
We all know that product sourcing decisions are strategic and often involve longer time horizons. Therefore it is very appropriate for sourcing and product management teams to be broadening their horizons out to 2014 and beyond. That would include, by our view, some discussion in the Executive S&OP process.
If you are asked to support these efforts, keep in mind that sound analysis and insightful information will go a long way to insure that decisions on continued outsourcing or nearshoring are made with all the facts and with consensus assumptions. We remind sourcing and product management professionals to absolutely include the voice and insights of transportation, logistics and supply chain operations in these ongoing analysis and decisions.
The good news is that newer analytical and business intelligence technology tools making their way into mainstream use will greatly help in these efforts.
Supply Chain Matters is pleased to report an update on our ongoing alert commentaries regarding the labor dispute occurring at the Port of Hong Kong.
Various media and other reports confirm that a settlement has now been reached by the parties involved. After 40 days of protest, striking dockworkers have voted to accept a 9.8 percent pay hike after four labor contractors agreed to honor the proposed pay hike. Contractors also agreed to provide workers work breaks for meals and use of bathroom facilities, which was not a previous practice.
What was also significant was that the strikers appeared to have garnered broad public support, calling into question the dominance of the city’s business elite. In a legal challenge, striking workers upheld their rights to peacefully picket the corporate offices of the port operator, Hutchison Whampoa. The operator was reported as welcoming the decision and stating that it respected the freedom of speech and peaceful protest.
According to a news report from The Standard in China, port operations should return to normal sometime next week. Global shippers and ocean transportation providers apparently heeded the alerts from this site and others, and began diverting cargos to other Chinese ports, thus the overall impact of the port disruption may have be controlled. None the less and similar to what occurred in contract manufacturing facilities in mainland China, this event will stand as being a rather significant milestone in terms of dock workers standing-up to perceived conditions of low pay and sub-standard working conditions. Many in the region were initially doubting that the work stoppage would hold and that workers would not stay united.
In our 2013 Predictions for Global Supply Chains (available for no-cost download in our Research Center), Prediction Nine declared that higher and more expensive incidents of counterfeit products appearing in multiple industry supply chains will motivate step-up mitigation efforts.
Thus, we were not terribly surprised to review a published article appearing on The Wall Street Journal which noted that dealing with fake goods is as profitable as illicit drugs. (Paid subscription required or free metered view)
This article summarizes a report from the United Nations Office on Drugs and Crime which concludes that counterfeit goods, mainly from China, have become as profitable as illegal drug trafficking for Asia’s criminal gangs. The UN report reviewed 2008-2010 data and concluded that $24.4 billion was earned from fake drugs and goods originating from the East Asia and Pacific region. This UN report further notes that much of the trade in counterfeit goods is traced to China which the report estimated to be a direct source of about two-thirds of the world’s counterfeit goods.
While government agencies in China have been stepping up efforts to identify and provide harsher penalties to people convicted of breaking China’s laws on counterfeiting, the producers themselves are much more sophisticated. Not alone to drugs and goods appear more identical to their original counterparts, sophisticated distribution methods disperse these goods through a layer of various global distribution networks which mask the original origin of these goods. These facts were brought to light in last year’s episodes of fake cancer medicines entering the U.S. and other countries.
Supply chain risk identification and mitigation teams need to continue with the assumption that the volume of counterfeit goods is increasing and that mitigation plans, processes and tools to identify potential sources of fakes must be vigilant and active. This would include testing and traceability mechanisms.
In late 2005, while leading supply chain management research for IDC, I was asked to help in launching a brand new research practice that would be focused on manufacturers who were considering sourcing supply chain activities throughout China. Readers will recall that this was a period where many global based manufacturers were just discovering China as a low-cost manufacturing hub and IDC wanted to provide clients the insights and watch outs needed to formulate their strategies.
Among the many companies I had the opportunity to interview was Samsonite. Bob Parker, my manager had met Robert Zelinski on a plane ride in 2005. At the time, Robert was Vice President of Sourcing for the North America and was returning from one of his frequent sourcing oversight trips within Asia. He later graciously agreed to participate in our research interviews after we explained the purpose.
