Supply Chain Challenges

About two dozen supply chain executives from around the world gathered here earlier this month to discuss the business-technology challenges of managing their dispersed and diverse supplier networks in China, a country rich in opportunity but short on support infrastructure. Sponsored by the Supply-Chain Council and GeorgiaTech’s Executive Masters in International Logistics program, the Supply-Chain Executive Forum attracted senior supply-chain managers from Lowe’s Companies, Sealed Air Corp., BMW Manufacturing Corp., The Walt Disney Co., Motorola Corp.,  Hewlett-Packard Co.,  Intel Corp., and Dell Inc., among others. Carrefour China president Jean-Luc Chereau kicked off the forum with a presentation about the logistical difficulties of distributing retail products within China, a market that accounts for 22% of the world’s population.

Carrefour entered China in 1995, and now has 73 hypermarkets in 28 of the largest cities. The company had €2 billion in sales last year, and was the leading foreign retailer in the country. Size and geography creates its own set of problems for the company. Carrefour has 9,000 different suppliers in China, shipping 250,000 different products. A typical store would have about 40,000 different products, he said. However, there is no nationwide distributor in China. In fact, the country’s fleet of five-million delivery trucks is distributed among four-million different transportation companies — an average of just over one truck per company. And the distances are huge. It takes seven days to ship a product from Shanghai to Urumqi in the far west of the country. Meanwhile, local politics can hinder products shipped from one province to another, and in some places the physical infrastructure is just being built. Supplier service levels are also unstable. Carrefour has to teach suppliers how to do business with the company and provide many of them with computers.

Systems Disconnect

The technology used by suppliers — or lack thereof — is an issue for other companies doing business in China, as well. At Rosemont, Ill.-based World Kitchen Inc., for example, whether or not a supplier has ERP installed makes a big difference. Wilfredo Tan, the company’s managing director for the Asia Supply Chain, buys cookware from hundreds of factories in China. Without ERP, World Kitchen must have its own engineers and quality control people at some suppliers’ factories to monitor daily production. Having an ERP system in place is also a good indicator that a supplier has internal processes and procedures under control, he added. “If they don’t have ERP, their procedures are a little unstable,” Tan noted. World Kitchen’s technical experts will work with suppliers to install management systems. “We walk them through what we want them to have,” Tan said. “Our IT people come out and do their own evaluation.” ERP can help alleviate some of the cultural barriers to communication between Chinese suppliers and Western companies. “It makes it more convenient to communicate with each other, and helps with forecasting and planning,” Tan said. Having access to production data means that suppliers don’t have to give bad news in person — a common problem in Asia, noted John Oska, regional supply chain manager for Asia Pacific at Sealed Air Corp., which is building a new plant in Shanghai, in addition to two small plants already in China.

Global Pursuits

For Ying Wu, executive director of business transformation for global supply chain at Lenovo Group, the main challenge this year is to integrate the company’s supply chain with that of  IBM‘s PC unit, which it recently acquired. As of October 2005, Lenovo started the first step of the integration, with a unified global procurement function.

“Over the next two to three years, we will be building a best-practices supply chain network,” he said. “Another long-term priority is global planning.” Technology executives present at the forum said that, for the most part, sourcing critical components was straightforward since there is a high barrier to entry in these businesses and suppliers tend to be very mature and well organized. That’s not always the case for distributors, however — Lenovo’s Wu explained that mom-and-pop store owners in China now send text messages on their cell phones to report daily sales data, since many don’t have access to the Internet and the company’s Web-based or EDI interfaces. Another presentation, by Chris Gubbey, executive vice president of Shanghai GM, a joint venture between GM and the Shanghai Automotive Industry Corp., chronicled the long, hard road to automotive manufacturing success in China. GM entered China in 1999. By 2000, Shanghai GM only produced 30,000 cars.

“It was a pretty depressing period,” Gubbey recalled. Since then, the country has become the company’s second most important market, Gubbey noted. After the World Trade Organization (WTO) agreements in 2003, the market grew 60% for two consecutive years — and Shanghai GM’s sales grew 90%. The company expects to sell 400,000 vehicles this year.

“In 2001, China was the seventh-largest automotive market in the world,” he said. “In 2005, it was second only to the United States — and the untapped potential is still huge. It is the world’s fastest-growing vehicle market.” Gubbey admitted that there is some overcapacity in the domestic industry, but said that there were still huge opportunities in the country. Still, challenges remain. For instance, to avoid import duties, a car has to be made at least 40% from local components — and Shanghai GM aims for 80% within a couple of years of the launch of a new vehicle.

As a result, the company works with 276 local suppliers, most of them joint ventures with foreign companies, which presents inventory management and other logistical challenges. Shanghai GM is now implementing a lean warehousing system to support an important initiative: to reduce sticker prices, due to increased competition from both local and foreign auto manufacturers. For example, the cost of one car model was around 100,000 yuan ($12,400) when it was launched a couple of years ago, and has been brought down to 68,000 yuan ($8,460).

This article was originally published in Managing Automation, which has since ceased publication.