9.26.2007

Consultant: Sourcing from China is a Mistake

At least one consulting firm actually understands that going abroad to reduce manufacturing costs is a bad idea.


            Lean advocates have long argued that the increased waste from overseas sourcing – in the form of additional transportation plus longer cycle time – makes no sense. Unfortunately, too many businesses and consultants believe – wrongly – that the lower production costs in China make up for any negatives.


            Kudos to Boston Consulting Group, which issued a report earlier this year entitled Surviving the China Rip Tide: How to Profit from the Supply Chain Bottleneck.


            BCG cites a variety of factors other than actual manufacturing that contribute to costs, including delays caused by bottlenecks at ports and the increased risk of stocking items that don’t sell because you had to purchase them too far in advance.


            The authors of the report – George Stalk, Jr., and Kevin Waddell – don’t say you should never outsource from China. Rather, they argue that if you do pursue that strategy, you should be focusing on your supply chain processes:


 


We believe strongly that a firm focus on reducing time and variability in the China-anchored supply chains serving North America and Europe can help companies dramatically reduce their costs, improve their margins and build competitive advantage. We believe that such performance improvements will dwarf the more conventional profit-improvement efforts now under way at most of the companies we are familiar with. We also believe that companies should be looking closer to home (North American companies to Mexico, Central America and South America and Western European companies to CEE), where the cost-of-labor penalty is more than compensated for by superior supply-chain performance that is significantly less variable and virtually unaffected by port and surface-capacity constraints.


 


In their rush to source from China, many companies are blindly walking into a strategic trap. The trap is thinking that sourcing from China will result in lower product costs, when in reality the supply chain dynamics will, in many cases, drive up overall costs and reduce profitability, thereby creating an opening for a competitor. The only hope for these companies is that all of their competitors will make the same mistake. But competitors that do not source from China – or that focus on supply chain speed – will be competing with a different set of economics. The first company to see and correct the strategic error of sourcing from China without an appropriate investment in supply chain dynamics to minimize costs will seal the fate of its competitors.


 


            Stalk and Waddell don’t actually use the word “lean” in their report. But they seem to understand.


 


            Incidentally, in a posting on the same topic, Kathleen Fasanella at the Fashion Incubator blog writes about the book Birnbaum’s Global Guide to Winning the Great Garment War. She comments:


 


His greatest lesson is that it's a wasted exercise to chase the lowest cost production considering the variables of quotas, the nation of origin politics and general conditions including infrastructure. If anything, I think this book is more likely to convince you to produce domestically than not.

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