We were very interested in Samsonite because the company was one of the very early entrants into China, along with the fact that the manufacturing of luggage products is very direct labor intensive, and was a core capability of Chinese stitch-oriented manufacturers. Logistics costs in moving finished goods in end markets were another critical input to production sourcing decisions.
During our interview sessions, Zelinski explained that Samsonite had already gained a tremendous amount of learning from its initial sourcing activities up to five years prior. Initial sourcing activities centered in factories located in the coastal Pearl River region. Even in late 2005, Samsonite was experiencing increasing direct labor costs in the coastal region and was already exercising plans to move production to the more interior regions of China, along with scouting other emerging low-cost production sourcing areas such as Vietnam. Robert explained that the luggage industry is highly sensitive to direct labor and landed cost analysis and was not at all reluctant to change sourcing strategies when required to meet established margin goals. In 2005, the company was conversely aware that China had an emerging consumer market that would eventually travel more. They were therefore one of the first of our interviews to articulate the tradeoff of sourcing for cost advantage vs. the sourcing for market access, which are too different sourcing decision criteria. While direct labor costs were tracking in the negative nearly seven years ago, the company still had an eye toward China as a producer and as a prime consumer class of its products. The challenge was constantly finding the right balance.
I was thus very interested to read of Samsonite’s latest reported quarterly results that were announced several weeks ago. The company recorded nearly $225 million in before-tax profits, up 62 percent from a year earlier. Revenues climbed 13 percent to $1.77 billion, fueled by increasing demand from traveling consumers seeking new luggage in Asia and North America. Sales in Asia alone grew 40 percent in the most recent quarter. Introductions of new hard-sided luggage lines were noted as facilitating increased sales growth.
In its reporting of Samsonite’s latest earnings, The Financial Times made note that molded plastic luggage had benefitted Samsonite because the stitching required producing the softer nylon luggage made it much more labor intensive as opposed to a hard-sided molded variety. It also acknowledged that the majority of luggage components stem from China.
The takeaway from this Supply Chain Matters commentary is that seven years can sometimes appear to be a lifetime within the short-term, ‘in the moment’ business world of today. Yet, more and more, the impacts of smart supply chain sourcing decisions eventually lead to bottom line and stockholder benefits. In the case of Samsonite, agility and a certain balance supply chain sourcing obviously played a role in a successful business outcome.
Sourcing for efficiency and cost savings is quite different that sourcing for market access and agility. When both strategies come together, the sourcing decision becomes far more beneficial to the bottom line. Balancing the need for near-term results in cost and efficiency savings in the context of longer-term direction and business strategy needs is not often easy, but beneficial. Who really knew seven years ago that hard-sided luggage would return with such attractiveness for traveling consumers.
I do wish that more CEO’s and CFO’s would acquire and support a longer view perspective of global supply chain sourcing needs and decisions. Procurement leaders and supply chain executives need to foster, as much as possible, education as to the differences for both strategies.
This weekend, The Financial Times reported (paid subscription required or free metered view) a significant finding, one that probably is not a surprise, but none the less should be of continued keen interest to product management, supply chain and IT functional support teams. The FT article cites findings from the recently released 2013 China Climate Survey Report conducted by the American Chamber of Commerce in China.
The FT headline is that a quarter of U.S. companies conducting business in China indicate that they have had trade secrets stolen or compromised through cyber related attacks on their China operations. The Chamber report cites 34 percent of respondents indicating material damage to China operations, a 12 percentage point increase from the previous annual survey. Once more, 14 percent indicated that these breaches caused material damage to global operations and a majority of these same respondents, 95 percent, indicate that this situation was unlikely to improve. More than 40 percent indicated that risk of a data breach is actually increasing. Almost half of all US companies surveyed indicated that intellectual property (IP) theft had damaged their operations.
The annual Chamber survey recorded a significant deterioration in perception of the investment environment in China, dropping from 43 percent a year ago, to 28 percent in the latest survey. Worries over corporate espionage were cited as a primary reason for the drop in confidence. Over one-third of respondents believe that industrial policies favor state-owned enterprises to the detriment of their own company. De-facto technology transfer as a requirement for China market access was cited by 37 percent of respondents as an increasing requirement, a 10 percentage point increase from the prior year. This is a further indicator of concern related to IP protection.
