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This piece was produced in collaboration with CIPS, the Chartered Institute of Purchasing and Supply

Food scandals are shaking confidence in food supply chains around the world. While food safety was once assumed to be paramount in the minds of food retailers and buyers, it has become clear that consumers have been deceived into consuming foods strikingly different from what their religion, preference or cultural values allow.

Both McDonald’s Corporation and KFC parent Yum recently suffered brand damage when Chinese authorities closed down a local meat supplier after evidence of old and contaminated meat was found in their products. More recently, a Taiwanese company, Chang Guann, has been fined for selling old oil, unfit for human consumption, as food-grade cooking oil. 

McDonald's and Yum Foods have stopped using the maligned supplier, Shanghai Husi Food Co Ltd, found new suppliers and publicly apologised to consumers. 

China is the third largest market for McDonald’s with Yum close behind. With competition offering increasingly attractive domestically and locally-sourced foods, this scandal occurred at a time for McDonald’s and Yum Foods.
CIPS believes that part of the solution to food scandals like this lies in a licence for the procurement profession. Employers seeking procurement professionals for their business can rest assured that MCIPS holders are the best professionals in the procurement field.

MCIPS-qualified professionals operate under the key concepts behind ethical and sustainable procurement and supply management thereby reducing instances of fraud and corruption. Supply chains are becoming increasingly global and complex in nature, and MCIPS training provides the skills to keep up with these changes.’

Stay tuned for our next piece on ethical and sustainable procurement.

Photo: Agence France-Presse
Global textile and apparel sourcing is currently in a state of change. In China, the textile industry is not a major focus for industrial development, and lower value added manufacturing is progressively moving into South East Asian countries. For this reason, textile and apparel sourcing has to become more diversified. Yet this does not mean that China is no longer one of the leading players in this field, but emerging countries in South East Asia are increasingly challenging China's dominance. 

China still has a lot going for it. It has well-established supply chains, as well as good infrastructure and expertise in making apparel and textile products; no single emerging country in South East Asia can yet hope to match China in all of these capabilities. Hence China will likely remain the leading textile and apparel sourcing country in the region over the near to medium-term. But the basic point here is that sourcing can (and should) now utilise the increased number of sourcing options in the region, and not focus solely on China. 

Old and emerging players: The global landscape
The World Bank has identified four basic types of apparel exporting countries in the world, with the largest share of production occurring in Asia:
  • Steady Growth Suppliers: China, Bangladesh, India, Vietnam, and Cambodia (Pakistan and Egypt can also be included on this list, but with smaller market shares)
  • Split Market Suppliers: Indonesia (which is increasing its market share in the US and Japan, and decreasing its share in the EU), Sri Lanka (which is increasing its market share in the EU and decreasing in the US)
  • MFA-era Suppliers*: Canada, Mexico, the Central America Free Trade Agreement, (commonly known as DR-CAFTA, a free trade agreement including the US and the Central American countries of Costa Rica, El Salvador, Guatemala, Honduras, Dominican Republic and Nicaragua), EU-12, Tunisia, Morocco and Thailand (all of which have all registered sharp declines in textile and apparel exports after the MFA quotas were abolished in 2005)
  • Past-prime Suppliers: Hong Kong, South Korea, Malaysia and other countries with decreasing market shares since the 1990s such as the Philippines and Singapore

The map below illustrates the new challengers to China's dominance for textile and apparel sourcing, highlighting the emerging sourcing potential of South and South East Asia:

Textile and Apparel Sourcing Landscape.png
New opportunities in the Asian landscape
China is no longer the only option for textile and apparel sourcing, and it certainly is no longer the cheapest option. So taking advantage of this new landscape means being able to exercise a range of sourcing options focusing on a number of emerging Asian countries. Some of these opportunities are outlined very briefly below: 

  • With low cost domestic supply of cotton and low labour costs, Pakistan has a good track record for pure cotton apparel production for items such as male T-shirts and cotton jerseys
  • Bangladesh still has an underdeveloped apparel and fabric manufacturing industry, although it also has very low labour costs and cotton prices. Thus Bangladesh can be targeted for sourcing of cotton garments of basic design and standard quality
  • Sri Lanka has similar cost advantages as Pakistan and Bangladesh (although the cotton price and labour costs are slightly higher), but operating and capital costs are higher, and a lot more machinery needs to be imported. As a result, Sri Lanka could potentially only be a sourcing target for certain niche products such as women's underwear
  • Cambodia's textile industry is still highly underdeveloped, but low costs and government support for the industry makes it attractive likewise for niche products such as basic design T-shirts
  • Indonesia's cotton price is the lowest in the region, but operating costs are higher than most countries in the region and much of the machinery in the industry is largely outdated. Indonesia does, however, have substantial installed capacity across a range of textile segments, and hence can be targeted for a number of products such as synthetic fabrics, synthetic apparel, and high-end cotton shirts
  • Vietnam has a lower cost base than China and India, although higher than Bangladesh and Pakistan. The textiles and apparel industry is actively supported by the government, and relatively significant currency depreciation makes the country's exports competitive. The local workforce is still largely of a low-end skill base, however, meaning that Vietnam's best sourcing opportunities are still in basic designs and standard types such as woven garments and children's products
  • India has a diverse and integrated fabric and apparel industry, and it now has lower labour costs and cheaper cotton prices than China. These and other trends mean that India will likely gain a comprehensive competitive edge over China in the future. India can be targeted for sourcing fabrics and textiles across virtually all product categories

This very brief outline illustrates that China is no longer the only game in town for textile and apparel sourcing. It is still the dominant player, and will likely still account for the largest share of global textile and apparel sourcing for some time to come, but other countries in South and South East Asia are now attractive for specific products, and China's position will be further assailed in the years to come by these emerging Asian countries. The trick is to exercise the right sourcing options.   

