Indeed, according to the AmCham/Booz Allen survey, companies that have successfully integrated their Chinese export-oriented activities with their Chinese market operations are achieving higher levels of profitability: They report gross profit margins of 29.6 percent compared with 17.9 percent for those that have not achieved integration.
Integrated from the Ground Up
Developing the mind-set that global integration is imperative is the starting point for companies in becoming a global supply chain integrator. In putting global integration into practice, one key step is to create manufacturing systems that produce large volumes of products but delay the moment at which those products have to be customized for specific Chinese and non-Chinese markets. There may be an infinite number of ways to assemble a personal computer, for example, but few of those ways make economic sense until and unless the company knows who the final customer is. This concept is called postponement, and, of course, there are different ways of achieving it depending on the type of product being manufactured. Hewlett-Packard Company engages in light postponement, making universal printers with the same labeling and packaging for all orders but including power supplies and language-specific manuals at the last moment. Motorola Inc. engages in more advanced postponement for its radio products by waiting until specific orders are received and then adding customized labeling and packaging.
Companies that are successful at postponement also typically create what we call tailored business streams. These companies take advantage of China’s capacity for large-scale, cost-efficient manufacturing yet retain high levels of differentiation throughout the assembly process for both Chinese and global markets. At their heart, tailored business streams segregate the manufacturing of products with similar needs into parallel tracks. A PC manufacturer such as Dell Inc., for instance, identifies the common elements that unite 80 percent of its output, while reserving 15 percent of capacity for somewhat predictable demand conditions and 5 percent for opportunities that simply cannot be forecast.
It is only after adopting this philosophy and applying these practices in China that companies should engage in footprint and network modeling or specific planning for sales. In layman’s terms, that means determining how many plants they should have, where those facilities should be located, and what their focus and mission should be, after considering customer and market requirements and weighing the economics of different options.
The next crucial step is sales and operations planning, a systematic approach to coordination between those two departments, calling for planned rather than ad hoc decision making. It requires robust communication among product managers, sales executives, and processing center leaders to answer key questions and determine where along the spectrum of customer needs a particular order falls. Does the customer want 10,000 very specific personal computers in two days? Does he or she want a more generic order in a week or 10 days? What is the customer willing to pay to expedite the order? Better communication of customer needs allows companies to make more informed decisions about where last-minute customization should be performed and where inventory should be held across supply chains that can span the globe.
After a manufacturer goes through these specific steps it is in an excellent position to apply lean practices, originally pioneered by the Toyota Motor Corporation but now widely practiced by manufacturers everywhere. Many manufacturers start at precisely the wrong point in China by trying to create lean operations because they don’t understand the sequencing of the building blocks of a successful operations strategy. We estimate that fewer than 5 percent of the companies in the world are able to fully deploy lean practices, and the percentage is much lower in China.