Excerpt from: China Supply Chain and Logistics Strategy
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| November 07, 2005 | | Low Cost Not Sufficient to Sustain Competitive Advantage | I recently attended an event in Shanghai where Mr. Gary Coleman, who serves as the Global Managing Director for the Manufacturing Industry Practice of Deloitte Touche Tohmatsu, discussed his points of view regarding sustaining profitable growth in today’s complex business world.
Gary commented on how one senior executive told him that “the days of cutting costs have reached diminishing returns”. Leading manufacturers are again putting sustainable, profitable growth at the top of their agendas.
He questioned whether low cost production is a good long term strategy considering that if the Chinese Yuan appreciates manufacturers will need to re-locate to other countries. China already isn’t the lowest cost producer, compared to countries such as India and Eastern Europe, which also have a pool of talented and educated workforce that surpasses China. (10% in China compared to 30% in these other countries)
The speaker’s discussion about “Value Chain Masters” and the collaborative “networker” reminds us that collaboration with suppliers and customers can be done to re-design processes, components, and products in ways that give you a head start over rivals. However, he didn’t go into much detail regarding the prospects for successful supply chain collaboration in China.
In my opinion, collaboration with suppliers in China will be the key to obtaining long term sustainable competitive advantage, rather than using China as a low cost production center. The value to sourcing in China as opposed to these other lesser developed countries lies in China’s:
- Scalability
- Quality
- Dependability
- Technical expertise
- Efficiencies
However, there are major obstacles to achieving collaboration with suppliers in China and these obstacles are largely cultural. A deep analysis of the local environment will expose hidden conflicting agendas which should alert companies to put more attention on intelligence gathering and interpretation of what is shaping the mentality of their business partners in China.
Cultural Factors Can Reduce Supply Chain Efficiency
- Lack of trust
- Avoidance of challenging the way others do business (especially superiors)
- “win-lose” mentality
- Primary emphasis on social relations and long term relationships
- More interested in group goals
- Financial information is kept secret
To overcome these cultural factors manufacturers that are outsourcing in China must place more emphasis on developing suppliers that have the right management attitude. It is important to clearly convey the message that you are doing business with them for long term mutual benefit, not just lowest cost. However, do not expect to be able to create a perfect partnership with your suppliers overnight. As development matures over time, the lines between supplier and buyer will fade and collaborative partnerships will form.
Developing suppliers is a contact sport! - In order to achieve true collaboration with your suppliers in China you need to be on the ground with them. It cannot be done via conference calls or email. Understanding and innovation ultimately boils down to good relationships where learning from your suppliers is as important as teaching them.
Skill Development – Without the local team to back you up, you will never maintain good relationships with your suppliers. Building a skilled work force is critical to forming collaborative relationships in China. Personal involvement of the top manager and ongoing development programs is a continuous process required for sustainable team building. | | |
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