* The Multi Fiber Arrangement (MFB), implemented as a short term measure to allow developed countries to adjust to imports from the developing world, governed world trade in textiles from 1974 to 2004 and imposed quotas on exports from developing countries to developed ones.  

Also see this report on the CEIBS website: China's Role in the Global Textile Industry

A New Approach to China Procurement

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China's procurement environment is changing under the weight of both old and new trends, and procurement managers worldwide must adapt to a new opportunity landscape. A different approach is now required that takes advantage of China's more sophisticated manufacturing base.

For the past 10-15 years, China has been the undisputed darling of purchasing managers worldwide. The goods Chinese suppliers export to the EU and US range from apparel and electronics to heavy machinery, all of which have grown steadily in the past decades to place China in the number one spot for overall exports volume. Exports of machinery and equipment to developed countries have particularly enjoyed rapid growth over the past ten years (see chart below, right). But since 2006-07, new issues such as an appreciating currency and increasing labour costs have started to impact both the real and perceived competitiveness of China as a source of manufactured goods. How should a procurement manager re-assess China in the light of these and other changes? How can they assure that competitive advantage is gained by investing in a China sourcing operation? How to benefit from the long-term trends and evolving landscape of China’s manufacturing base?

Old news: Labour and currency issues 

 Labour cost increases and rapid rises in input prices, mostly for commodities and energy, were a significant problem for the Chinese manufacturing industry in the years preceding the global financial crisis. The crisis provided a brief respite, with declining exports and capacity utilisation releasing upward pressures on prices and wages. But since early 2010, the trend has resumed, with labour costs increasing by 14.3% in real terms in 2010, and PPI inflation reaching 5.5%. Not only is labour becoming more expensive, but there is also a shortage of experienced white collar workers, engineers and managers which are increasingly in high demand. 

In addition, the Chinese government is allowing the gradual appreciation of the renminbi, with has risen by 21% against the US dollar over the past five years. With pressure from the US and other developed countries for China to further appreciate its currency, this trend is likely to continue for the foreseeable future. Other trends that are not new but continue to plague the Chinese manufacturing base are intellectual property protection; weakly defined and poorly implemented quality management processes; governance issues in supplier selection and management; and inconsistent product quality. 

Wages and Exports.jpg

New trends 

There are also more recent discernable trends which are negatively affecting the pricing and availability of Chinese exports. The government is increasingly implementing trade restrictions such as export bans or export quotas, and also reducing VAT export rebates and in some cases placing export duties on certain commodity-type products, especially energy-intensive goods or low-value-added processed raw materials. On the other hand, newly emerging or existing sources of manufactured goods, such as Vietnam, Thailand, Malaysia, Indonesia, and the Philippines, have started to look comparatively better from a labour cost perspective. Governments across the region have started implementing some of the policies that brought success to China’s leading export manufacturing industries, and are offering increasingly attractive investment incentives to manufacturers. Procurement managers across the globe are under pressure to evaluate these up and coming low-cost countries, and determine the best approach for avoiding increasing costs in China and taking advantage of these opportunities.

Estimating the extent of change 

From our experience in China and our understanding of China’s manufacturing strengths and weaknesses, none of the trends described above are surprising. They all fit into the mould of the long term income rise of China’s population, as well as government policy goals of increasing the value added of local manufacturing, reducing the country’s energy and raw materials dependency, and shifting the growth engine of the economy away from export-oriented manufacturing towards a more balanced portfolio of investments, including boosting local consumption and the service exports are forecasted by MEPS to fall by 37% this year, while seamless tube exports will only see a modest 8% growth. To better understand how to take advantage of this shifting China procurement equation, we need to re-assess the key elements of China’s traditional manufacturing competitiveness. What began 30 years ago as a cheap labour outsourcing base for unsophisticated goods has changed dramatically to become a continent-scale country of widely varying costs, standards, capabilities and business environments.

In terms of labour costs, cost to company per employee is increasing across China due to uneven supply, high demand, inflationary pressure, organised labour demands, and growing social spending requirements. But Western China still offers large pockets of very reasonable wages for skilled and semi-skilled labour, and foreign and local manufacturers in China are increasingly taking advantage of this. While it is true that wages are rising quickly in coastal regions, labour productivity gains due to investment and technical upgrades, especially in the machinery industry, have kept pace with the rise in labour costs (see chart above, left).

Chinese exporters of manufactured goods are also taking advantage of the massive local market. The demand for new plants, equipment, infrastructure – often one third to half of world demand – has created significant economies of scale and of scope for most of China's manufacturing sub-industries. The competitiveness and innovation in the construction machinery sector, for example, have primarily been driven by the country’s infrastructure build-up over the past 15-20 years. The same effect has benefited the producers of steel commodities and structural steel, construction materials, trucks, barges, electrical equipment, power generation equipment, etc. The infrastructure build-up and procurement demand, initially fuelled by foreign-invested companies and with some assistance from government procurement policies, government-approved projects, and the availability and low cost of land and capital, have generated a highly competitive and increasingly sophisticated plethora of local producers that are now dominating the Chinese market and aiming for global expansion.

The size and growth of China’s manufactured goods market is in effect supporting a self-sustaining cycle of cut-throat competition that features innovation, capacity expansion and upgrading, and ‘learning by doing’. Suppliers and clusters of suppliers compete with each other but an engineering talent pool and the related innovation usually travels freely and contributes to China’s overall manufacturing competitiveness. They take advantage of the more than 600,000 students who graduate with engineering degrees every year, excellent transport infrastructure, especially in coastal regions, and generally supportive government policies favouring Chinese high value added manufacturing. As industries across China consolidate and manufacturers grow and become more assertive in their quest for value-added production and profitability at home and abroad, firms sourcing from China must address the following question: How can we protect and consolidate our savings in sourcing capital goods from China through the establishment of a China procurement operation? At the same time, how can we move to the next level and take full advantage of an increasingly sophisticated manufacturing base?

