China's supply chain challenge: Mitigating supply risk

Filed in archive Market Overview on July 6, 2009

AMR Research, supply chain analyst firm recently published a report on countries' risk profile and interestingly, in a survey of 130 global companies China was the top contributing region for nine of 15 risks examined, including supplier and internal product quality failure, security breaches and intellectual property infringement. (Note: Probably you remember some of these issues from Mattel case).

According to Global Supply Chain Council, other risk factors for China cited in the survey include volatile energy and commodity prices. Noha Tohamy, vice president of research at AMR, notes that this "creates a dilemma" for many global companies. As those companies continue to enjoy the advantages of cheaper material and labor costs, as well as the potential to reach vast consumer markets, they must continually reassess the pros and cons of operating in China," she says.

"There is a cost to low cost," says Harold Sirkin, senior partner at BCG in Chicago and global leader of the firm's operations practice. "The key is to bring suppliers up to your standards. Given the potential cost advantages of 10% to 30% that China sourcing can deliver, it's well worth it for companies to invest in their suppliers," he adds. A good start would be for buyers to educate their Chinese suppliers on the value of brands and how quality issues could hurt them.

Chinese companies, such as white-goods giant Haier and telecommunications equipment-maker Huawei, have shown "demonstrable success" in ensuring quality control, Pinney says. Companies that have years of experience in procuring from China are also "on top of this quality issue," says Michael.

But not all Chinese companies have learned the right lessons, especially those behind the recent quality scandals, and a reorientation appears to be in order. Managing supplier relationships is one critical area. Setting up small, on-the-ground procurement teams with weak local relationships isn't as effective as adapting to local conditions, Pinney says. Companies that succeed with China sourcing "invest in localizing their teams, processes and quality controls," he notes. "They become more flexible and adapt their operations to local conditions." As a result, local suppliers and manufacturers absorb the right systems and processes either as joint venture partners, by watching and learning, or by hiring select talent from foreign companies.