December 08, 2011 at 9:18 AM

Contributed by Vantage Partners

For many years, global companies have been shifting spend to suppliers in low cost regions, especially in China and other east Asian countries. Up until very recently, the primary driver was the significant labour arbitrage opportunity. With wages in much of Asia - particularly China, India, Malaysia, Vietnam, and the Philippines - a fraction of what they are in developed Western countries, many goods could be manufactured at significantly lower cost, and similarly, many services, from call centre support, to software development, could be sourced at significant savings.

Results for many companies have been mixed, however. Quality problems have been common, and costly. Moreover, many underestimated the transportation costs and logistical complexity associated with a global supply chain. The net result is that actual savings realised by organisations were often a fraction of what was projected.

Moreover, when negative impacts to revenue associated with supply chain difficulties are factored in; the net impact of shifting significant sourcing to low-cost Asian suppliers has actually been negative in many instances. In a 2007 study, nearly 20 percent of respondents reported that the costs of sourcing from China can exceed the savings. 

During the past years, several major Western brands such as Mattel, Apple, and Iams have endured costly and highly publicised problems caused by their Asian suppliers (e.g., dangerous levels of lead in children’s toys, poor treatment of workers,  and pet food contamination and associated  pet fatalities).

Moreover, when compared to the performance of their suppliers in other low cost countries, Western companies report being significantly more dissatisfied with their suppliers across Asia - with Thailand being the most satisfactory, and India the least. 

This gap is recognised by suppliers as well. In a 2009 global study of customer supplier negotiations and contracts, we found that suppliers in Asia report that they are only able to deliver, on average, 59 percent of the total potential value of their contracts with customers, compared to European and North American suppliers who reported delivering more than 67 percent of potential total contract value. Not surprisingly, these suppliers have some very different perspectives on reasons for the erosion of value than do the companies that source from them. 

In general, suppliers laid much of the responsibility at the feet of their customers, citing unclear requirements, frequent changes to specifications, inaccurate and late forecasts, and failure to provide adequate staff access and support as primary explanations for under-delivery. 

Asia sourcing difficulties - Sourcing from suppliers in many Asian countries entails inevitable challenges - geographic distance coupled with inadequate communications and logistics infrastructure, cultural differences, and immature legal and regulatory frameworks, to name a few. Nonetheless, many companies have been highly successful sourcing from Asia.

Indeed, our research and experience working with companies on global and lowcost region sourcing initiatives indicate that these structural challenges are tractable, and that the root causes of failure have a great deal to do with the manner in which companies build and manage (or fail to) relationships with their Asia-based suppliers.

Far too often, Western companies have taken a short-term and highly tactical approach to dealing with Chinese and other Asian suppliers. They have focused on unit-price, rather than carefully analysing total costs of acquisition and ownership, or considering supply costs in the broader context of profit margin contribution.

They have given lip service to quality, environmental sustainability, responsible labour practices and the like - yet through their actions have sent a clear message to suppliers that cost is all that truly matters, and have expended little if any effort working jointly with suppliers to reduce and manage costs through greater efficiency, rather than cutting corners. 

Most fundamentally, they have viewed and treated suppliers like vendors rather than business partners. Few Western companies have invested in truly understanding their suppliers’ business models, their capabilities and limitations, or their supply chains. Nor have they built strong interpersonal relationships between management teams, characterised by a high degree of mutual commitment, respect, and trust.

Instead, when production or service problems arise, supply chain managers and senior executives too often blame suppliers instead of working with them to diagnose and address difficulties, and frequently simply switch suppliers, rather than looking at how their own actions  might contribute to supply problems (or conversely, to more successful outcomes).  

A rapidly changing context Increasingly, a number of factors are converging that require a fundamental re-thinking of Asia as a supply market. As economies in the region have matured at an unprecedented pace, Western and multinational companies need to begin seeing Asia-based suppliers not (simply) as a source of cheap labour, but as a source of talent (especially in technical fields such as engineering), and of innovation.

China and India alone produce more than one million engineering graduates each year, as compared to just 70,000 in the US and 100,000 in Europe.4 In addition, while labour arbitrage opportunities in the region will not disappear any time soon, they are already diminishing and will continue to do so as rising affluence drives continued wage increases.

Moreover, in 2010, more than 30 percent of global growth in consumer demand is expected to come from China.

As countries in Asia rapidly become wealthier, the region is increasingly the major market growth opportunity for many companies (and not only for major multi-nationals). Asia-based suppliers are essential partners in helping companies from other regions enter and expand their presence in Asian markets.

Their relationships with local distributors and government agencies and officials, and knowledge of regional consumer needs and preferences, are invaluable assets. But leveraging them to support go-to-market efforts requires a new and more collaborative approach.

Read Supplier Collaboration in Asian Markets (Part 2)

Download Supply_Chain_Asia.pdf here

Vantage Partners

A spin-off of the Harvard Negotiation Project, Vantage Partners helps organizations negotiate and manage their most important business relationships, with key customers, suppliers, and business partners. The company is based in Boston, Mass. For more information, go to: http://vantagepartners.com/