A new approach: Drawing in the supplier and sourcing goods of increasing complexity

The structural changes in China’s competitiveness across the sourcing spectrum will require procurement managers to shift some of their commodity spending from China to other LCCs, while increasing their orders of machinery, complex parts and high-value added consumables in China. In our view, the key to taking full advantage of a broader spectrum of cost and feature innovation present in the Chinese market is to move from a customer-supplier model of price-based sourcing with strictly dictated specifications and standards to a partnership-based approach where the supplier takes an active part in the overall project and in specifications design. This would entail a structured and patient exchange of ideas, a deeper understanding of Chinese manufacturing practices and standards, and above all, an open mind from both the customer and the supplier. Commercial practices would also require modifications. Contract management with Chinese suppliers generally relies less on contract enforcement and more on relationship management, so many of the standard contractual clauses traditionally used by international procurement teams are either not applicable or not enforceable in China, and thus create unnecessary burdens on suppliers and ultimately increase the total costs of the contract.

Ultimately, a sophisticated foreign buyer of Chinese capital equipment will probably need to adopt a number of Chinese standards, practices and approaches – all without compromising quality, environmental and labour protection standards, or good governance.

Note: This article originally appeared in the section China Sourcing Strategy of the September 2011 edition of The China Analyst. 
Software Advice has just released is overview key trends in procurement systems for 2011. Those sourcing from China may consider implementing some of these processes in their of businesses.

First, with rising costs elsewhere in the supply chain, managers are increasingly turning to automated procurement systems over manpower. Most active in the implementation of procurement software are mid-sized businesses, those with revenues between USD 100 and 750 million, which are turning to cloud software. This unique form of data management operates without being grounded to a server but instead on an extended network of users.

Cloud and other types of software are allowing procurement specialists to network outside of their own organisations, another trend noted in the Software Advice report. Greater connectivity within the industry has increased the viability of reverse auctions, where suppliers can collaborate for heightened purchasing power. 

The main advantage of an upgraded procurement system is enhanced information flows. For example, through order history tracking and via the data obtained from an expanded network, down times in purchasing can be identified, at which point prices are cheaper. Furthermore, greater information swaps promote collaboration between a business' procurement and finance divisions, improving the budgeting process. Two applications cited in the report for this purpose are purchase-to-pay and supplier performance management applications.

The article also states a trend toward automation, not just for the purchasing cycle, but for the endorsement of contracts--a move that could further expedite the procurement process. However, the arrangement of this type of system seems a long way off with most Chinese suppliers.

For more details about these trends and others, see the full report hereThe homepage URL is here.
Switching your sourcing to the world’s third largest economy can save you 30%. But getting in there is no easy matter. 

China’s development has been one of the great marvels of the modern age. Its output was regarded as a mere statistical anomaly on the international landscape just a generation ago, but has since ascended to become the world’s third largest economy. Chinese exports dramatically expanded after the country’s admittance to the World Trade Organization in 2001, culminating in China’s current status as the number one exporting nation. 

In 2009, roughly USD1.2 trillion of Chinese goods reached consumers at every corner of the globe, with sub-Saharan Africa accounting for USD26.27 billion, the Southern African Development Community region accounting for USD12.9 billion and South Africa USD7.37 billion. If businesses wish to remain competitive, it is no longer possible to ignore China’s export potential. For those involved in sourcing, incorporating China into the supply chain presents numerous opportunities. 

But before you call the bank to open a letter of credit, you first need to understand how China sourcing can and should be done. Success depends very much on appreciating a few critical drivers and constraints. 

Low wages, good infrastructure 

The main reason for China’s prominence as a sourcing destination is low costs. Average cost savings of around 30% (depending on product and industry) can be achieved by shifting procurement to China. At the heart of this is labour costs. Average wages in developed nations such as the US are nearly 30 times those of China. Even other developing nations are unable to compete with China on a labour cost basis. The average wage in Brazil is more than six times that of China, and in Mexico, three times. Other factors that contribute to cost savings include lower product input costs and lower finance costs including access to finance and cost of capital. 

China’s infrastructure also affords it a distinct advantage over other developing nations. The country ranks 27 on the World Bank’s Logistical Performance Index, higher than Brazil, Russia and India. Numerous new highways and 78,000 km of railway end in six of the world’s 10 busiest ports. Five hundred airports are available to link Chinese products with their end-users abroad. This network of thoroughfares effectively link China’s low labour costs with the world. 

Risks and challenges 

How then does a procurement manager access China’s significant potential? The answer lies in appreciating that one size does not fit all and the process is time-consuming and requires effort. Distance (time zones), language and culture are significant constraints, and Chinese specifications and standards – especially when it comes to technical industrial pieces and equipment – are not always easily comparable and require clarification. 

When these factors have been accounted for, a comprehensive China strategy can be developed. The pivotal element of this is deciding on the conduit between decision-makers at home and Chinese producers. To manage this crucial task there are three options: to work with a local Chinese agent; to work with an international company with a presence in China; or to dispatch your own employees to China. 

Using a local Chinese agent is the cheapest option. Such agents have the potential to be well connected, with the most experienced able to find products for their foreign partners at significantly favourable prices. The major downside to this arrangement is that potential cultural barriers can be a serious hindrance. A common complaint is Chinese counterparts are often less responsive to emails and may be less direct regarding true circumstances. A straightforward 'no' is rare. Thousands of agents exist, making the best ones more difficult to find. Many of these agents may not also have the appropriate import/export registration. 

