Supply Chain Delays, Disruptions Make China Sourcing a Potential Strategic Trap, New BCG Report Warns

North American and West European Companies Should Consider Options Closer

to Home; Develop Back-Up Plans, Including Additional Use of Air Freight;

and Explore Ways to 'Squeeze Time' from Delivery Cycle

May 09, 2007, 01:00 ET from The Boston Consulting Group

    BOSTON, May 9 /PRNewswire/ -- Congestion at North America's West Coast
 ports and continuing capacity problems at major European ports have
 complicated the China sourcing equation to such an extent that companies
 need to consider alternatives, experts at The Boston Consulting Group (BCG)
     While the situation is worse in North America than Europe and likely to
 worsen even more, say George Stalk Jr., a BCG senior partner based in
 Toronto, and Kevin Waddell, a partner in BCG's Warsaw office, companies in
 both regions need to look closely at the effects such transportation
 bottlenecks can have on their profits and reevaluate their manufacturing
 and distribution assumptions. With no solution in sight, they say, many
 U.S. companies may be better off manufacturing in Mexico or at home, though
 labor and other costs are significantly higher than in China. Similarly,
 West European companies that now source from China may want to switch all
 or part of their manufacturing operations to Central and Eastern Europe.
     "In their rush to source from China," Stalk and Waddell write in the
 newly published BCG report, Surviving the China Riptide: How to Profit from
 the Supply Chain Bottleneck, "many companies are blindly walking into a
 strategic trap.
     "The trap is thinking that sourcing from China will result in lower
 product costs, when in reality the supply chain dynamics will, in many
 cases, drive up overall costs and reduce profitability."
     The BCG experts conducted a number of simulations and found that the
 China manufacturing "advantage" quickly disappears when companies have
 problems getting goods to market in a timely fashion.
     While there is still some excess capacity at major European ports, and
 steps are being taken to expand capacity, the situation in the United
 States is far more serious and far more complicated - with many ports
 experiencing virtual gridlock. Because there is no politically viable
 solution, they say, the effective result is "a giant non-tariff trade
     Indeed, the U.S. problems extend far beyond clogged ports. "Existing
 rail infrastructure to disperse the flood of goods from China ... is also
 being strained, with freight out of Los Angeles and Long Beach [America's
 busiest ports] already very near capacity and freight out of Oakland,
 Seattle and Tacoma expected to reach capacity in the next couple of years."
 With no major projects to expand U.S. rail capacity currently on the
 drawing board, this problem will also worsen over time, the BCG experts
     In view of these problems, Stalk and Waddell advise senior corporate
 officials to take a sober second look at their China sourcing and consider
 a variety of options:
     1. Bring manufacturing home.
     2. Build "land-side" capacity at ports not yet overwhelmed by congestion
        (a solution that is probably more applicable in Europe than the United
        States, where environmentalists routinely lobby against the expansion
        of existing facilities).
     3. "Aggressively manage" their China-based supply chain, "looking for ways
        to squeeze time from it that competitors haven't identified or
     4. Explore shipping alternatives, such as air freight, "that may appear
        costly but may actually lower overall expenditures by reducing hidden
     5. Invest in "premiums" and "capabilities" - paying higher prices, for
        example, for priority service ("premiums") or improving the company's
        own abilities to move goods quickly and efficiently past or around
     6. Diversify supply with "multiple suppliers and supply points" or produce
        critical components and products domestically, accepting higher
        production costs as a tradeoff for lower supply-chain costs and
        reliable delivery schedules.
     Stalk and Waddell offer a brief reminder: Success depends on providing
 customers what want when they want it.
     Supply chain disruptions undercut the ability of manufacturers and
 retailers to satisfy these demands. They also add costs by forcing
 companies to increase inventories, juggle production and shipping
 schedules, and discount the prices of goods that weren't in the right place
 at the right time.
     The greatest cost of all, however, the BCG experts say, is a hidden
 cost: the "unrealized" profits companies lose when they can't meet their
 customers' needs. That's the side of China sourcing that global companies
 are just now starting to face.
     About The Boston Consulting Group
     Since its founding in 1963, The Boston Consulting Group has focused on
 helping clients achieve competitive advantage. Our firm believes that best
 practices or benchmarks are rarely enough to create lasting value and that
 positive change requires new insight into economics and markets and the
 organizational capabilities to chart and deliver on winning strategies. We
 consider every assignment to be a unique set of opportunities and
 constraints for which no standard solution will be adequate. BCG has 63
 offices in 37 countries and serves companies in all industries and markets.

SOURCE The Boston Consulting Group