SCDigest editorial staff

The News: A recent report by McKinsey finds that despite the rapid growth in sourcing goods and components from China, most companies have only partially realized the potential advantages and savings.

The Impact: Companies (and executives) must realize global sourcing efforts take time to evolve; achieving those benefits might mean continuing to move responsibility and decisions from the home base to China offices.

The Story: A recent study by management consultants McKinsey has found that companies currently sourcing from China believe their performance and results have room for considerable improvement.

The study results are interesting both in their own right, and also because (as we’ve noted before in SCDigest) in general companies tend to overrate their own supply chain performance versus their competition. Conversely, in the McKinsey study, a majority of the 39 respondents felt their companies were performing below average in Chinese sourcing operations (see figure below).

Source: McKinsey Quarterly

“US companies have captured only a fraction of China's potential as a source of low-cost products and plan to strengthen their purchasing activities in the country, despite high employee turnover and other difficulties,” study authors Jimmy Hexter and Ananth Narayanan write.

For example, on average respondents believed they were currently only sourcing 30% of the total products they ultimately could source from China, a figure they expected to grow to 50% in three years. This is a substantial expected increase, with still large room for even more growth (above the 50% figure) that will have a huge impact on a company’s supply chain and even fundamental business strategy.

A variety of issues, from turnover among employees in China to cultural and language barriers, are preventing companies from increasing more rapidly the level of Chinese sourcing, and also achieving the maximum potential savings. McKinsey estimates that Western companies have only captured about 25% of the total potential savings available from their Chinese sourcing operations.

A key element of capturing that full value, however, is giving up more and more responsibility and activities to the Chinese operation. For example, although only 14% of respondents were doing product design engineering in China currently, 50% expect to be doing so in three years. 34% today allow Chinese offices to improve prototypes; 68% expect to be doing so in three years.

By moving some of these responsibilities, improving the “workflow” and communications between headquarters and Chinese offices, and putting more effort into selecting and grooming local suppliers to Chinese factories, companies can reduce both cost and lead times, and improve product quality. The report cites an example of a European apparel company that has been able to reduce the cycle from design to order placement from 24 to 12 weeks by just re-engineering the business process.

Of course, moving more responsibility to China has many impacts – perhaps a further reduction of domestic employment levels. Even without such reductions, resistance from the home base used to calling the shots is likely.

As the authors note: “A prerequisite for giving an office in China more authority—and for raising the volume of goods purchased there—is the ability to instill greater confidence about Chinese staffers, suppliers, and products among the company's internal customers, many of whom prefer to buy from familiar suppliers.”

The bottom line: few companies have really achieved the savings potential that is possible or that they expected from their Chinese sourcing operations. A lot more benefits can be achieved, but don’t necessarily look for great support even among the white collar members of the team.

Do you agree that most companies are only scratching the surface of their potential Chinese savings? Do you expect to see more and more autonomy and functional activities, such as product design, moving to China as well? Let us know your thoughts.