China's manufacturing has primarily been export-driven. This has been due to a large historical price gap. Other gaps, however, have resulted in huge costs, long delays, and a lack of knowledge for manufacturers, buyers and end customer expectations. These are information transfer gaps.

To improve supplier management, these information gaps must be sealed. Companies are doing this through end-to-end supply chain monitoring. A method for linking the manufacturer with end expectations will reduce operational risks. Likewise, conveying manufacturer production and lead time expectations to the customer can reduce costs.

Examples in Product Dying
Information and material flows in product dying are complex. Color pallets are created by designers. The pallets are then translated to dying machines. Once confirmed, dying colors must be maintained within a variance to minimize coloration discrepancies. If just one process occurs incorrectly, work-in-process inventory can turn to waste.

The challenge is translating the color pallet to the manufacturer. This takes technical knowledge of machinery calibration and material characteristics, engineer to engineer. Unfortunately, errors are caused by knowledge transfer from marketing staff to engineer. For example, a foreign buyer switches suppliers in China. The color pallet is referenced as displayed on the buyer's website or a sample is provided. Is the new manufacturer expected to recreate the color only by sight?

The Problem Permeates Sourcing
Many companies face this reality daily. With far removed buyers more closely associated with higher value added marketing and branding, technical knowledge needed to address engineering challenges is often left to the manufacturer's discretion. Here is another example.

In the apparel industry, raw material is defined by the end-customer in terms of feel, fit, and perceived value. The buyer's responsibility is to translate these qualitative characteristics into tangible products. There is a divergence in the production process, however. The buyer relays marketing language such as 100% cotton, feels cheap, and wrong shape. The manufacturer relays material specifics in technical language: vertical and horizontal thread count, weight per square meter, and stitch width per mm.

To address this issue, technical knowledge must be conveyed directly to the manufacturer. Passing through intermediaries may create potential miscommunications. On-the-ground teams who understand the product, material and process specifics are essential. To minimize the risk of error, bring the customer to the manufacturer.

With rising costs, it is clear China is entering a new phase. The new era will focus more attention on customer-driven metrics instead of direct cost and quality. Being closely integrated in supply chain flows will be essential for supplier managers to unlock once hidden productivity and efficiency gains. As global supply chains become longer, sustainable advantages will be solidified through increased collaboration in supply chain operations.

Bradley A. Feuling is the CEO of Kong and Allan, based in Shanghai, China. Kong and Allan is a consulting firm specializing in supply chain operations and global expansion.

The impact of volatile oil prices and rising transportation costs is still sending shock waves across global supply chains, illustrating the potentially tenuous foundations of low-cost country sourcing and raising new claims that China sourcing is about to be eclipsed.

As The New York Times put it, globalization may be losing some of the inexorable economic power it had for much of the past quarter-century, because cheap oil, the lubricant of a fast global transportation network, may not be returning anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. Yet the greatest impact of rising transportation costs will not be a reversing trend in globalization, but rather that companies will seek to move production closer to consumers, like the growing number of U.S. electronics manufacturers that are returning production to Mexico. Hence globe-spanning supply chains, most of which involve China at some point, make less sense today than they did a few years ago, and a likely outcome if transportation costs remain high is a strengthening of the so-called neighbourhood effect where manufacturers would seek supplies closer to home instead of where they can be bought most cheaply.

Yet as The Economist cautions, if there is a migration of manufacturing growth from China, it is hardly an exodus: the latest trade figures do not show a decrease in Chinese exports but only a drop in their pace of growth. And because buyers on the other side of the ocean absorb the bigger share of fuel surcharges on freight, higher shipping costs are not as big a factor in China as the rising yuan or increasing costs for raw materials. Considering increased labour costs in foreign markets and the volatility in oil prices, moreover, leaving China is not a decision any company can ever take lightly.

Thus for the claims of reversing globalization and increasingly drawing manufacturing away from China, rising and volatile oil prices may be inducing some companies to consider moving production closer to home, but all things considered, for the foreseeable future China remains the sourcing destination of choice.

Negotiation is often a critical element in closing a sourcing deal, and while the process of negotiation in China is dependent on a complex cultural context, effective negotiation in China can only operate within China's cultural context to seek a positive outcome for both sides.

In the first instance, negotiation is the interface between two parties and their respective objectives, and reaching agreement could depend on the skills, knowledge, and flexibility applied. Yet the crucial element is often in the details of the negotiation approach. Alliance Bernstein CPO Jonna Martinez coined the term Immersion Negotiation (h/t Supply Excellence) to underline the need to be the best prepared negotiator: The more you understand the positions, cultures, pressures, and backgrounds of your opposites, the more you can use that knowledge to attain your objectives. While resonating with the ideas of Sun Tzu and The Art of War, there is no doubt that such a strategy is difficult in China while Western and Chinese cultural notions differ so substantially on issues like the use of contracts, the value attached to personal relationships and the issue of face. Yet in China, the applicable saying is 入乡随俗 (ru xiang sui su)*.

