still rampant there, and U.S. companies
worry about the access of Chinese suppli-
ers to their proprietary technology. Gon-
zalez expects some progress as China
develops its own generation of skilled
engineers, many of them trained in the
West. Nevertheless, “there is still some
maturity that needs to take place in terms
of their IP protection laws.”
Even the issue of wage rates isn’t as sim-
ple as it once seemed. Gonzalez points to
the recent strikes in China as evidence that
the country no longer can be treated solely
as a source of cheap labor. There have been
reports of worker unrest at factories making
automotive parts in Guangzhou, electronic
components in Tianjin and air conditioning
systems in Zhongshan, among other loca-
tions. Work stoppages were becoming
increasingly common in the spring and
early summer of 2010.
A New Approach
All of this suggests that supply-chain exec-
utives need to adopt a more sophisticated
approach to the sourcing question. “We’ve
been predicting now for a couple of years
that companies need to think a bit more
start to rise.
“Chinese companies are looking for the best
place to be doing business. In some cases,
it’s not in China.”
— Jim Lawton of Dun & Bradstreet
string of measures that require companies
to fully vet their foreign suppliers. In addition, says Lawton, original equipment
manufacturers need to know intimate
details about a supplier’s level of quality
and financial condition. The unanticipated
failure of a key supplier can seriously
impact a global supply chain, especially
when cost-conscious executives allow for
narrow margins of error.
A further complication is the multi-tiered nature of many supply chains. Companies relying on production in China
might be surprised to learn of the true
source of some of their goods. For example, says Lawton, a large portion of the
value-add in a given product might come
from sub-Saharan Africa. “Chinese companies are looking for the best place to be
doing business,” he says. “In some cases,
it’s not in China.” Still, U.S. buyers tend to
take the “Made in China” label literally.
Lawton believes companies are just
beginning to make progress toward
adoption of a “total landed cost”
approach to sourcing evaluations. During the worst of the recession, he says,
many were focused exclusively on survival. Now, with modest recovery beginning to take shape, they can afford to
consider factors such as quality, delivery
issues, supplier solvency and the cost of
keeping inventory on a ship for 30 days.
“Have I seen a dramatic increase in
companies’ ability to get their arms
around [total landed cost]?” asks Lawton.
“I’d say no. Many companies are not
equipped to take into account the factors
that are much more relevant... But some
have gotten smarter about it.”
holistically about global sourcing,” says
Ellis. Some product categories are
extremely price-sensitive and don’t
require short lead times. But many others
call for a rethinking of basic strategy, to
maintain high levels of customer service
while keeping the lid on cost. Ellis is push-
ing the concept of “optimized sourcing,”
by which companies seek to align supply
with projected demand growth.
Deeper Into China?
One alternative is to shift production
within China, from overcrowded coastal
areas to inland regions. China itself is promoting this move, as it seeks to develop
other parts of the country and build up
infrastructure in non-urban locations. Josh
Green, chief executive officer with Panjiva, calls this strategy “a short-term solution to rising wages.” He points out that
much of the industrial labor force in
coastal China was drawn from inland
areas in the first place.
“It’s not as if you’re really tapping a
totally different labor pool by moving
inward,” Green says. At the same time,
lengthier supply lines are boosting trans-