Other routes 

An alternative is to use an international firm with a presence in China. These firms typically employ international staff alongside local Chinese to obtain the best of both worlds. A more acute understanding of the buying company’s procurement requests can be obtained through the use of these agents and it may even be possible to find such an agent from the same country of origin in the more cosmopolitan cities of Shanghai and Beijing. These foreign-owned companies are able to obtain import/export rights, and often do. But they tend to charge higher fees for their services and are subject to stricter administrative controls, which may cause further delays or unexpected costs in the procurement process. 

Lastly, there is the option of directly dispatching employees to China. This may be the most attractive option for those considering large-scale operations abroad. Expatriate staff will already be aware of the product requirements, eliminating communication problems. This option could be considered if relationships have previously been established with Chinese suppliers as the China-focused strategy matures. But this is a less feasible option for companies still in the early stages of their China strategy. It can be difficult for newcomers to find appropriate suppliers and to successfully manage all steps in the production-to-port process. 

Objectives and challenges 

Having a representative of the company physically present in China greatly eases the business interaction with suppliers. Business in China is very much centred on relationship building. The ability to associate a face with a voice over the phone or the signature line of an email will foster greater personal commitment from the Chinese supplier. This process involves regular visits and is an important cultural aspect in dealing with Chinese suppliers. Concurrent on-site inspections ensure greater quality control. 

As with all long-distance international trade activity, there are many risks and it is critical that companies understand them. An on-site presence allows final inspection of the product to take place at the factory rather than when it arrives at your port. This allows immediate adjustments to be made, saving weeks in shipping time and legal complications that may arise with payment terms. Carrying safety stock is another simple technique in preparing oneself for potential supply chain interruptions. It is also useful to arrange supplemental agreements with separate suppliers so as to avoid an over-reliance on any single supplier. 

Once relationships have been established with Chinese suppliers, procurement professionals may be pleasantly surprised by some of the added benefits. Long-time partners in China will frequently share information with international clients, including referrals to other Chinese suppliers in noncompeting industries. Advanced payments often become unnecessary. As stated earlier, Chinese professionals are more responsive to personal affiliations often making it unwise to switch Chinese partners on the basis of marginal price differences. Information sharing, consistent production quality and faster enquiry response times quickly make up for small price discrepancies. 

Why choose China? 

 ✓ The potential to obtain significant cost savings because of China’s lower cost base, particularly for labour 
✓ You can use the 'China price' to negotiate reduced prices from existing domestic suppliers by gaining greater visibility into the true cost base in low-cost countries 
✓ You will avoid the risk of delays or disruptions in material shipments by diversifying your supply base, specifically with critical items 

When should China be considered? 

Whether to source items from China should not be a one-off decision, but should rather be based upon a series of systematic decisions. Some initial questions to ask are: 
✓ Is the category large enough to warrant the effort? 
✓ Do Chinese suppliers have experience exporting these items? 
✓ Is there reason to believe that Chinese suppliers are significantly cheaper than our current/existing suppliers? 
✓ Do we want to diversify our risk from relying on local suppliers? 

If 'yes' is the answer to any of the above questions, then consider China, but only with a reliable, on-the-ground partner to support you.

This article was published on Supply Management in August 2010. 
Today China is an acknowledged early leader in pursuing green economic development. From having an almost non-existent renewable energy industry in the early 2000s, China is now a leading exporter of renewable energy equipment and machinery. Here we highlight three factors contributing to the explosive growth of China’s renewable energy industry.

Active government support

Renewable energy will be a key focus of the 12th Five Year Plan and of China’s plans to achieve energy independence and reduce pollution. The 11th Five Year Plan already mentioned natural resource depletion as a challenge and up to 40% of China's RMB 4 trillion economic stimulus package is targeted at green projects. Not surprisingly, China is now the world’s largest investor in renewable energy. In 2009, China invested close to USD 35 billion in clean energy, almost twice that of the US. Today, renewable energy accounts for 4% of China’s total energy capacity and close to 20% if we include hydroelectric power. Still, despite the impressive progress, China still has a long way to go before boosting renewable energy capacity to 10% by 2020 and hence we can expect continual government investment in this sector for the foreseeable future.

International and domestic pressure

Despite China’s impressive developments in clean energy technology, the fact remains that China is now the world’s largest emitter of greenhouse gases. In 2007, China released over 6.5 billion metric tons of carbon dioxide into the atmosphere, about 23% of the world total. China was also blamed by some for the breakdown of talks at the 2009 Copenhagen Climate Conference. More than ever, there is mounting international pressure calling on China to curb its carbon emissions and act like a responsible superpower when it comes to climate change.

Aside from international pressure, there is also growing domestic pressure for China to ‘clean up its act’. Presently, about 80% of China’s energy is supplied through burning coal and the demand for coal keeps rising every year. The result is that air quality for many of China’s cities has turned into a toxic soup of hazardous chemicals and cancer rates have risen dramatically. As the Chinese become accustomed to a better standard of living, more people will begin questioning whether the pursuit of economic growth is worth the cost of environmental degradation.

Partnerships with international companies

As China continues to pour money into developing its renewable energy capabilities, more multinational companies are setting up shop in China, building state-of-the-art facilities and transferring their technologies. Vestas of Denmark has built the world’s biggest wind turbine manufacturing complex in northeastern China, and transferred the technology for the latest electronic controls and generators. Bosch of Germany has spent USD 42 million in expanding its wind turbine manufacturing facilities in Beijing and Changzhou. This arrangement benefits both sides. Multinational companies are able to take advantage of China’s low labour costs and huge demand for renewable energy, while the Chinese benefit by receiving more foreign investment and foreign technology, which creates more jobs and raises the quality of the Chinese renewable energy industry. 

