China presentation Council of Supply Chain Executives
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April 2, 2015 to the Council of Supply Chain Professionals, University of South Florida chapter on the impact China has, does and will have on Supply Chain professionals.
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China presentation Council of Supply Chain Executives
- 1. China’s Role in Global Supply Chain Strategies: Past, Present and future
- 2. About Us Baysource Global is a bridge for small and medium sized companies who want to capture all possible advantages of working with China as a low cost supplier of manufactured products as well as a potential market for U.S. branded goods and services.
- 3. Talking Points 2 3 4 Why China?1 A Paradigm Shift: Sourcing Goes To China Looking Ahead: Global Supply Chain Trends Today’s Global Sourcing Environment
- 4. Why China? • Low cost labor • Low Start up costs • A decade of gov’t stimulus • Advanced Infrastructure • Innovation
- 5. The Rise of China 1949 1958 1966 1976 1978 1997 2001 2008 Accession into WTO Founding of the PRC Beijing Olympics Hong Kong Handover Open Door Policy The Great Leap Forward Cultural Revolution Begins Cultural Revolution Ends
- 6. Why China? China as a strategic manufacturing destination Low Costs Ideal location for start up projects Profits
- 7. Why Not India or Other Developing Nations? India rate of investment not as high Less Politically Stable Lack of infrastructure Southeast Asia rate of investment not as high Geographical limitations Eastern Europe high inflation Higher Labor costs Tried it Latin America high inflation Higher labor costs
- 8. A PARADIGM SHIFT: SOURCING GOES TO CHINA
- 9. The Walmart Effect "Wal-Mart is one of the key forces that propelled global outsourcing -- off-shoring of U.S. jobs -- precisely because it controls so much of the purchasing power of the U.S. economy."
- 10. Calling the shots in the Global Economy • ~1990 became most aggressive U.S. company in pursuing a global sourcing strategy • Setting price points and forcing suppliers to meet targets • Shifting the balance of power: Big-box retailers call the shots vs. brands
- 11. An Empire Built On Bargains American Brand Name Items Private Label Items VS.
- 12. An Empire built on Bargains • Retail leverage increases as dependence on American brand share reduced by Private-label programs • PL as market share in Europe near 50% by early 2000s • US Retailers following wave now augment their category management; develop National Brand Equivalent (NBE) quality standards • Move to offshore sourcing for (low hanging fruit) categories such as socks (Fruit of the Loom) and food storage (Rubbermaid) • Sourcing & Supply Chain become fixtures in Org Charts
- 13. Jumping On the Savings Bandwagon
- 14. The Trend Continues… • Brands hop on the bandwagon • Industrial and commercial industries follow • Traditional Purchasing & Supply Chain Evolve
- 15. Cost – Below the Line Hidden Costs Cost Materials Inventory Management Plant, Property, and Equipment
- 16. The Devil Is In the Details
- 20. China &New Product Development • Lowest Start up costs • China stimulates investment • Multitude of manufacturers and industries • Flexible manufacturing
- 21. What China Has Become • Greater emphasis on innovation • Improved technology • Advanced infrastructure development • Economic development zone hub (SEZs)
- 22. LOOKING AHEAD: TODAY’S GLOBAL SUPPLY CHAIN ENVIRONMENT
- 23. So What? • Evolution of the Supply Chain Strategy • New Era & sophistication for Senior Supply Chain Professionals • Dawn of the CPO – Chief Procurement Officer – Proficiency in – Carrying cost of capital – Sourcing – International freight, 3PL, – Quality, testing & Standards accountability – Personnel • New balance of re-shoring and offshoring – Global balance strategy • Total Landed Cost!
- 24. Striking a balance • Supply chain analysis of what makes sense • No longer a wholesale move to mfg offshore • Re-Analysis of Total Landed Cost
- 25. Labor costs cost of labor is rising so sharply in Asia that pay for senior management executives is on par with, or exceeds, that of their American counterparts. manufacturing wages in the United States have in the face of the economic crisis declined 2.2 percent since 2005. Automation Sophisticated equipment, such as robotics and automated guided vehicles (AGVs), also require a more skilled workforce, which is in greater supply in America. Intellectual property protection The protection of intellectual property is haphazard at best in China and other low-cost manufacturing nations Onshoring of Manufacturing
- 26. Onshoring of Manufacturing Transparency Revelations of child labor and environmental destruction in China has resulted in negative publicity for some companies and calls for improved transparency of the supply chain. Risk management fluctuating price of oil, labor disputes, freight costs, safety issues -- to name a few -- have added a layer of costs and bureaucracy that some companies concluded they could do without. Closer to customers Proximity also creates a better environment for innovation, keeping manufacturers and designers together.
