The Resilient China Supply Chain

As we emerge from the Covid19 supply chain nightmare and dust ourselves off, we note that some companies were able to react immediately to market opportunities. They placed orders and planned deliveries, secure in their knowledge that their supply chain will deliver.  Those companies did really well when the market bounced back. 

Others scrambled looking for qualified suppliers in what seemed to be an irremediably changed environment.  Everybody started talking about resilience, resilience, how to make their supply chain resilient.  

Nice word “resilient,” but what does it really mean?  

The dictionary definition is “toughness; the capacity to withstand or to recover quickly from difficulties.”  More specifically, according to Gartner, a research and advisory company, there are six key elements to a resilient supply chain strategy:

• Inventory and capacity buffers
• Manufacturing network diversification
• Multisourcing
• Nearshoring
• Platform, product or plant harmonization
• Ecosystem partnerships

Let’s unwrap these and consider how they apply to the China supply chain.

• Inventory and capacity buffers: Before 2020, everyone was focused on “Just in Time,” a strategy dependent on a smoothly working and highly predictable supply chain to ensure a sufficient and highly responsive inventory at a low cost. Nice to have but, as it turned out, fragile.  During Covid, the global supply chain became unreliable, buyers got burned and missed sales. They switched to a “Just in Case” system, building more of an inventory buffer to ensure they would not run out of inventory again. There are pros and cons to both, but having a good buffer is the more resilient approach. 
• Manufacturing network diversification: Putting all your eggs in one basket can make sense if you don’t have many eggs. But it is risky.  Ideally, you should increase your choice of suppliers and avenues of supply so that you have an abundance of flexibility for your most important products. Meaning: find non-China suppliers. Doing this, of course, can be expensive, both in terms of first costs and in terms of research and implementation.  
• Multisourcing: Single sourcing is a great way to ensure complete engagement, exclusivity, and usually, low prices from the single manufacturer. But there is always a risk of supplier default. Multisourcing is when you work with multiple suppliers who compete with each other for your business – and know it.  Obviously, Multisourcing is a much safer process, but it is also more expensive to manage. 
• Nearshoring: We are all familiar with the concept of buying close to home, of the benefits of “Made in the USA,” or, failing that, Made in Mexico. All serious buyers have examined the idea at some point because it would make life much easier, the supply chain more robust, and less prone to suffer from unforeseen events.  China is over 7,000 miles away from the United States, so basically the opposite of nearshoring. Given the current political pushback it doesn’t make sense to buy from there. Except for one thing: it is cheaper. Often a lot cheaper. 
• Platform, product or plant harmonization: This is about data management and digital supply chain platforms.  It is a rapidly evolving concept that will have a big impact on the management of the supply chain. The ancestor of the concept is the UPC label. It was attached to the product at the factory and used for tracking and inventory purposes at the store. Another example was Walmart’s barcode requirement for packages that facilitated the automation of its warehouses. But harmonization is becoming a lot more than that. Consider this: a China supply chain is incredibly complex, and it involves many moving parts. To ensure predictability and reliability, buyers must understand and manage vast amounts of information about data, materials, and logistics. And this is before you consider Environmental, Social and Corporate Governance (ESG).  If you have a large number of SKUs and you factor in regulation and compliance concerns, then the concept of a digital supply chain platform becomes very compelling. 
• Ecosystem partnerships: When you reflect on the complexity of the international supply chain and you are determined to make it work as smoothly and reliably as possible, you realize that each of its key components (i.e., ESG compliance management, Sourcing, Quality, Logistics, etc.) require distinct skill sets that you probably do not possess, and, good news, that there are specialists available to help you with those. That is what is meant here by “partnerships.”  

When evaluating a supply chain, management considers three factors, in order: cost, service, and strategy. Cost is always first.  How to get the best cost, how to preserve that cost, and, if possible, how to make sure that the cost is better than what the competition can get. The next concern is: what services do I need in order to secure that cost advantage? And the third is what strategy should I employ to secure the services and processes needed to toughen up my supply chain.

We can draw three conclusions from the above:

• The first is that a resilient supply chain requires, above all, good management, and, more specifically, a good strategy. The executive in charge should carefully evaluate the data, the risks, and the rewards, and then put together the best supply chain solution for their product.  
• The second is that China, despite the current geo-political environment, remains a compelling source. Sure, historically it has scored poorly on many of the above elements, but it is reliably cheaper than most alternatives. Furthermore, the China supply chain is highly responsive and adaptive to international consumer demands, including its new ESG requirements. 
• The third is that a good service provider, an “Ecosystem Partner,” makes a big difference in execution.

There is no question that a resilient supply chain will benefit your business. But be mindful that “resilient” does not mean “profitable”: optimal resiliency conflicts with cost-effectiveness. It’s a tradeoff. Chances are you probably already have a good supply chain. The trick is to make it more resilient. It is an incremental process. What will you fix first?

 

Michael De Clercq, CEO