Hence negotiation in China is rarely straightforward, like with the complex importance attached to building trust and the finer nuances of participating in banquets, dinners, visits and even karaoke. These, as David Dayton writes at Silk Road International, are all planned and scripted with clearly defined roles, where foreign buyers are required to play their part in the Chinese script, whether they speak Chinese or not. Of the various ploys and stratagems he experienced in conducting negotiations in China, Dayton deems organization, detail, politeness, a strong will and a healthy dose of patience as the most important. Yet while foreigners in China inevitably have to conduct negotiations under the guise of the foreign buyer, actual negotiating with Chinese suppliers can be a dynamic and unpredictable process in which buyers need to immerse themselves fully in the circumstances and thinking of their Chinese suppliers. There is only one way in China, and while almost anything can be negotiated - it can only be done in the Chinese way.

(* When entering the village, follow the local custom.)

Chen Weiliang, President of Foxconn International, Taiwan's biggest company and the largest contract manufacturer of electronics worldwide, last week announced that the company will be moving its factories from Shenzhen to northern Chinese provinces such as Hebei and Shanxi, where the average salary is more than 60% lower than in Shenzhen. In addition, Chen said Foxconn will be opening new factories in low-cost markets like Hungary and India to reduce the pressure caused by cost increases. 

Foxconn's move away from Shenzhen echoes a current chorus of detractors about the fact that China is not so cheap anymore. In the 2008 eyeforprocurement Low-Cost Country Sourcing Report (available for download here), a full three-quarters of respondents were still sourcing goods from China. Yet 42% of responding companies indicated they were now sourcing goods from Eastern Europe (where Foxconn also plans to produce from), up from 24% in 2007, clearly reflecting this region's emergence as a serious challenger for the world's leading low-cost centre of production. Compared with 2007, almost double the respondents (34%) this year also pointed to Mexico as one of their low-cost countries of choice.

China's gradual climb out of low-cost production is contrasted by the steady rise of its high-tech companies and their growing statute in foreign markets. In a paper (see Econpapers reference) measuring and explaining China's competitiveness and impressive export performance, three US scholars tracked the spectacular record of Chinese exports since 1990, expanding at more than twice the rate of growth of world trade. High-tech exports from China like office machines, telecom, electrical machinery and parts, moreover, have been growing much more rapidly than traditional Chinese export products like clothing and footwear (though the latter remain quantitatively important). And the explanation for why China has, in comparison with other East Asian countries, become a dominant exporter is clearly not monocausal, but hinges on the coincidence of several factors such as a favorable exchange rate, low wages and supplies of unskilled labour, the reduced cost of communication and transportation, the flow of foreign direct investment, the large scale of the potential Chinese domestic market, and the encouragement of Chinese foreign trade policy. Yet especially important, the authors concluded, is the fact that Chinese producers have become much more proficient at meeting world requirements for quality and product design. 

While acknowledging that Chinese private sector high-tech and electronics companies have improved their productivity, using scale to dominate the home market, The McKinsey Quarterly for July 2008 remains skeptical about these companies' current abilities to export their success and effectively absorb the drastically increased costs this entails, in particular marketing, R&D, and labor costs. Yet Supply Chain Digest recently outlined ideas presented in the book Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition by Peter Williamson and Ming Zeng, who pointed to a new generation of Chinese competitors using not just low labor costs but also total cost innovation in product design and the supply chain to gain competitive advantage.

Despite the difficulties, it seems to be a question of when, and not if more Chinese companies will successfully compete abroad.

There are many reasons today why Assembled in America makes more sense than Made in America, even though the latter, as Gail Dutton writes at World Trade Magazine, signifies innovation, quality and reliability. Based on the experiences of commodity leader Mark Thompson from plant genetics leader Pioneer Hi-Bred International, Dutton extrapolates ten basic premises why companies today would logically take recourse to global sourcing, ranging from the geographic availability of materials and technology and varying costs of goods and labour, to the value of joint ventures and the wisdom of establishing additional sources of supply. Under such basic formulae the process of outsourcing and especially the phenomenon of low-cost country sourcing have expanded significantly over the last thirty years.

Yet there are indications that global sourcing is set to enter a critical phase, or a strategic inflection point brought on by structural changes and altered estimations of cost and risk.

