Design, Plan and Implementation of Supply Chain Activities Based in China

Content

01 02 03 04

Competitive Business Environment, Focus on Asia Preparation for a Venture in China. Possible Implementation Approach. Global Integration

Competitive Business Environment Focus on Asia

Perceived Environment for Growth

Europe and USA offer long term mediocre prospects: defined market segments are mostly captured margin pressure, market volume is limited Asia is bright, the positive aspects: increasing new customer potential migration of existing customers to Asia long-term saving potential in sourcing vast HR potential learnings for future developments in products, services and processes: emergence of new competitors

Perceived Environment for Growth

Imperative to operate in Asia

price level 30 to 60 percent below Europe FX challenge USD some regional taste and preferences compete with local delivery time
Delivery Time to Customers in Days Europe China Europe China

Location of Departure Location of Arrival

Customer in China

Customer in Australia

Container loading Plant to harbour Customs at departure Seafreight/lorry Customs at arrival Harbour to customer Total

1 3 2 21 3 2 32

1 0 0 3 0 0

1 3 2 27 3 2 38

1 3 3 12 3 2

4 -88% improvement of 4 weeks

24 -37% improvement of 2,5 weeks

Modelled Economics for an Industrial Product: Produced in China and Exported to USA/Europe
Savings Percentage 100 100 20-25 Additional costs

80

5-10 10-15 5 5 0-5 0-5 50 10 70

60

40

20

0
U.S. or Western Labour European manufacturing cost Depreciation Materials, components, and tooling Scale Special LCC Logistics Other incentives manufacturing costs management cost (transportation, cost additional inventory, and expediting) Duties Landed cost from LCC

Bhattacharya, Arindam et al.: Capturing Global Advantage. How Leading Industrial Companies Are Transforming Their Industries by Sourcing and Selling in China, India, and Other Low-Cost Countries, The Boston Consulting Group, April 2004

Global Competition from companies in Rapidly Developing Economies (RDE)

Mature Markets
(Switzerland, UK, USA)

Western Company
s itie ets un rt ar k po M p ng eO isti eiz x S dE fen De

Business Location Emerging Markets

(China, India, Russia)

CEE* China Emerging Markets

(Poland, China)

Supply Base Location

Mature Markets
(Germany, USA)

CEE* = Central and Eastern Europe

Business Environment in China

Challenging place to operate: fierce competition Unpredictable (interpretation of) legal environment, constantly new laws No slow-down of growth despite governmental wording Huge amount of FDI, contrary to Japan and Korea 75% of all exports initiated by Non-Chinese companies Cost-conscious consumers, middle-class USD 5000 to 10000 p.a. Like branded products, low IPR protection, many counterfeits Cheap labour force, favourable industrial policy R&D efforts and results; catch up quickly Best Chinese companies go abroad: winning by quality

Competitive Business Environment for Industrial and Commercial Products in China

Domestic producer improve quality, diversify with own products, dominate mid/low market Foreign products only for highest price niche Fragmented market with locally dominant players that sell direct, high degree of vertical integration price level
Europe

China

China Leads the World in Making and Consuming Many Products

Hemerling, Jim / Hsu, Hubert / Michael, David C. / Wong, John: China: The Pursuit of Competitive Advantage and Profitable Growth, The Boston Consulting Group, June 2003

Chinese Companies deinvent manufacturing: use of cheap capital and simple manual labour

Cowan, Jonathan et al.: Riding the Next Wave of Outsourcing, The Boston Consulting Group July 2004

Preparation for a Venture in China

China Supply Chain Strategy Options

Testing the water

Recognize Chinas
potential

Purchasing components or complete products

Developing comprehensive sourcing

Adopting an integrated China strategy

Capturing global advantage

Exploit global synergies

in: - cost structure - manufacturing strategy - supply chain

Sourcing plan includes

- parts - products - talent/R&D

View China as both a

market and a sourcing location

May source some

products on a trial basis

Focus on reducing
purchasing costs

Leverage synergies
between export sourcing and domestic production - integrated capacity planning - flexible production

Leverage best global

capabilities

Obtain valuable
understanding of the supply base

Advantage gained from

- supplier relationships - product development - proprietary tools and processes - market intelligence

Deploy high-cost assets

Have no formal
China initiatives

Are not yet

organized for sourcing in China

But gain little defensible

advantage

Creating global centres of

excellence

Level 1

Level 2

Level 3

Level 4

Level 5

Hemerling, Jim / Hsu, Hubert / Michael, David C. / Wong, John: China: The Pursuit of Competitive Advantage and Profitable Growth, The Boston Consulting Group, June 2003

Often Supplier Clusters for an Industry

Objectives reduced to SCM topics in China

Functional objectives: Competitive, high quality products for Chinese and Asian market. Comply with local laws, rules and regulations, respect Company guidelines. Build a local network with guanxi relationships, integrate local authorities. A structure to learn from China, to transfer experience to other countries. Economical objectives Reduce the total costs of parts, components and products by 20 to 50 percent (TCO). Be profitable with the Chinese supply chain operation 2 years after launching it. Reduce customer lead time to local standards in China. Develop, source and manufacture products that meet local expectations Ecological objectives Vendors must comply with the Companys environmental standards.