- 27. Onshoring of Manufacturing Quality control Offshoring often means giving up some aspects of control and as many companies have discovered, quality may suffer as a result. Ease of doing business Language barriers and different business cultures aside, keeping the suppliers close makes financial sense as transit times are reduced and quality issues can be addressed more quickly. Reduce supply chain disruptions Civil unrest, port closures, and natural disasters add uncertainty and unanticipated costs to doing business overseas.
- 28. Future & Trends • Companies that procure goods from China must keep up with country's evolving challenges to take full advantage of the opportunities. • Pursue China as both a growth market (Top line) and a market for lower cost labor and sources (Bottom line); Integration into long-term model & strategy • China’s rising labor costs and currency structure have shifted, forcing companies to rethink how they structure their Chinese operations and how they perceive China in their overall global strategy.
- 29. Factory Asia: Other Low Cost Countries? Singapore Vietnam Indonesia
- 30. Is Sourcing in China Still Competitive? Manufacturing has traditionally taken place within coastal provinces As wages on rise on the east coast manufacturing is moving into central and western provinces
- 31. Is Sourcing In China Still Competitive? Infrastructure Stable Gov’t High Population Factory Conditions Stable Industrial Chain Natural Deep Sea Ports Although an important factor, wages are only one brick in the wall
- 32. Questions ??
Editor's Notes
- For many industries, the proportion of overall procurement needs sourced from low-cost countries will double within five years. But it’s a complex technique, demanding great flexibility and a careful balancing of often competing interests within a company
- David
- David Low Cost Labor manufacturing in China can help reduce costs by 30% to 80%, depending on labor intensity of production (iti manufacturing) *Access to cutting edge technology (Recent development) Realizing the potential of its market in the era of globalization, China has spent the last few years developing its technology. Heavy investments in research and development have helped the country gain an edge over other emerging countries.
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- David Companies who’s products that are unproven Dramatically lower tooling costs Eliminates need for investment
- Michelle India GDP growth in China outstrips all other developing countries, with only India after 1990 coming close to China's experience. Scholars believe that high rates of investments, especially increases in capital invested per worker, have contributed to China's superior economic performance. China's relatively free economy, with less government intervention and regulation, is cited by scholars as an important factor in China's superior performance compared to other developing countries. Lack of infrastructure investment creates a logistical headache for supply chain managers Less politically stable compared to China South East Asia Textile manufacturing is going to SE as Chinese wages rise BUT… Fabrics often imported from China so transport costs are high Difficult to beat China’s speed, scale, and flexibility Lack of investment: infrastructure & human capital development To compete with China ASEAN needs to make it easier to move goods around Latin America Weakening demand for commodity exports (China’s demand has slowed down) Corrupt and dysfunctional political system -Last 7/8 years, Brazil was doing very well, and the problem with the commodity-fueled boom was that it helped the government postpone reforms of regulations, the tax system etc. Now that commodity prices have dropped, it will be more challenging for Brazil to tackle the “old structural problems inherited from the past.” Eastern Europe The Eastern bloc economies saw declines of 13 to 65% in GDP at the beginning of reforms, while Chinese growth has been very strong since the beginning of reform. China also managed to avoid the hyperinflation of 200 to 1,000% that Eastern Europe experienced; Success is attributed to gradualist and decentralized approach of the Chinese government, which allowed market institutions to develop to the point where they could replace state planning. Contrasts with "big bang" approach of Eastern Europe, where state-owned sector was rapidly privatized with employee buyouts, but retained much of the earlier, inefficient management. No real gov’t investment at the time eastern European block opened; could never get same quality of products, many unskilled workers.
