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
"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