From these factors its a safe bet that renewable energy in China will continue to be a growing industry with the rest of the world taking notice.

There are many similarities between China and India in today's global-economic climate. Both have over one billion citizens, both have experienced resilient growth in output, and both have greatly expanded their roles in international trade. The relatively inexpensive yet well educated workforces of these two countries have made them key prospects for the sourcing of manufactured goods. Yet differences remain in their supplier and logistical capabilities which must be taken into account by the sourcing professional.

Both India and China are capable of world class manufacturing processes. A study performed by the London School of Economics on the supply chains of the two countries’ automotive industries found that two-thirds of their domestic suppliers were able to provide inputs with defect rates of less than 100 parts per million – the typical threshold for suppliers in the US, Europe, and Japan. It was observed that both Chinese and Indian auto manufacturers domestically outsourced component production at similarly high rates, suggesting an adequate availability of competent local suppliers. Whereas the study found higher productivity levels in India, in terms of capital intensity, delivery frequency and stock-turn ratios, China had the edge. In a more recent, broader assessment across multiple industries, Deloitte found that the average number of days an item sits in inventory favored China at 24.2 compared to India’s 32.5.

Beyond the factory floor, connecting products to end users poses different challenges in China and in India. Within India there is a heavy reliance on roads. Their network is the second largest in the world, behind the US, at over three million kilometres. However, only around half of these roads are paved, and their width is generally too narrow to allow the passage of anything beyond smaller, two-axel trucks. Road transit is further slowed by a fragmented Indian trucking industry and by state border checkpoints. China, in contrast, has a far less extensive network of roads. Out of its million-plus kilometre road network, only around 300,000 kilometres are paved. But what China lacks in actual length, it makes up for by having newer, more passable roads. It has five times the number of multiple lane highways than India.

China also has more transport options available to its supply chains in the form of rail, air, and waterways. Over 78,000 kilometres of terrain are connected by rail in China compared with 63,000 in India. Goods can be flown in and out of China by way of 500 airports whereas there are only 334 locations to take to the sky in India. Thanks to geographical endowments, China also has more navigable waterways. Besides some of the world’s most active ports, commerce in China moves on 110,000 kilometres of inland aqueous passageways. This is more advantageous than India’s 16,000 kilometres of waterways, particularly in the movement of bulk commodities.

These transportation differences are partially reflected in the World Bank’s Logistics Performance Rankings. China is rated the highest of all BRIIC (Brazil, Russia, India, Indonesia and China) countries at 27th in the world. Its comparatively higher scores in customs clearance, infrastructure adequacy, logistics, timeliness and tracking ability place it above India, ranked 47th globally. Some of the largest discrepancies between the two countries are shown in survey data collected by the World Bank. Responders reported much higher frequencies of compulsory warehousing/transloading and involuntary payment solicitation in India, while in China greater expenses were incurred in the form of agent fees.

The infrastructure and logistical differences may explain why India is a more common site for the outsourcing of services, particularly IT services, which do not require a physical good to be brought to market. However, India should not be entirely discredited as a sourcing destination for manufactured goods. Both it and China have allocated over 10% of their GDPs toward infrastructure development which will enhance their future logistical abilities in bringing their products to the world’s consumers. The greatest similarity between China and India: neither can be ignored by the sourcing professional.

International LPI Ranking (5 Pt. Scale)– World Bank
Country Rank LPI Cstms Infra IntSh Lgstc Trckg Time
China 27 3.49 3.16 3.54 3.31 3.49 3.55 3.91
India 47 3.12 2.70 2.91 3.13 3.16 3.14 3.61
Brazil 41 3.20 2.37 3.10 2.91 3.30 3.42 4.14
Indonesia 75 2.76 2.43 2.54 2.82 2.47 2.77 3.46
Russia 94 2.61 2.15 2.38 2.72 2.51 2.60 3.23
Abbreviations: "Rank" is World Rank; "LPI" is cummulative Logistics Performance Index; "Cstms" for customs procedures; "Infra" for infrastructure; "IntSh" for international shipping; "Lgstc" for logistics; "Trckg" for tracking capabilities; "Time" for timeliness

Country Logistics Scorecard – World Bank
  China India Brazil Indon. Russia
Clearance time with physical inspection (days) 3.38 3.45 5.47 5.12 4.62
Clearance time, no physical inspection (days) 1.70 1.92 1.67 2.14 2.57
Percent of imports physically inspected 8.59 13.63 10.54 11.08 44.20
Percent of imports inspected multiple times 2.46 6.20 2.04 2.56 10.05
Export lead time from shipper to port (median) 2.77 2.34 2.80 2.12 3.98
Import lead time from port to cosignee (median) 2.56 5.31 3.88 5.35 2.88
Number of export agencies 4.06 3.43 3.47 2.50 5.83
Number of import agencies 4.20 3.71 4.21 3.67 5.17
40 ft container export charge (USD) 418.90 660.30 1,614.05 378.93 1,310.37
40 ft container import charge (USD) 376.37 1,266.94 1,570.42 1,023.84 1,144.71

supply conference.JPGI recently attended the ‘Global Purchasing and Supply Chain Forum 2009’, in Tianjin on 21-22 November, a forum was organised by the China Federation of Logistic and Purchasing (CFLP) and the Institute of Supply Management. The conference drew in around 200 people, including purchasing managers from MNCs, representatives of companies both state and privately owned, logistics company managers, government officials, as well as scholars in the field of supply chain management.

Besides a discussion on the macro economy, the two main topics from the forum were:
  • Supply chain management in the environment of economic recession; and
  • Supply chain management contributions to company value

Since the value enhancing role of supply chain management is a common topic discussed at a majority of procurement forums, I was more interested in the first topic. While exchanging ideas about supply management under economic recession with other purchasing managers, I received many useful tips—including those from the speakers. One speaker was Mr. Dai Dingyi, Vice Chairman of CFLP, who introduced the status and trends of purchasing and supply management in China. He indicated that supply management in the state-owned companies remains weak and that government purchasing is marred with problems.

