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September 13 , 2007 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

The Supply Chain and China’s Dragons

I have been powerfully affected by Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition, a new book by the UK’s Peter Williamson and China’s Ming Zeng. If you are a company in North America, Europe, Japan or actually almost any region, the work should be a wake-up call to better understand and respond to the enormous competitive threat posed by Chinese manufacturers. Whatever is happening now, China will continue to impact our supply chain strategies to an even greater degree for probably decades to come.

Gilmore Says:

Haier reached its current market position, in part, not by fleeing supply chain complexity, as most developing companies are doing, but by embracing it.

What do you say?

Send us your comments here

The central point of the book is that Chinese competition today is much different than “low cost” competition from Japan in the 1960s, then later Korea and other Asian countries. In those cases, the emerging competition was, in general, more leveragable than threatening to establish companies in developed countries. This new competition was also able to be kept under control, if you will, due to the supply chain limitations faced by the new market entrants at the time.

Why is China different now? According to Williamson and Zeng, Chinese companies:

  • Are not just producing products at low cost, but using the concept of “cost innovation” to attack and eventually dominate entire product segments.
  • Can leverage their huge and rapidly growing domestic market not only to build scale, but to develop products and supply chains that dramatically reduce product and customer usage costs. That’s what it takes to succeed and build a market in China, with brutal competition and still low per capita income.
  • Have emerged in the era of a “Flat World,” in which easily accessible global supply chains flows and dramatically reduced barriers to world trade provide a platform unavailable in earlier periods for the Chinese’s Dragons to build market share world wide.

Haier, the Chinese appliance manufacturer, also stands out. For example, it used its cost innovation (manufacturing and design) to fundamentally change the “wine refrigerator” market from one characterized by high prices and specialized distribution, to a mass market product sold at Sam’s Clubs and other retail outlets. It now also has something like 60% market share.

It is also a powerful player in most other “white goods” segments. It got there, in part, not by fleeing supply chain complexity, as most developing companies are doing, but by embracing it.

According to the book, existing major players like Whirlpool, Maytag (now part of Whirlpool), and GE often “refused to accede to the request of customers for a unique product variant that would upset their well-hone supply chain designed to push through volume.”

Haier thinks differently. A Haier executive said, “Whirlpool and Maytag often say no to the hassle of customer tailoring.” Meanwhile, a procurement exec from Office Depot noted that, “We usually give our products more unique characteristics if we cooperate with Haier.”

Does the supply chain matter here? I’d say so. If fact, the authors persuasively argue that Maytag’s failure to fully understand the competition from the Chinese Dragons (e.g., it could thrive at the high end alone), and a poorly considered partnership with a Chinese company for entering the Chinese market itself, were key factors in Maytag’s eventual business troubles, leading to the sale to Whirlpool (only after it outbid an aggressive attempt by Haier to snag the company).

Ok, there’s a lot of the bad news if you are competing with China. Other than reaching for the anti-depressant, what can you do?

The book’s last chapter offers some suggestions, though I’d say they may be a tad bitter to swallow, in that the path leads through China, rather than strategies that go around it.

In fact, Western companies must move beyond thinking about China as a low cost sourcing location or even building some direct manufacturing and design capabilities there, which is often done in an attempt to enter the Chinese domestic market.

Companies need strategies from the top to create a “global China mandate,” in effect using China as the basis for your own global cost innovation strategies.

There are perils there too, it seems to me, especially around intellectual property. Intel, for example, has been criticized in some quarters for its plans to build a complete chip manufacturing plant in China for the first time, as this may accelerate Chinese knowledge and eventual direct entry into the market. But it just may be the less of two competitive evils.

There is so much more in this book, and I encourage both execs and managers to read it. You might send this review or the book excerpt to your CXO’s too. If they don’t see what is happening here, it’s time to get up to speed.

What is your take on the “Chinese Dragons” and cost innovation? What strategies can companies in the West and Japan take to compete? What is the role of supply chain? Let us know your thoughts at the Feedback button below.

Let us know your thoughts.

Want a printable version? Go to:



Dan Gilmore


New Certified Lean Masters Lean Supply Chain Training and Certification Schedule Released


This Week’s Supply Chain News Bites – Only from SCDigest

September 13, 2007
Supply Chain Graphic of the Week: Postponement Strategies and "The Long Tail"

September 12, 2007 Supply Chain by the Numbers: September 12, 2007


Can You See the Big Picture in your Supply Chain?  

JDA can make that picture clearer. Faster.

Join us at CSCMP in Philadelphia to learn more.


Our Supply Chain and Logistics stock index reflected the market’s continued overall downward spiral. Logility in the software group provided a bright spot (up 15.5%).  The week brought little movement in the hardware group, and sent most transport stocks sharply lower. 

See stock report.


Global Supply Chain: How CIMC Became the Dominant Ocean Container Manufacturer in the World

Excerpt from “Dragons at Your Door” Demonstrates Competitive Power of “Cost Innovation” by Chinese Manufacturers; How can Western Companies Compete?

