The Hindu Business Line : Is China's supply chain sustainable?

Many a supply chain originates from China, and each has its pros and cons. The international community and sourcing companies need to take a long hard look at the emerging supply scenario.

The world is changing fast, thanks to globalisation that has integrated economies, people's movement and knowledge. Take the case of global trade, which has been growing faster than the world GDP. Cumulatively, these changes have resulted in new phenomena, the full implications of which are not yet completely understood, realised or factored into decision-making — either at the national or international levels.

Historically, international trade evolved largely at the two ends of supply chains — either for procuring primary products or for selling final products. Primary products were procured both as sources of raw materials (for instance, minerals) and for consumption (for example, agricultural products). Supply chain management attempts to manage flows of materials and information with the twin objectives of strengthening and optimising the whole length rather than individual links.

From the second half of the last century, physical flow of materials as well as virtual flow of information are becoming less expensive due to economies of scale and technological changes. So, more efficient supply chains that transcend countries have been developed. But such fragmentation has made supply chains more complex and difficult to manage. The recent emergence of China as a manufacturing hub has added a new dimension to the fragility and vulnerability of global supply chains.

The global producer

China is emerging a major global producer and in many sectors is already the dominant player — garments, computer hardware, steel and chemicals, both bulk and speciality. Chinese products are not only price- competitive but seem to offer value for money. In India, often the quality of Chinese goods is under-estimated, but it is important to realise that quality and grade are not the same thing.

Generally the lower grades of Chinese products are seen in India. The higher-grade products can be seen in stores and malls of the developed world.

In fact, this highlights the ability of the Chinese manufacturers to satisfy the needs of all categories of customers. Chinese producers make not only the inexpensive mass-produced shirts but also trendy fashion garments for women.

Win-win for all

As a manufacturing hub — particularly for consumer goods — the Chinese are able to offer many advantages such as the range and variety of designs. By supplying customers in different parts of the world, the Chinese have learnt to cater to local tastes and preferences and have emerged as repositories of global designs.

At the micro-level, companies are raising the efficiency of their supply chains by streamlining them. This means building long-term relationships and includes supply consolidation, global sourcing, implementing the lean approach and outsourcing.

While supply consolidation implies moving from many to a few suppliers, global sourcing has the potential to cut procurement costs, and the lean approach of lowering inventory costs and outsourcing makes production less expensive and improves service levels.

Though successful, this approach opens up new risks. For example, many firms are now becoming aware of the risks of having a single supplier and of the need to have a responsive supply chain to mitigate the effect of possible disruptions.

However, as a common link, China is fast emerging a nodal point for many global supply chains and consequently all these sources are vulnerable to what happens in that country. It is time that individual nations, the international community and sourcing companies took a long hard look at the emerging supply scenario.

(The authors are professors at the International Management Institute, New Delhi.)

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