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September 11, 2015
China slowdown and your supply chain strategy
By: Ops Rules Team

In a recent HBR piece,You Can’t Understand China’s Slowdown Without Understanding Supply Chains, David Simchi-Levi describes how the current slowdown in China is partly related to the decision by companies in recent years to move production closer to their markets. So for the US market, they would typically move to Mexico, for Western Europe to Eastern Europe etc. This is related to various factors such as higher labor costs, increased risk, changes in oil price etc.

Beyond these quantitative factors there are other benefits to near-shoring – customers appreciate locally-made products. For instance “Made in America” is a claim that many consumer companies like to make, even though as Consumer Reports uncovers, this is not always exactly true.

For every industry or company, the mix of locations and strategies depend on their specific circumstances. As the HBR article notes “For high tech industries (e.g., the manufacture of laptop computers and mobile phones) recreating the infrastructure in China somewhere else would be expensive and difficult to do. In contrast, it will be easier for footwear and apparel companies to move to lower-cost locations. Manufacturers of heavy products such as appliances or cars that are heavily influenced by shipment costs may find it pays to move production closer to market demand.”

These types of trade-offs are what we have been working on with companies for many years. There are quite a few ways to look at these considerations:

  1. Network design trade-offs – near-shoring can be done in manu ways so you need to make sure that the various short-term and long–term costs are taken into account. Over ten years ago, we worked with an appliance manufacturer on where to locate their plants in order to efficiently service the North American market. As a result, they decided to move production to Mexico from Asia. Nowadays, both GE and Whirlpool source most of their US appliances from Mexico.

  2. There are many good options - One important attribute of network design that helps with this is the flat around the optimum. This means that there are many good solutions that are about the same optimal cost so decisions can also include other considerations such as risk, quality and brand preferences.

  3. Segmentation – Not all products are the same so you may need different strategies. When Dell performed its detailed segmentation transformation for its products it left the production of the lighter notebooks in Asia while it moved PC manufacturing and assembly closer to the customers.

  4. Risk trade- offs – In order to protect against risks companies can consider various strategies such as more locations, more inventory etc. In order to understand the risks, drivers and costs they need the ability to assess these and weigh the trade-offs. David Simchi-Levi’s Rise Exposure Index is influencing the assessment of global economic risk as described here.

  5. Inventory Location – Inventory can be placed in different facilities in the supply chain taking advantage of push-pull strategies and risk pooling. In addition, smart strategies such as postponement can take advantage of localization to finalize certain assembly or packaging decisions.

As the HBR article concludes: "The bottom line: Companies need to evaluate on an ongoing basis whether the trade-offs for their particular industry have shifted enough to justify a change in their sourcing strategies.”

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