Strategic Options
The Boston Consulting Group, Avoiding Stalemate in China, 2000, p. 3

You are the national leader

Protect and leverage leadership position to improve profitability - reap rewards from both scale and brand leadership

Make your brand the reference for the category (e.g. Kleenex for facial tissues) - Accelerate category-definition process among target consumers

Competitive Position

No players have distinctive advantages

Invest or acquire to secure leadership or retrench to your niche - Base decision on anticipated size, timing, and risk of the ultimate payoff

Build on the momentum - Become a trend leader - Perhaps lobby for structural advantages

Another player dominates

Reevaluate ambitions in China - Extend portfolio into less defined categories - Perhaps lobby for structural advantages - Acquire, find a niche or exit

Alter the playing field - create a trend in the way your product is used or perceived - perhaps lobby for structural advantages

High

Low

Category Definition

Possible Implementation Approach

Criteria for Supply Chain Design in China

Operational efficiency (efficient production, manage inventory, VAT refund process, minimal administration, total cost of ownership) Process quality and transparency (robust processes, quality control and environmental standards, ease to understand the framework, visibility of events) Compliance with legal requirements (laws and regulations in China, Company guidelines) Time effectiveness (delivery time, setting priorities, direct contacts) Social factors (understanding with Chinese suppliers, contact to local authorities, retain employees and management)

Rational for Optimism to Succeed

Possible to transfer the successful supply chain model Combined own experience of outsourced production to suppliers manage distant production location (USA) develop supply market in a region of RDE Rapidly Developing Economy (Eastern Europe) Being able to reduce complexity (new: personnel, location, language, culture, suppliers, legal/rules, product, ERP)

Possible Selection of Perceived Challenges in the Beginning

Quickly find and develop qualified suppliers takes 1-2 years. Keep the required quality level of parts. Major delays during foundation procedure, unforeseeable requirements. Find and retain crucial personnel in purchasing, quality and logistics. Build guanxi relationships with local authorities. Support of key management personnel from Europe.

Possible Selection of Perceived Challenges in the Beginning

Run the production within capacity limits. Get the ERP system running Manage liquidity to survive the tedious VAT refund process and artfully balance the DSO for buying/selling terms. Chinese counterfeits undercut own products drastically in price with good quality. Own products Made in China will not be accepted.

Predetermined Scope of Options for Supply Chain Design in China

Location I Location II Legal Business Licence Building Production spectrum Choice of products SCM activities Management Staff Product Development Financing Quality Suppliers IT Software close to customers industry park WFOE production company build full product spectrum develop new products outsource all SC activities in China (involve agents) only locals at home with share capital domestic Chinese 2 years ahead wait and see close to suppliers local offer JV expanded FIE buy limit to 1 division modify existing reduce to key success functions in SCM mix locals with expats mix of home and local suppliers loan (foreign/RMB) regional Asian 1 year ahead locally known close to harbour free trade zone M&A trade company rent core product(s) bring in existing complete inhouse expats only cooperation with CN suppliers prepayments corporate standard parallel with foundation corporate standard

The Province Guangdong

Guangdong has ca. 90 million inhabitants, in sq.km. half the size of Germany - Major supplier cluster of the selected industry; 90% of all suppliers within 1-3 hours of location - Low production cost, also long term - Foreseeable rule of law, non-corruptive customs in selected location - Experience with foreign companies in selected location, professional service attitude

Some Learnings for Setting-Up a Company in China

Start simple with focussed objectives. Involve top management, build success stories Physical proximity is key, ideally own local personnel. Existing suppliers need minimum size to quickly relocate to another continent. Incent R&D to use new suppliers create successful products Applied Engineering new cost base offers alternate product offering. Sales welcomes savings but not delays no frictions during transition. Savings in production/logistics do not lead to savings in sales. Yes and Yes and No be aware of cultural differences.

Global Integration

From National Sourcing to Global Integration

4
Factory in the USA

4
Factory in China

3
Factory in Europe

1. National sourcing 2. Suppliers abroad

2
Suppliers abroad

3. Global expansion 4. Global sourcing 5. Global integration

Trent, R. J. / Monczka, R. M.: International Purchasing and Global Sourcing What are the Differences?, in: The Journal of Supply Chain Management, Vol. 39, No. 3 2003; Kaufmann, Lutz / Hedderich, Fabian: A Novel Framework for International Sourcing Applied to the Emerging Chinese Supply Market, in: Perspektiven des Supply Managements Konzepte und Anwendungen Festschrift fr Ulli Arnold, Eds. M. Eig, Berlin, Heidelberg 2004

Global Activities form the Supply Network: Next Step: Plan and Control
Global Plan Global Sourcing Global Production Global Distribution Global Control

Global Sourcing Global Production Global Distribution

Global Sourcing

Complexity of Supply Chain

Global Distribution

Global Distribution

time Increase in complexity: products, variants, locations, customers, time zones, languages Need for global standards in part numbers, supplier evaluation, HR, IT, processes Facilitate communication, BDPs, mutual learning, know how transfer Fulfil requirements like VAT, customs, transfer pricing rules, taxes