Mr. Johnson Xiao, Global Sourcing Director of TRW Automotive Inc, was another speaker. Mr. Xiao shared his personal experiences in service sourcing. Attendees also learned a lot from Mr. Zhang Jiamin, Director of Li & Fung Group, who gave an insightful speech on how China’s manufacturers have survived the global financial crisis and advised ways for companies to adjust their sourcing strategies.

These speeches were very insightful about the current state of supply chain management in China and about its future outlook. Although most procurement managers remained stressed by the cost reduction target now, we were encouraged and inspired by this get-together; as long as a business can survive the crisis and remain innovative, there is a bright future ahead.
During the past 3 months, I traveled with a few clients to visit some Chinese suppliers of motors, pumps, valves and other industry supplies. As usual, we recommended the best local Chinese producers – their pricing levels were normally between Chinese-foreign joint ventures and local middle-sized and smaller producers, but their quality was acceptable for our clients.

Although the manufacturing technology for some of the products was not on the international level, the quality of most products exceeded my clients’ expectations. From manufacturing machinery, i.e. widely-used CNCs, to every step of the manufacturing process, casting, machining, welding, surface treatment and packaging - all of these met my clients’ criteria for qualified suppliers. The previous biggest problem affecting my clients' China sourcing strategy, QUALITY, seems now to have been effectively solved. Chinese suppliers' price and delivery, moreover, is usually comparatively better than competitors from other countries.

So what else is the problem then? The biggest problem arose afterwards. Most of the suppliers we visited did not have any agencies in any of my clients' countries, which, incidentally, made it easy to talk to the supplier directly and get lower prices. But for those products frequently requiring maintenance, it is simply not possible to rely only on the suppliers.

Let’s take the procurement of pumps for mining industries as an example. The pumps are usually used in tough (i.e. high pressure and corrosive) conditions. The lifespan of the key parts will be short, sometimes 20 days to 1 month. The buyer can save 1/3 of the total purchase value by sourcing pumps from China. But for maintenance, the buyer will have to keep enough stock for the key parts. If there is not enough stock and the buyer has to order parts from the Chinese supplier, it requires lead time of at least 1 month, plus shipping time. To set up a solid agency overseas is a large investment for many Chinese suppliers, so after-sales service is not an obstacle that can easily be overcome. Yet as long as they are fully aware of the problem, with thorough communication, Chinese suppliers and overseas buyers can come up with solutions, such as
  • Sourcing some general-use parts (i.e. seal parts) locally with the assistance of other Chinese suppliers
  • Negotiating with Chinese suppliers to have a ‘green channel’ to shorten lead times
  • Setting up a stock level system with supply chain management knowledge

As another example of problematic after-sales service, I can relate the following example. A South African client recently bought an engineering machine from a Chinese producer. The drive, which carried an international well-known brand produced in Germany, turned out to be faulty. The German brand, however, has an agency in South Africa, and so the client was expecting the agency would easily be able to solve the problem. Yet the client was told that it could take 3 months to get a new drive and that this was the normal lead time. The client then came back to the Chinese supplier directly and finally got a new one within 15 days.

From this perspective, the fact that Chinese companies do not have agencies overseas is not reason enough to dismiss their after-sales service completely. Indeed, for international companies who have agencies anywhere else, rigid systems and other factors can sometimes form stumbling blocks of their own. Sourcing managers will still need to invest a lot of time to conduct thorough research before they can decide where to source most profitably.

The recently released Supply Chain Intelligence Report (SCIR) is an international, independent study on supply chain management and logistics practices in emerging economies, conducted in South Africa. The aim of the research is to provide insight into many forces that are driving change in supply chain management and to demonstrate how the most successful companies are dealing with these new and evolving challenges. Conducted annually, the SCIR facilitates progress and development in supply chain and logistics practices through the sharing of information and knowledge, without compromising confidential or strategic information.

The basic premise of the report is that planning and forecasting are undoubtedly the only big challenges to efficient supply chain management – as further illustrated by several international studies in recent years. Yet as we all clearly realize, the world is changing, and it is changing at a far faster rate than before – one of the primary drivers of this rapid change is information, the freely available and accessible information that the average person has access to.

What the SCIR 2009 proposes is that the only really effective way of addressing the planning and forecasting challenge is to improve visibility (both for demand and supply) in a supply chain, while simultaneously increasing the supply chain’s reactivity. If this is achieved, one will be able to plan and forecast and thus have an effective and efficient supply chain.

Visibility is the capability of easily observing, of being able to provide a clear view in respect of both supply & demand and is primarily determined by two drivers: technology and collaboration. By increasing forward and backward visibility along the supply chain, companies will have a greater lead time to adjust their production schedules and orders. Through the efficient use of technology, one is able to have greater access to information (in real time) and thus greater visibility.

Reactivity on the other hand is the ability to readily respond to a change, in this case a change in demand, with supply chain reactivity being best improved through the appropriate use of in-sourcing, outsourcing and virtual resourcing, as well as through integrative practice techniques. The report elaborates on the fact that the essential components of reactivity are ‘flexibility with respect to the ability to deploy supply chain assets, and the ability to assemble a virtual best of breed supply chain team that can redesign, implement and operate what will need to be almost an organic supply chain - one that changes, learns and evolves continuously.’

