Supply Chain Infrastructure

The Chinese economy has been growing rapidly despite an underdeveloped supply chain network. Most Chinese manufacturing companies do not yet rely on supply chain systems, but the environment is becoming increasingly competitive and many enterprises will find it difficult to survive if they do not make their sourcing, production and distribution more efficient. That makes the supply chain management market potential enormous.

China’s underdeveloped transportation infrastructure, fragmented distribution systems, limited use of technology, shortage of logistics talent, regulatory restrictions and local protectionism still limit the efficient distribution of domestic and imported products. Yet, the growing number of foreign invested companies and multinationals entering China are aware of the importance of supply chain.

“I think the pushers are foreign invested companies, manufacturers and retailers,” said Max Henry, founder and executive director of the China Supply Chain Council. “Now there is a new wave of interest for our discoveries from the medium-size Chinese manufacturers.”

Though supply chains in China are similar to those found elsewhere, the concept of supply chain management is a bit different. In Western countries, most think that supply chain management is just an extension of logistics management, but China takes a fresh approach. The influence of foreign investors is forcing China’s manufacturers to learn about supply chain management.

“They are fresh as they are learning from basics so that, in the long term, manufacturers will have better knowledge of SCM than some other Western companies,” said Henry.

In most regions, the majority of industries find supply chain excellence has become a key driver of value and competitiveness. This is also true in China, even though the local supply chains of multinational corporations, as well as those of Chinese private and state-owned companies, tend to be more fragmented and less competitive than their counterparts in the United States and Europe. By some analysts’ estimates, SCM in China remains three to five years behind the West.

Supply chain decision makers are faced with many obstacles before they can develop a strategy. Companies then may have to invest a couple of years before they are able to set up a supply chain system in China.

A further stumbling block for joint ventures is that the Chinese joint venture partners often have a rather different background from their foreign counterparts. The Western-style management approach is faced with a corporate mentality that is mostly interested in growing production rather than productivity.

According to Horacio Tucunduva, quality director for Asia Pacific at one of the world’s 10 largest auto parts manufacturers, the West’s systematic and optimizing auto supply chain sourcing process clashes completely with local SOEs’ backgrounds.

The sourcing process, for example, is used primarily “to generate turnover for somebody and not focused on cost reduction or even quality,” said Tucunduva. “The sourcing process is based on friendship—on whom I know and who knows whom I know.”

Many companies work in conditions where there is no one available who can use a computer, do sourcing or purchase electronically. There are no purchase orders, no invoices for receivables, and much of the work is done by hand. This makes it hard to collect data, analyze the supply flow and design a strategy, added Tucunduva.

CSCC’s Henry argues that the lack of good qualified middle management staff is striking. “They do not always have management skills, and they are actually just at the start of the process,” said Henry.

One of the key points to supply chain development for any company in China is the development of supplier quality, added Tucunduva. The ability to evaluate the supplier’s capability and define an action plan for improvement is very important.

“There are many who want to make business with major companies, but they are not capable,” said Tucunduva. “So you have to spend time to support these people and improve them.”

(With Betta Plebani.)

This article was originally published in CIO Insight, but is no longer available.