- David From a small-town five-and-dime, Wal-Mart Stores Inc. has grown over 50 years to become the world's largest corporation and a global economic force. Effects: Suburbanization of the local shopping experience, the driving down of local prices for all everyday necessities, the draining of the viability of the traditional local shopping areas, a continual downward pressure on local wages, the consolidation of consumer product companies aiming to match Walmart's scale, a continual downward pressure on inflation, and a new and continual cost scrutiny at a wide ranges of businesses enabling them to survive on thinner profit margins
- Michelle and David Most aggressive U.S. company is pursuing a global sourcing strategy Wal-Mart has been actively pursuing a strategy that emphasizes global sourcing. Wal-Mart identifies common products used throughout the world and “determines whether there is an opportunity to improve quality, reduce costs and, by working with a best-in-class supplier, achieve better replenishment and new item introductions” Example - Has worked with its copy-paper sales supplier to offer new products and more value to customers throughout the world. By actively working with these suppliers, Wal-Mart has realized sales increases of 46% in England, 94% in Germany, 38% in Canada, and 25% in U.S. discount stores, and a 13% increase at Sam’s Club stores. Setting price points and forcing suppliers to meet their targets the big box retailers, epitomized by Wal-Mart, have been "driving a massive restructuring of production worldwide; moving jobs from the U.S. and Europe to Asia. They do it by setting price points and forcing suppliers to meet their targets. Only lowest-cost labor can meet their targets, and that means producing in Asia.“ Changing the balance of power: Big-box retailers call the shots "We've definitely seen a shift in the balance of bargaining power between manufacturers and retailers," Lindsey says. "Back in the old days, manufacturing was a high-productivity endeavor; retailing and distribution was fairly low-productivity. And manufacturing was big and consolidated; retailing was small-scale and decentralized. And so manufacturers called the shots. "Now, things are very different. You have large-scale retailing that's very high-productivity, that has a lot of bargaining power. And they can go to smaller manufacturers and call the shots and say, 'If you want to be on our shelves, you have to do it our way.' …Wal-Mart -- they're very demanding, and they've got a lot of bargaining clout to back up their demands."
- Introduce Topic of Walmart aggressively developing pvt. Label items and scaling down on Brand name Items. Ask students if they know why Walmart would do this? What advantages are to be gained?
- (David & Michelle?) the power of Wal-Mart -- and competitors like Target -- is increasing, as they reduce their dependence on well-known American brand names by developing their own in-house brands. According to Wal-Mart Vice President Bracy, Wal-Mart has significantly stepped up development of house brands "because there [are] supply chain efficiencies to gain by working directly with the factories." And also, more profit for Wal-Mart Walmart Reinvents Global Sourcing Model (2010) announced a consolidated global sourcing structure centered around new Global Merchandising Centers (GMCs) creating a strategic alliance with Li & Fung, a global sourcing organization (goal: leverage company’s global scale) Core of overall global sourcing strategy will be to continue increasing direct sourcing for private brands. Today, private brand merchandise represents more than $100 billion in purchasing annually. “New strategy and structure should drive significant savings across supply chain,” The strategic alliance between the two companies will allow Walmart to realize the benefits of consolidating a portion of its sourcing portfolio. Li & Fung, which is forming a new company to manage the Walmart account, is expected to build capacity that would enable it to act as a buying agent for goods valued around US$2 billion within the first year. By realigning our resources, leveraging our scale, and restructuring our relationship with suppliers, we will enable our businesses around the world to offer even more competitive pricing on merchandise and to provide our customers a clear and compelling assortment of better quality products at lower prices Another Article (Same content worded differently) Walmart this week announced a sweeping plan to consolidate its global procurement functions and reduce the use of intermediaries in its global sourcing processes, leading to savings of billions of dollars per year. It turns out that Walmart, the world's largest importer, still relies on the use of sourcing intermediaries for the bulk of its global sourcing initiatives, buying less than 20% of its goods directly from offshore suppliers. In addition, it often operates in a very decentralized mode, with each of the 15 countries where it operates buying goods from the same suppliers, esp. for its growing private label brands. company's goal is to switch that ratio, so that within a few years it is buying direct from the manufacturer for 80% of its purchases. If it can do that and gain additional benefits from centralized purchasing, potential cost reduction from taking out the middleman mark-up of 5-15%, depending on the category, leading to billions in savings. The move to more direct procurement will be facilitated by greater centralization of its sourcing operations.
- Michelle most of our job and industry losses didn't happen primarily because of Asia's aggressive export policies. Instead, the experts tell us, these are self-inflicted wounds. American companies played a central role in the rise of China and the Asian Tigers. The seismic shifts in the global economy, they say, have been largely driven by American companies -- not just by multi-national manufacturers like GE or Hewlett Packard moving production overseas, but by giant American retailers like Wal-Mart, Target, Kmart, Toys "R" Us and Home Depot, and brands like Nike or Liz Claiborne galvanizing Asians to export to the U.S.
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- Michelle and David SEZs – Special Economic Zones – early 2000s to encourage bilateral investment; stimulate job growth; special tax incentives. Shanghai now to follow More Innovative Technology Investment by Gov’t - Infrastructure It has excellent, and improving, infrastructure: it plans to build ten airports a year until 2020. And its firms are using automation to raise productivity, offsetting some of the effect of higher wages—the idea behind the government’s new “Made in China 2025” strategy.