The report further goes on to expound the hypothesis that planning and forecasting are inseparable parts of what drives competitive advantage. In fact, planning and forecasting really drive efficiency – defined as cost reduction and precise execution – which is also matched by effectiveness – defined as doing the right thing at the right time. Effectiveness in itself is supported/driven by market sensitivity; which is an ability to acutely read and/or understand the market and be able to detect and anticipate events before they actually occur. Once all these are in place, understood and properly managed/executed, then a company has created a competitive advantage and can be defined as a ‘winning company.’

You can get a free copy of the main research report if you participate in the survey, which will take you about 10 minutes to complete, on the official SCIR 2009 website.  

How to Make a Good Enquiry Part 4

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  • Packaging
Packaging can sometimes be very important in the composition of the price. The buyer should be aware of the following issues and raise requirements on packaging where necessary:

  1. Characteristics of the goods
  2. Shipping methods (by sea or air, by bulk or by container)
  3. Shipping period
  4. Policy in force at the destination, such as regulations on imported wood
  5. Storage needs

  • After Sales and Warranty
For some goods it is necessary to know what type of after sales service the seller can provide, especially when the sellers do not have a presence in the buyer's home country. The quality of after sales is also a key consideration when choosing the best supplier. If a buyer has a specific requirement on the warranty, the seller should be notified so they can take account of this when calculating prices.

  • Quotation Deadlines and Validity Period
An enquiry should include a reasonable deadline for the sellers to quote by, and should also remind them to include valid by information in their quotations. Usually, a quotation's validity period could range from three working days to three months depending on the goods. If the buyer requires a longer period to do more filtering work, they should state this requirement clearly in the enquiry.

  • Non-disclosure Agreement (NDA)
When buyers send enquiries that contain sensitive information, such as designs with IP or new product information, they should prepare an NDA and ask the potential seller to sign it before they transmit confidential information.

  • Contact Details
As the last part of an enquiry, the buyer's contact details should be clearly provided with the contact person's full name, title, department, telephone and fax numbers, and email address.

In this series we have talked about a lot of elements which together make a good enquiry. These elements can reduce risk, increase sellers' and therefore buyers' efficiency, and of course help in getting the quotation you want.

We welcome any feedback should there be further questions or suggestions.
Since the advent of economic reform in China, Chinese exports as well as China's share of world exports have grown at a fast pace to surpass that of many developed economies. As a result, by the end of 2006 China had become the world's third-largest exporter after the US and Germany. In April 2008 the WTO announced that China had overtaken the US to become the world's second-biggest exporter, second only to Germany.

Yet the rise in China's exports has also been characterized by an important shift in its export structure. Where twenty years ago China was primarily an exporter of textiles, textile articles and apparel, today China is the world's largest exporter of electronics and machinery-related products, which make up 43% of China's total exports. China is rapidly moving up the technology ladder and is therefore becoming more competitive in exports of high-value capital goods - industries where traditionally Western countries such as Japan, Germany and the US have held the competitive advantage. But to what extent is China really able to compete with these countries today?

To better analyze this competitive landscape, we can make us of the industry classification of the OECD in its STAN Bilateral Trade Database, edition 2006, to compare Chinese and US high technology exports during the past few years.
China High-Tech Exports.JPGAccording to the chart above, if we assume that the US' share of high-technology exports will continue the trend it has followed in the past 5 years, China's high-technology exports have already surpassed those of the US. So what does this mean? Is China the new high-technology power? Are there grounds for concern about China's threat to the competitiveness of Western industries?

I believe if these questions were posed to Laozi, the father of the yin yang concept, his answer would not be yes or no, and neither black or white, but rather a combination of both.

Yin: A sourcing opportunity rather than a threat
According to OECD sources,
some 55% of China's total exports are attributed to production and assembly-related activities, and 58% of these are driven by foreign enterprises, of which 38% are entirely foreign-owned. In fact, among the top 10 high-technology companies by revenue, not one of them is Chinese.
China's export performance, therefore, is directly linked to its specialization in assembly operations and the high value-added inputs imported from Western economies. This has facilitated a rapid diversification of its manufactured exports, from low-end manufactures to high-technology products.

Yang: A sourcing opportunity but a future threat
Although Chinese high-tech ability is still subsidized by foreign technology transfers and government support, Chinese companies are developing competitive advantages in several areas of high-value industrial and equipment manufacturing. Good examples are Huawei (a telecommunications equipment maker based in Shenzhen), whose equipment and services were considered good enough to beat Siemens in a German tender; Zhenhua Port Machinery, which had a full two-thirds of global port crane orders in 2006; and Tian Di Science & Technology, the national leader in the design and manufacturing of coal mining equipment.

To effectively make use of China's cost advantages as a high-technology assembly center, foreign companies will have to carefully consider to what extent and with which strategic framework technology transfers are implemented and imported inputs are assembled in China. At the same time, and considering China's evolving high-technology exports, trying to avoid China as a high-technology sourcing destination will likely result in an unfeasible cost structure and a loss of competitiveness. Successfully dealing with China's sourcing challenges and particularities will finally determine whether China is a threat or an opportunity.

New Motivations to Source from China

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The current global financial crisis is reshaping the world's economies at various levels and it seems that no country in the world will be immune from the ripple effects. The lack of liquidity in global financial markets, combined with the drop in purchasing power is leading to a decrease in profits that are forcing many companies to re-evaluate and completely restructure their procurement strategies. In essence, the only way to keep profit margins at a healthy level - while at the same time remaining competitive in global markets - will be cutting costs and/or increasing revenues. It is within this space that new opportunities lie to source from or manufacture in China.

The potential benefits of sourcing from China are now more than ever becoming powerful, even necessary drivers for some companies to overcome the present difficulties. If approached correctly and strategically, China can be a solution that will not only help stabilize the present turbulence, but also establish a foundation for a more sustainable and profitable outcome by engaging the main components of the profit equation.