These findings certainly echo the current public concerns now be openly expressed by many global governmental and legislative leaders regarding the increasing threats of cyber attacks. That included a recent trip to China from newly appointed U.S. Treasury Secretary, Jack Lew.
In response to questions raised by this survey, FT reports that:”… the Chinese foreign ministry described any accusation of Chinese cyber theft as “irresponsible” and urged US officials and companies not to politicize economic and trade issues and to stop hyping the issue of cyber security.”
Supply chain related technology and cloud services providers should take note of the survey finding that more China based companies are considering cloud computing options but the majority distrust China based providers because of data security concerns.
Readers can downloaded the full report at this web link.
Supply chain and IT professionals need to heed these growing concerns. Insure that supply chain risk mitigation plans include special emphasis toward business and information policies for all owned operations within China. Emphasis should also be focused on information transfer and management practices that involve suppliers residing in the region.
China is both a vast growth market for goods and services and the global center of multiple industry manufacturing operations. In the survey, the majority of the respondents continue to cite high profit margins in China. While those facts cannot be overlooked, attention to cyber security and IP protection should continue to be of a high priority.
One of our very first series of commentaries in 2008, the year of the founding of Supply Chain Matters, related to the ongoing melamine contamination of milk powder and milk products that occurred throughout China. Tragically, six children died and thousands of children were sickened and suffered major health impacts. As the events unfolded for weeks and months since, we have been amazed by the impacts.
This specific incident continues to be top of mind for many Chinese consumers of dairy related products, who even today, in spite of massive remediation efforts by China’s agriculture authorities, have more trust in foreign brands and supply of dairy products than in Chinese brands. This lack of confidence in Chinese producers has fueled shortages of infant milk formula produced by foreign producers causing consumers to shop in other foreign countries for their needs. The Financial Times reports that Australian students were recruited to buy tins of formula and ship them to China where they sold for twice the price. This has caused Australian supermarket chains to in-turn, limit the amount of sales from popular brands such as Karicare, which comes from New Zealand producers.
In 2010, we penned a follow-up commentary, Turning Supply Chain Risk into Opportunity, related to New Zealand based Fonterra, the world’s largest diary producer by volume. This company became indirectly involved in the 2008 incidents because of its prior minority ownership in Sanlu, a major producer of dairy products across China. Fonterra officials were the first to inform the Chinese government, via the government of New Zealand, of the existence of contamination.
The company paid a dire price monetarily, by having to liquidate its entire ownership of Sanlu, while rebuilding its creditability as a major supplier to food companies such as Nestle and Kraft. In 2010, Fonterra was resolute to return to China and rebuild its brand creditability, by establishing a network of its own operated dairy farms within that country. It has since been building an integrated milk business through two directly owned dairy farms.
This week comes news of another twist of turning supply chain disruption into opportunity.
Readers may have read that New Zealand has been suffering from major drought conditions, the worst in 30 years. Many dairy farms have been impacted and here are concerns for as much as a 20 percent drop in total milk production this year.
Fonterra, having to warn of both supply and earnings impacts for the second-half of its fiscal year, has announced this week that it plans to move into China’s infant formula market, the same market that was at the center of the 2008 contamination incidents, and currently has to rations foreign brands because of overwhelming consumer demand. The company will launch its own Anmum brand of infant milk formula later this year along with plans to construct a Chinese plant to process ultra-high temperature (UHT) milk.
Thus, nearly five years later, Fonterra is ready to build-out the last leg of its owned dairy supply chain, the control and processing of milk production. Stockholder in the company were pleased, driving the stock up over 7 percent on hearing the news.
We keep an eye out for industry examples that highlight how companies turn supply chain disruption and risk into a more positive market opportunity, which we will continue to share on Supply Chain Matters. Add Fonterra to this list, and it continues to proactively convert a series of setbacks into market opportunities. Knowing your global market and the dynamics of that market that involve disruptive supply or demand events is an important capability component.
We continue to wish Fonterra and its supply chain teams well in its endeavors across the globe.