How To Integrate China Into Your Supply Chain

Last year's lead paint scares and the unfolding conflict in Tibet have damaged China's reputation as the premier low-cost manufacturing source for global organizations. China's competitive edge faces a host of other challenges, too, including the appreciation of the renminbi, subpar logistics infrastructure, and increasing competition from neighboring low-cost countries such as India and Vietnam.

But China's trump card is its vast domestic market. A pair of new studies from Booz Allen Hamilton explores the shifting competitive environment for multinational companies doing business in China and finds that the majority are committed to the Middle Kingdom for one overriding reason: they can't afford to ignore a market of 1.3 billion people. More than 80 percent of respondents said that they currently have no plans to move capacity from China, and 78 percent of that group cited the country's domestic market as an important factor in their decision to stay put.

The key to success in China is to develop a dual-mode operation that balances the sourcing opportunity with the selling opportunity, according to Booz Allen. Companies that adopt that strategy achieve average profitability of 30 percent, compared with only 18 percent for other organizations.

Surprisingly, though, only about one-third of multinational companies that operate in China have achieved full integration of their sourcing/manufacturing and sales operations. Many organizations adopt an export-focused strategy and sometimes end up sourcing in China, completing production in their home country, and then reimporting back to China. And some businesses focus on China mainly as a market; they may miss the opportunity to pull exports from China into their global distribution networks.

Booz Allen proposes the following framework of best practices for creating a supply chain that leverages China's strengths:

1. Global integration. Companies should examine the fundamental guiding principles for organizing their Chinese operations. The most successful companies view China as the linchpin of their global operations rather than just another market.

2. Postponement/late customization. Organizations should leverage China's ability to produce large volumes of products, but postpone the moment at which the products have to be customized for specific markets. The National Hockey League, for example, manufactures jerseys in bulk then customizes them with players' names and numbers in the final stage of assembly depending on the popularity of specific players. It often makes sense to apply culture-specific, customer-driven touches when the products are outside China's borders and closer to the ultimate consumer.

3. Tailored business streams. An outcome of the postponement strategy, tailored business streams enable a manufacturer to identify the common elements of its output and allocate the majority of its capacity to those, while reserving some capacity for somewhat predictable demand and a small amount of capacity for unpredictable opportunities.

4. Footprint and network modeling. This consists of determining how many plants are needed, where they should be, and what their focus and mission should be. Key elements of the decision process include an assessment of market requirements -- lead times, for example -- as well as constraints, such as regulatory requirements and labor agreements.

5. Sales and operations planning. S&OP is a crucial component that enhances communication between the sales force and the manufacturing team and drives decisions around customization and where inventory is held. A good S&OP system and planned, rather than ad-hoc, decision-making can make the difference between profit and loss.

6. Lean practices. While lean methodologies offer huge scope to improve operations, they should be applied only after the other pieces of the operations strategy are in place, the report emphasizes.

Click here for access to the two Booz Allen Hamilton studies.