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 / Spring 2005 / Issue 38(originally published by Booz & Company)


The China Syndrome

• Products with one or more design changes per quarter may not be suitable for Chinese procurement. Frequent design changes mean the supply chain could end up with a continuous run of obsolete inventory and on a learning curve that resembles a merry-go-round. Products that are stable for at least a model year, such as automotive components, may fit better in a Chinese procurement strategy, since they essentially involve a successful one-time launch rather than continual incremental changes.

• China is probably not a good option when a high degree of skill is required to implement design changes. Chinese supply chains are challenged by the language gap, a lack of local technical capability for implementing changes correctly, and the complexities of suppliers’ processes for managing launches of new products.

5. Technical Capabilities. China is not currently a viable option for highly specialized manufactured products made with custom equipment, such as application-specific copper-wrapped coils or high-speed connector assemblies. The processes used to manufacture such products often require specific technical knowledge of product engineering or equipment design that generally is not available among suppliers in new procurement markets such as China.

By contrast, almost all suppliers can handle commoditized processes such as stamping, casting, and manual electronics assembly. Companies buying from Chinese sources must weigh two issues relating to the supplier’s capabilities:

• Sourcing subcomponents in China and maintaining technology-intensive activities in more highly skilled domestic factories will probably yield a better total cost return than procuring the total product. Technology-driven processes often need significant oversight if process control is to be maintained. That frequently can be achieved only in sophisticated plants in developed countries. When factory processes get out of skew in China, yields decrease and the resulting scrap (as well as logistics costs) can quickly overshadow the savings generated by lower wage rates.

• The evolving sophistication of Chinese suppliers means careful buyers can gain some important, albeit temporary, advantages. Although products made with the least complicated, most mature technologies are the best choices to source from China, the nation’s suppliers continue to develop increasingly sophisticated skills. As a result, more companies are sourcing process-sensitive products, such as rubber and machined parts, from China. That can be a good decision when other critical procurement dimensions, such as lead time, engineering changes, and labor and transportation costs, favor China. It also can give a purchaser a boost over competitors who haven’t figured out where to go to combine China’s cost advantage with its emerging capabilities.

By analyzing the five critical dimensions for each unique procurement initiative, companies can better understand their geographic sourcing options — which products are candidates for being sourced from low-cost countries and which should be purchased from more developed markets. If a low-cost country is appropriate, assessment of lead times can help establish which commodities can be sourced from remote low-cost countries (such as China or India) and which need to be purchased more locally — from Mexico, say, or Eastern Europe.

China remains one of the world’s most desirable sourcing opportunities. Its wage advantages are not likely to end anytime soon, and its skills as a supplier and manufacturer will only grow stronger. But as is the case with any other procurement effort, obvious costs, such as labor, are not the only factors to take into account. When the other, subtler criteria in our model are considered, China may still be a lucrative gold mine for some companies. Others, though, should be careful: The ore could be a fool’s blend.

Reprint No. 05102

Author Profiles:

Mitchell Quint ([email protected]) is a principal with Booz Allen Hamilton in Cleveland. Mr. Quint focuses on operations strategy, and has expertise in manufacturing, global sourcing, and supply chain management in automotive, industrial products, and high-tech industries.

Dermot Shorten ([email protected]) is a vice president with Booz Allen Hamilton in Boston. Mr. Shorten specializes in value stream restructuring, and has expertise in supply chain management, supply base configuration, and manufacturing strategy.

This article is adapted from The Missing Link: Designing Supply Chains for Growth, Profitability, and Resilience, edited by Jeffrey Rothfeder with an introduction by Tim Laseter and Keith Oliver (strategy+business Books, 2005). To learn more or order a copy, click here.
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