The China Sourcing Syndrome

CIPS 26 July 2019

Fallout from the trade animosities between the U.S. and China are creeping into the outlooks of global retail companies. AP reports that Walmart has warned investors that its retail prices will have to go up to cover at least a portion of those tariffs. Macy’s appears to be hinting the same. Tariffs and counter-tariffs between the two economic superpowers seemed like bargaining strategies when they were first announced, but the recent collapse of negotiations is pushing American companies to consider what the CEO of Stanley Black & Decker called “sweeping changes” in its China-based supply chains. As a starter, Black & Decker is investing $90 million to build a plant in Texas to forge Craftsman-branded tools that had been made in China. A high level of automation will keep the cost in line with sourcing from there.

The timing of this particular disruption to China-based supply chains might have come as a surprise, but the migration away from sourcing in China is not new. The obvious insight is that sourcing in lowest-cost countries is only cost-effective until the country is no longer lowest cost, and China now has many competitors in the sectors it once dominated. I recently bought a barbecue grill for my RV that was built in Taiwan – one of the countries that has been very aggressive recently in chipping away at China’s market share of consumer product exports. Of course, a migration strategy does not necessarily mean abandoning China. There are companies that may be building capacity in other countries, but leaving some production in China to serve the local market or other non-U.S. countries with lower trade barriers.

For some companies there may be other tactics that can be used to reduce the costs of importing to the U.S. We once worked with a food manufacturer that faced a regulated price for domestic sugar that was far above the world market price. So instead of purchasing domestic sugar and mixing it with other ingredients in the U.S., we arranged for a Canadian firm to buy lower cost Canadian sugar, mix it with flavorings there and label it “pudding blend.” We applied for and earned a U.S. Customs permit for it and were able to drop the cost of production significantly, as long as we stayed within a set import quota. A very good working knowledge of customs rules paid off in that case.

In a way, the question, “are tariffs a temporary bargaining strategy, or a long-term reality?” is not particularly relevant to many supply managers. The current animosities have added another unknown – a risk factor to sourcing in China that won’t necessarily go away if or when the animosities end. To mitigate that risk will add costs. So, even if the current tariff battles end with a new U.S.-China trade agreement, supply chains are moving back to the U.S. or other countries where relations are less volatile. As an example, the CFO of Cisco reportedly told investors it had “greatly reduced” its “exposure” to China.

The challenges of sourcing from China right now provide lessons for all supply managers, regardless of what they are buying. They provide solid evidence for a comprehensive procurement plan that goes well beyond the transactional, low-bid-wins approach. It looks at best value purchasing that incorporates risk mitigation, logistics, strategic value of the product or service purchased, as well as newer concerns such as sustainability and transparency throughout the supply chain.

A procurement strategy generally has four basic elements, each with its own core question:

Operational Efficiency – How is your organization committed to constantly improving processes to reduce the cost of purchasing and managing its supply chains? Can some transactions be automated, for instance?

Products and Processes – How is your organization seeking the best overall value of each purchase incorporating total landed costs, function and risk? Is every supplier at every link in the supply chain adding value that justifies the cost?

Supplier Relationships – How are you seeking and working with suppliers that deliver continuous improvement, innovation and integrity from their own work and others that supply them? How well do you know your suppliers and those that supply them?

People – How are you identifying the best skilled team and building a culture that supports them, keeps them in your organization and continuously builds their skills? How can you build cross-functional teams and incentivize on-the-job learning?

It’s not uncommon for businesses to be asking these questions separately, but the real value comes when they are considered as a whole. I once worked with a biotech company that was earning a significant margin and most of its profits from a single product. To protect its position it analyzed everything, starting with any sole sources or even single production lines. It considered multiple solutions, from keeping a high inventory to replicating production lines with or without full regulatory approval. In the end it was worth it to have a plan or a backup for every single step in production.

Whether it’s tariffs, typhoons or tornadoes, disruptions are inevitable in supply chains. Nimble organizations plan for change and build the skills of their procurement staff to meet every challenge that comes their way.

The CIPS Risk and Resilience Assessment Tool is a free, online self-assessment platform that will help you identify risks in your supply chain and provide guidance to mitigate key areas of risk.

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