The impact of high and rising energy costs is currently a fundamental issue complicating (as Bob Ferrari puts it at Supply Chain Matters) the interrelationships and flow of goods across global supply chains, which he believes will ultimately structurally alter supply chain and sourcing strategies. Supply Chain Digest has even raised the specter of a so-called Perfect Storm developing in transportation with oil prices at unprecedented levels and other energy costs also on the rise. This all contributes to complexity in the supply chain and the the advent of risk mitigating fever, or a regulatory choke hold as supply chains become fast, cheap and out of control.

An AMR Research Study (see press release) recently found the U.S. (35%) and China (28%) to be the regions with the most supply chain risk for manufacturers; and rising transportation costs (51%), volatile commodity prices (43%) and weakening consumer spending (37%) were identified as the top supply chain concerns. A study released this year by Marsh, however (see also Sourcing Innovation blog), served to quantify the extreme degree risk has increased in global supply chains in the last few years, with 73% of North American risk managers indicating their supply chain risk has risen since 2005. Yet most businesses are ill-prepared to handle the rising risk levels, with only 35% reporting that their supply chain risk management was moderately effective.

Notwithstanding the substantial risks in global supply chains, manufacturers are still increasingly looking to their supply chains to boost profits and cut costs. Procurement Leaders last week reported research conducted by Archstone Consulting which found that over 80% of manufacturers have responded to the current economic climate by devising aggressive agendas to boost sales and cut costs. Todd Lavieri, CEO of Archstone Consulting, explained that

In the past, manufacturers simply used their supply chains as a means to control costs by improving efficiencies. Now, they are using their supply chains as a mechanism to boost revenue and improve customer satisfaction through capabilities like better management of highly customized products, quicker delivery times, and more integrated services.

According to a report by the Renmin University of China and Donghai Securities, the Chinese economy has just peaked.

From the People's Daily, this report envisages China to be on the verge of a systematic slowdown after decades of unsurpassed economic growth. Due to a deteriorating external environment and a tightening of domestic policy, China's economy is forecast to grow at a slower rate of 10.4% in 2008, presumably the first indication of a sustained weakening of economic growth. The current situation also has the (Chinese) editors of the Economic Observer slightly worried, and for them too 2008 is the year in which the ideal track of the Chinese economy has been broken with slower growth, inflation and unemployment, intertwined with surging oil and food prices and a depreciating dollar - contributing to fewer Chinese exports during the first four months of 2008. Yet there are solid grounds for remaining confident, the editors conclude, as recent figures suggest that China's exports of primary, low-cost processing and low-value-added products have decreased, while exports of high-tech products have increased significantly, indicating a steady improvement of China's export structure.

Reflecting on the Chinese economy's ability over the years to overcome a host of obstacles in continuing to register double digit growth, Richard Brubaker at All Roads Lead to China recently pointed to another 'Is the China story over?' type of article, this time from The Motley Fool, whose authors traveled to Xi'an to see the real China and concluded that the China story is clearly far from over. Irrespective of the opulence of cities like Beijing and Shanghai, there is still a long way to go in improving the financial lives of all of China's 1.3 billion people, and with large developments planned a second-tier city like Xi'an (the designated center for westward migration in China) is destined to be a very different city in a few years. Thus the trajectory of the China story is more poignantly reflected in World Bank statistics compiled by Mark J. Perry at Seeking Alpha: Economic reforms from 1978 have helped lift 635 million Chinese people out of poverty, from 839 million in 1981 to 204 million in 2005, with the poverty rate falling from 53% in 1981 to  8% in 2001. (China's story would be incomplete, however, without inevitably assessing the grave ecological costs that rapid economic growth has entailed, as Gaoming Jiang recently did at China Dialogue).

Reflecting thus the broader trajectory of an evolving Chinese economy, the dynamics of low-cost sourcing from China is inexorably changing as well. Analyzing the logistical complexities of utilizing cheaper production in developing nations, Robert J. Bowman at Supply Chain Brain (h/t E-Sourcing Forum) last month emphasized the rising costs of raw materials and labour in China, with the latter being a sign of a growing middle class with new wage demands. Hence, Bowman writes, multinationals in search of cheap labour are moving into less-developed countries, a process which results in further delays and logistical headaches in the supply chain.

As the China story unfolds, however, it is clear that China might eventually completely price itself out of low-cost country sourcing, and when that happens it will form part of a remarkable Chinese story of economic growth and development, often against significant odds, and undoubtedly at great ecological cost, yet ultimately an astounding human achievement.

Small players: they are the weakest link (h/t Supplychainer).