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- Michelle and David Although onshoring so far has resulted in a trickle rather than a tidal wave of new jobs, the fact it is happening at all has generated hopes of a manufacturing renaissance in the United States. A number of factors, none of which alone would not prompt a company to terminate an overseas venture, have coalesced to make the value proposition of electronics "Made in the USA" increasingly hard to resist. Forecast and demand planning Why U.S. Manufacturing is Poised for a Comeback (Maybe): http://www.wsj.com/articles/why-u-s-manufacturing-is-poised-for-a-comeback-maybe-1401475962 Optimists: Manufacturing in the U.S. is starting to make a comeback, and is poised for even bigger gains in the years ahead. Skeptics: Not so fast!
- David and Michelle clinging on to low-cost manufacturing, even as it goes upmarket to exploit higher-value activities. Its share of global clothing exports has actually risen, from 42.6% in 2011 to 43.1% in 2013. It is also making more of the things that go into its goods. The World Bank has found that the share of imported components in China’s total exports has fallen from a peak of 60% in the mid-1990s to around 35% today. This is partly because China boasts clusters of efficient suppliers that others will struggle to replicate. 1. Despite rising wage, China is still clinging on to low-cost manufacturing, even as it goes upmarket to pursue higher-value added products. For example, China's share of global clothing exports has actually risen of late, from 42.6% in 2011 to 43.1% in 2013, the last year for which data is available. China is also making more of the parts that go into its finished goods production. The World Bank estimates that the share of imported components in China's total exports has actually fallen from a peak of 60% in the mid-1990s to around 35% today. This is partly because China boasts clusters of highly efficient suppliers that other countries will struggle to replicate. Chinese manufacturers are also now investing heavily in robotics and other automation to offset the increase in wages - the idea behind the government's new "Made in China 2025" strategy.
- Michelle China’s second strength is Factory Asia itself. As wages rise, some low-cost activity is indeed leaving the country. Much of this is passing to large low-income populations in South-East Asia. This process has a dark side. Last year an NGO found that almost 30% of workers in Malaysia’s electronics industry were forced labour. But as Samsung, Microsoft, Toyota and other multinational firms trim production in China and turn instead to places such as Myanmar and the Philippines, they reinforce a regional supply chain with China at the centre. The third advantage is that China is increasingly a linchpin of demand. As the spending and sophistication of Chinese consumers grows, Factory Asia is grabbing a bigger share of higher-margin marketing and customer service. At the same time, Chinese demand is strengthening Asian supply chains all the more. When it comes to the Chinese market, local contractors have the edge over distant rivals. Deft policy could boost these advantages still further. The Association of South-East Asian Nations (ASEAN) is capable of snapping up low-end manufacturing. China’s share—by volume—of the market for American shoe imports slipped from 87% in 2009 to 79% last year. Vietnam, Indonesia and Cambodia picked up all the extra work. But ASEAN could do far more to create a single market for more complex goods and services. Regional—or, better, global—deals would smooth the spread of manufacturing networks from China into nearby countries. The example of Thailand’s strength in vehicle production, which followed the scrapping of restrictions on foreign components, shows how the right policies can weld South-East Asian countries into China’s manufacturing machine. SE Asia Attract More FDI Than China for 2nd Year: http://chinadailymail.com/2015/03/18/southeast-asia-attracts-more-foreign-direct-investment-than-china-for-second-year/
- Michelle Manufacturing has shifted from coastal cities to interior regions High tech companies are eating up available labor force
- Michelle Despite the economy not being as robust as it was China will continue to have three formidable advantages in manufacturing that will benefit the economy as a whole. China is clinging on to low-cost manufacturing, even as it goes upmarket to exploit higher-value activities. China’s second strength is Factory Asia itself; As multinational firms trim production in China and turn to places such as Myanmar and the Philippines, they reinforce a regional supply chain with China at the center. China is increasingly a linchpin of demand. As the spending and sophistication of Chinese consumers grows, Factory Asia is grabbing a bigger share of higher-margin marketing and customer service. Also, Chinese demand is strengthening Asian supply chains. When it comes to the Chinese market, local contractors have the edge over distant rivals. High supply of workers suppresses wage increases and ensures factories always have enough workers 5 Reasons Why China Will Remain The Worlds Factory: https://www.linkedin.com/pulse/20140821060820-94090867-5-reasons-why-china-will-remain-world-s-factory