The decision about whether to keep manufacturing in China or seek other sources must take into account multiple factors, some of them less obvious than others, says Mark Baxa, president and CEO of FerniaCreek LLC.
SCB: What should companies be thinking about today, as they struggle to balancing sourcing decisions against the backdrop of the U.S.-China trade war?
Baxa: For the last year and a half, supply chains have been on a crazy ride. Most companies have either fixed or very well-established relationships in China. They’ve become accustomed to its costs, quality and service levels. Now, with this sudden shift, supply chains are having to learn about agility and preparedness for more variability than they’ve had to deal with in the past. Alternative sourcing strategies are becoming more the norm — shifts from China to Vietnam, for example. But we’re reaching limits to capacity in many industries that already source out of Vietnam. Same thing for South Korea. We’re learning that diversification will be a very big part of the supply chain of the future.
SCB: Some of this shift was already starting to happen before the trade war broke out. Wages in China were going up. There was talk of diversifying production to other countries, especially in Southeast Asia. That raised the question of whether other countries could provide the same scale of manufacturing as China. Now it seems like companies have no choice but to diversify.
Baxa: We’ve got to figure this out. Infrastructure varies by country. China’s has become much more established over time. We helped that to build out that infrastructure to accommodate the massive amounts of exports out of China into the U.S. and Europe. Now, lead times are longer, and wages are higher, but supply chains don’t allow for rapid movement. We’re at an inflection point, where we’ve got to make decisions based not only on cost to operate, but also quality and cost to serve. It’s is a very difficult position to be in right now.
SCB: Might one result be that companies decide to diversify sourcing more than before, to alleviate risk?
Baxa: I’m seeing more companies do that than not. It’s going to take time to fulfill the move from China to a more diversified, multi-country sourcing portfolio. It requires more investment in management and oversight.
SCB: If you couch it in terms of risk management, recent natural disasters like tsunamis and floods should have taught companies that they can’t put all their eggs in one basket. Even though it costs more to diversify sourcing, it becomes an essential thing to do down the line because you’re saving money in the long run. Do you make that argument to a CEO?
Baxa: I would very easily do so. It’s not just about the mechanics of the supply chain and the quality of the product. We also have to understand the various legal requirements and compliance aspects. We need to know how we can meet the permissions and requirements to get something into the U.S. from other countries. Diversification comes in a number of forms. When I’m talking to CEOs about how they’re thinking about their supply chains, their goals are meeting quality standards and timing of delivery. Those things aren’t easily sustained when you shift quickly away from China, to new suppliers that you’re not familiar with. It’s going to take time, but it has to become the norm in investments, people and infrastructure, in order to survive in other countries going forward.
SCB: What about the joint trade and government programs that are available for companies to take advantage of? How are they helpful, and how are companies availing themselves of them today?
Baxa: If you’re in Europe, you’re talking about the Authorized Economic Operator [AEO] program. In the U.S., it’s the Customs-Trade Partnership Against Terrorism [C-TPAT]. I firmly believe that these programs afford benefits. They require an investment, but it’s about speed to market. When you have two to three days of working inventory in your supply chain, if you can shrink your lead time by managing that inventory in a faster pace, you’re going to gain.
The hard part is that in the U.S., we’re beginning to see a shift from just supply-chain security to folding that effort into a compliance-based play. So in the future, if you’re a C-TPAT-validated company, you might also have to comply with programs like Importer Self-Assessment [ISA]. That’s a very high standard for compliance, and has not been a part of C-TPAT. In order to maintain benefits, you might also have to prove yourself from a compliance perspective.
SCB: C-TPAT up to now has been a voluntary program. Do you think this will continue to be the case, or will companies be forced to participate in order to avoid delays in their shipments being cleared?
Baxa: I think we’re still in a period of volunteerism. With the U.S. and European governments’ help, we might work toward a more mandated platform — certainly as the idea of protecting the interest of the public becomes more of a trade responsibility.
SCB: Will participation be necessary for companies to compete in global markets?
Baxa: When you can increase your speed to market by two or three days, you have the advantage of reducing potential inventory. At the same time, you’re in a more competitive position. If you’re working with the big-box retailers, they’re all demanding that you be part of this program, or have an approach that mirrors them. We’ll see if it’s going to become something of a mandate or requirement in the future.
SCB: Has the volatility and chaos in international trade come to stay, or is it a temporary thing?
Baxa: In the case of China, let’s see where these negotiations go. This is probably going to have a long tail. The best way for supply chains to protect themselves is to think about an appropriate level of diversification across a number of different countries, rather than sole-sourcing out of one. I think that’s here to stay.