This was the finding of an independent report commissioned by the EU, Evaluating Business and Safety Measures in the Toy Supply Chain, which concluded that China has taken steps to address safety concerns after the recalls of last year, yet small players all round - both among Chinese manufacturers and European importers - tend to be the soft spots in the supply chain. According to the report's independent expert authors, final product testing alone is insufficient to guarantee product safety (which instead has to be embedded in the entire supply chain), and Chinese enforcement authorities should continue to strengthen supervision of the Chinese toy industry, especially focusing on weaker manufacturers. One example of these would presumably be Guangzhou Dongxin Electronics Co., Ltd., which turned out to be the only substandard toy maker in a recent review of the Guangzhou market undertaken by the Guangzhou Municipal Quality Inspection Bureau before International Children's Day. (For children's apparel, however, the review found 30% of clothing to be substandard).

Yet because of these weak links in the supply chain and the substandard products that have menaced consumers, as an indication of how the debate on outsourcing has shifted, serious quality and safety concerns in outsourced products have led consumers and regulators to question whether products using global suppliers are of sufficient quality for end-users. And these intense discussions, as Ben Heineman writes at Forbes.com, have moved outsourcing to the top of the globalization agenda and focused attention on the need for more regulation. And while the role of sourcing countries, such as China, in setting and enforcing standards have likewise been emphasized, for Heineman this should not obscure the fundamental point with regulation, namely

Businesses are responsible for their products and must have sourcing disciplines which ensure their products are free of safety and quality defects...This basic responsibility exists whether the business is sourcing a finished product or components...or whether it sources from one supplier or must rely on second- and third-tier suppliers...

With today's elaborate global supply chains, moreover, the deverticalization of the manufacturing process through off-shoring and outsourcing does not change that ultimate responsibility of companies to take things in their own hands through all stages of the sourcing process,

from solicitation of bids to qualification of suppliers to monitoring, auditing and testing by the ultimate seller of the product before it enters the market. Due diligence...is required to navigate the many shoals of shoddy businesses in the developing world - and to pierce the first-tier supplier, drilling back to the practices of second- and third-tier suppliers.

In global supply chains, therefore, as Bob Ferrari points out at Supply Chain Matters, the only thing that companies cannot outsource is risk.

I could not help being somewhat sidetracked this week by unprecedented political events in the U.S. as Barack Obama became the presidential nominee for the Democratic Party. Conducting his campaign with a message of substantial change, Barack Obama has also indicated a desire to engage more constructively with China. China Dialogue recently compared and analyzed the policies of both presidential candidates on climate change, and has republished in full Obama's speech from late May setting out his vision for a new energy future. Bemoaning the U.S.' failure to lead on climate change and its struggling to stay relevant in the debate, Obama noted that already some coal pollution from China's dirty plants is making its way to California, and in an effort to curb China's carbon emissions, he promised that

as we develop new forms of clean energy at home, we will share our technology and innovations with all the rest of the world. If we can build a clean coal plant in America, China should be able to as well. 

Obama's willingness to more readily share technology and innovations with China resonates with the approach adopted by German chemicals manufacturer BASF, which is finalizing plans for an ambitious joint venture in Nanjing with China energy group Sinopec in which the latter is set to receive $900m in investment to boost output by 25% over the next three years. Martin Brudermuller, head of BASF's Asia activities, told FT.com that the Nanjing operation will

aim to gain expertise in combining China's famed low cost
with the development of new design and production skills. If all goes to plan, this will involve importing ideas from BASF's operations around the world and linking these with concepts developed by BASF's 6,000-strong staff in China.

According to Brudermuller, such an approach is required as China's economy starts to mature. Yet BASF's strategy in China is part of a current wider phenomenon as China goes through (as the FT.com article puts it) a more subtle phase:

Known for its rapid progress to become the world's joint-second most productive manufacturing region, China...is becoming a giant test bed for manufacturing ideas, building on its existing strengths in low-cost production by using the efforts of engineers and developers not just in China but from around the world.

The article goes on to cite Jimmy Hexter, a director at the Beijing office of the McKinsey strategy company, who claimed that the greatest commercial rewards will be reaped by companies who are able to optimally utilize networking approaches that link different groups in different countries.

The growing imperative for networking and collaboration in global supply chains has also been emphasized in a new report and supply chain model, Future Supply Chain 2016, published by the Global Commerce Initiative and consulting firm Capgemini. Citing the new report, Sustainable Life Media outlined the best way companies can redesign their supply chains for maximum efficiency:

The coming years will see a new era for industry collaboration, which will become an important factor for future success...Some business areas that are now considered to be core differentiators may well become candidates for collaboration with competitors.

Cooperation in the form of information sharing and collaborative warehousing and distribution, the report found, can offer efficiencies that companies simply cannot achieve on their own.