Some of the potential benefits of sourcing from China are:

  • Direct cost savings - Companies can obtain direct cost savings due to China's lower cost base, specifically in the areas of utility costs, raw materials and labor. This has enabled Chinese companies to produce high-value products while retaining competitive pricing.

  • Access to a large potential market - Impressive economic growth throughout the years has given rise to a new Chinese middle class with increasing purchasing power. This factor, combined with the Chinese saving culture and low dependency on credit, has minimized the effect of the global financial crisis in China. Companies can take advantage of this and see China not only as a cost saving solution but also as a new source of revenue.

  • Competitive strategy - Many companies will accept that China is a viable solution in the current financial crisis, so quickly engaging the best Chinese suppliers before the competition reaches them will be instrumental to successful procurement strategies.    

All of these benefits have been mentioned before, but for many companies the global financial crisis has transformed the benefits of sourcing from China into essential requirements for remaining competitive or even solvent in the global market.   
Economic logic dictates that if one does not manufacture where the production costs are the lowest, one may lose global competitiveness and therefore market share. Yet this is not only a question of low labour costs. Far from making a decision based upon a single criterion, entrepreneurs analyze a wider picture within which many other factors may influence the success of sourcing operations in a certain country. Such factors include set-up costs, labor supplies, export subsidies, import and export duties, tax incentives, proximity, country risk, political stability, the investment environment, abilities and qualifications of human resources, access to technology, infrastructure, logistics and consumption markets.

Labor costs are the lowest in countries such as the Philippines and Vietnam, for instance, yet the lack of existing infrastructure or an industrial base are likely going to increase the cost of business operations. On the other side of the spectrum, developed countries such as the US or Germany excel in modern transportation networks, but labor costs are extremely expensive and will predominate in an unfeasible cost structure.

In order to identify the best destination for a particular sourcing operation, one should firstly determine the critical performance indicators that may differ from country to country, and secondly compare those indicators between the selected potential sourcing countries. Following this logic one could build an 'Export Competitiveness Model' which could determine the likelihood of a successful managerial decision.

An enterprise would typically consider four critical performance indicators in its decision-making process:
  • Exports: The more a country exports the more competitive its production in global markets will be. A country with a high level of export implies a developed industrial base and related transportation infrastructure.
  • Labor costs: The lower the labor costs, the lower the production cost structure and therefore the larger the profit margin.
  • Country risk: The lower the country risk, the more sound and stable the legal environment will be to support business operations.
  • Political stability: The more politically stable a country is, the more sustainable its operations will be in the future.
Export Model.JPGAs shown in the graph above, China's profile is the thinnest and hence China remains the most competitive. China's country risk and political stability index is higher than that of Germany or the US, but with much lower labor costs it reaches a very similar level of exports. In addition, there is little difference between China's country risk, political stability index and labor costs compared to those of Brazil and Thailand, yet its level of exports notably exceeds that of these developing economies.

Ultimately we can find many reasons to choose China as the most suitable sourcing destination. Yet the full answer depends not on one or two factors but on a combination of different factors that together create a favorable environment for sourcing operations.
Finally it seems something might be done about packaging in China. As someone who has frequently been frustrated by Chinese candy wrappers that often require the use of teeth to be opened, I was heartened to read that the powers that be have proposed that manufacturers and operators in China should cooperate with consumers to reduce excessive packaging. While encouraging product manufacturers to avoid excessive packaging and offer genuine goods at a fair price to consumers, the proposals also exhort packaging enterprises to conserve resources and develop new materials and technologies that are easy to recycle. The worst offenders in China, according to the China Consumers' Association, are health care products, tea, cosmetics and moon cakes. 

The new packaging proposals in China are in line with ongoing packaging innovations and improvements resulting from the current focus on developing green supply chains and sustainability. Jean Murphy at SupplyChainBrain has outlined how a recent explosion of corporate sustainability initiatives has led to renewed interest in packaging and achieving sustainability goals, and global retailer Wal-Mart has been a prime catalyst for the trend to reduce packaging in the supply chain, utilizing metrics such as greenhouse gas emissions, product-to-package ratios and space utilization to rate suppliers. 

David Busch of Spend Matters has offered some practical insights on how packaging engineering can save money while also helping the environment. He recounts the new designs retailer Costco uses for milk jugs which entail substantial labor, water and fuel savings and also reduce costs for consumers (see also Supply Chain Digest's illustration of the transportation benefits of improved packaging). The doctor at Sourcing Innovation has also proposed package design optimization by which one can attack the packaging category strategically by re-designing packaging materials or by using cheaper substitutions. Optimization of this sort, the doctor feels, will also help you save money and get greener faster.

And for mooncakes there might yet be a solution as well. While describing this distinctly Chinese delicacy as having cockroach-like resisted all attempts at eradication over the years, Imagethief believes a remedy is at hand  for the environmental toll of its excessive packaging, as mooncakes are infinitely recyclable and re-giftable. Shanghai, he writes, has brought the mooncake recycling market to a new level: rather than give physical mooncakes, its common to give a coupon that can be redeemed for mooncakes, so that while approximately four billion tons of mooncakes are gifted every mid-autumn, only about ten pounds are actually consumed.         

So as China's astronauts land on the northern steppes of Inner Mongolia after a historic spacewalk, I could not help but leave the final word in this posting to with its colorful description of the astronauts' diet while in space: 
The number 1 rule for the astronauts' menu is to avoid food that could cause gas. Such foodstuffs may cause stomach ache for the astronauts. And since their spacesuits have a self-circulation system, any gaseous after-effects could affect the air quality for the astronauts.
Yet luckily, 
scientists plan to pack on board traditional snacks from all the country's 56 ethnic groups

So here's to a safe landing, a moonwalk without gas, and a mooncake - without the packaging. 

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