Supply Chain Tip of the Week: Improving Piece Picking Productivity by Reversing Picks in a Zone

Technique is Especially Suited to Voice Picking; 10-15% Efficiency Gains?

Transportation News: ATA Makes Strong Case in Court Filing to Delay Enforcement Appeals Court Decision Striking Down Key Provisions of Hours-of-Service Rules

Decision Overturns Changes Favorable to Carriers and Shippers While Leaving Negative Rule Changes in Place; Carriers Can Not Simply Amend Processes and Systems on a Dime

This Month's Supply Chain Marketing News Exclusively for Supply Chain and Logistics Solution Providers

Expert Insight:
Living Supply Chains

Dr. John Gattorna

John Gattorna It's People That Power Enterprise Supply Chains; But Where are the HRM Professionals?

Supply Chain Executives Need to Reassess their Approach to People and Culture to Achieve their Goals; How would you Respond to Gattorna's Six Questions?


Q. In the 1990s, there were two large trade shows dedicated to automatic identification technologies. What were these now long gone events?

A. Click to find the answer below


Reader Question: Why Isn't Port Congestion at U.S.Ports an Issue Any More?

Reader Question: What Kind of Savings Do Companies See When They Implement EDI Transactions With Their Suppliers and CMs?

If you have supply chain or logistics related questions you need answered, ask our panel of experts

Share your insight.



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Feedback is coming in at a rate greater than we can publish it - thanks for your response.

We're really behind again - bear with us. But keep the letters coming!

We received a number of letters from our First Thoughts piece a few weeks ago on "The 50% Problem Revisited," which discusses the tendency of almost everyone to over rate their own supply chain and logistics performance. It's a good piece - take a look if you missed it.

Our feedback of the week is from Kate Vitasek of Supply Chain Visions, who offers a number of ideas on sources for benchmark data. We also have a letter from a director of logistics who says his company is a prime example of this syndrome, as well as others on the topic.

You’ll find several other good letters on this topic as well below.

Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the Week – On the 50% Problem

I loved this article when it ran before – and I was happy to see again. I have actually taught this concept in my classes for over 5 years.

As for feedback – I agree with you that the best way to really understand how you are doing is to benchmark.For some – they need this to provide a wake up call that they really are not doing “above average”.Fortunately benchmarking data and information is far easier to get now than it was 5 years ago because the professional associations in the field have invested in benchmarking tools and resources to help practitioners.Today companies can use good benchmarking resources from WERC, CSCMP and APQC that are cheap (or even free) to get comparables.

For quantitative data, companies can turn to the Warehouse Education Research Council’s annual benchmarking study which lists some great benchmarks for distribution centers (it is free to all WERC members and it’s cheap to join).APQC offers free benchmarking in all areas of the supply chain for companies that are willing to collect their data and enter into the APQC benchmarking database (it’s not easy – but it is comprehensive and free).

And of course, the Council of Supply Chain Management Professionals has the Supply Chain Process Standards which provide suggested minimum practices and best practice benchmarks for over 200 different supply chain activities.

For companies that are unsure how to get started – WERC offers a great 2 day seminar (title Benchmark NOW!) which is being offered in October.

Kate Vitasek
Founder and Managing Partner
Supply Chain Visions

More On the 50% Problem:

You described our company's scenario almost perfectly. I recently accepted this new position here, and was told repeatedly during the interview process what a leader we were in supply chain and logistics.

I now know there was simply no basis for this perspective. We're good in some things, not so good in others, but the main point, as you said, is that we take it as a matter of faith that we are a leader in process and results, without any basis at all really for thinking so.

Would it pay to rock that boat? For me, not yet.

Director of Logistics
Apparel Company
Name withheld by request

Good article on the 50 % solution… the comments, suggestions and recommendations are spot on!

I’d offer up that if you get the right people on your team and in the right roles, if you clearly define and put discipline into your business processes, if you automate thru state of the art technology as many of your processes as practical, if you measure every aspect of your business (including benchmarking your competitors) then you will likely get the results that you need to be successful with your customers.

Keep those insights coming!

Paul T. Newbourne
Vice President & General Manager
Leveraged Execution Providers (LXP)

You're exactly correct. It's far easier to claim success than admit you're less than ideal. The only time people really confess their problems is when they're losing money and can no longer deny. It's very easy to improve your inventory returns by excluding items that you over-bought that just won't every move. Anyone can have industry leading turns with a little magic. Or, by the way, our industry is unique (sic). Imagine that.

Right on with this problem.

Robin P. "Rob" Williams


Q. In the 1990s, there were two large trade shows dedicated to automatic identification technologies. What were these now long gone events?

A. Scan-Tech and ID Systems. The two shows combined at one point under the Scan-Tech banner, then morphed into a new show called "Frontline," which tried to take a broader supply chain focus, but was ultimately shut down a few years ago.

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