China Sourcing – A Potential Strategic Trap?

This is what a Boston Consulting Group study has to say on this:

SUPPLY CHAIN DELAYS, DISRUPTIONS MAKE CHINA SOURCING A POTENTIAL STRATEGIC TRAP
 
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) say.

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 barrier."

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 warn.

Strategy Needed

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 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 exploited."

4. Explore shipping alternatives, such as air freight, "that may appear costly but may actually lower overall expenditures by reducing hidden costs."

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 congestion.

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 scheduled.

Stalk and Waddell offer a brief reminder: Success depends on providing
customers what they 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.

Source: Anonymous (Boston Consulting Group).
“Supply Chain Delays, Disruptions Make China Sourcing a Potential
Strategic Trap.” COMTEX, 9 May 2007.