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Supply chain management key to competitiveness: An interview with CKGSB professor Chen Fangruo

by CKGSB Knowledge

July 27, 2011

China has been the world’s factory for decades, but despite this experience, its supply chain management still lags far behind developed countries. This is becoming a major problem not only for Chinese companies, but also for MNCs working in China. Yet, according to CKGSB Visiting Professor Chen Fangruo, more firms are now emphasizing supply chain management and it will become an essential part to reducing costs, strengthening quality control and expanding market share for both Chinese companies and MNCs.

“The era of cheap labor is gone and manufacturing, logistics and distribution people have been looking for new ways to reduce costs, and I think supply chain management offers a great opportunity,” says Chen.

But this opportunity will not be easy to grasp as many Chinese firms still need to develop a strategy to optimize their supply chain.

“Chinese companies are beginning to see that it is not just about managing your operations well and reducing costs, but it also means to work well with upstream and downstream partners,” says Chen. “The first step is to change your mindset and think about how you can reorganize your activities along the supply chain. The key difference is that you are thinking not just within your organization but actually thinking about the different partners along the supply chain.”

How to get these companies to coordinate their decisions is a big challenge, but if they do it well it is a great opportunity to save costs. Every year logistics and supply chain problems result in major losses not just for domestic firms, but MNCs as well. This has resulted in many MNCs upping their involvement in every level of the supply chain, from upstream to downstream.

Panalapina, one of the world’s leading providers of supply chain solutions, launched a new logistics center in Tianjin in December 2011 to beef up the country’s supply chains. The Swiss company is planning to expand further in China in the next few years.

FedEx, the American logistics and shipping giant, has also achieved considerable success in China. FedEx has recruited and retained skilled supply chain managers who are able to learn and grow within the company while tweaking American management techniques for the Chinese market. This has resulted in FedEx winning recognition at the Asia Freight & Supply Awards over the past several years.

But foreign expertise may not easily permeate the Chinese market.

“In the US, there is a fairly consistent way of doing business along the supply chain so it is easier to coordinate,” says Chen. “But in China different parts of the supply chain have different ways of doing things so they will have their own ways of coordination. That is a challenge MNCs will face in doing business in China. Though they have experience that may work in overseas environments, it may not work directly here so they also need to adapt.”

While these companies adapt, however, they will run into another major challenge facing many industries in China–talent cultivation and retention.

According to education research firm DHD Consulting, China will need 75,000 managers fluent in at least one foreign language by 2020. The current supply of such talent is short and competition for their services is fierce.

“Managing manufacturing companies and managing service-oriented companies will require a lot of management talent and for service-oriented companies, the knowledge resides in their employees,” says Chen. “Sometimes it is very hard to codify and retain that knowledge. As firms move to more services and project management, retaining talent becomes more important. Developing and retaining talent are becoming very difficult.”

Fortunately, China already has companies that have been successful in retaining talent and managing supply chains — e-commerce firms. Some Chinese e-commerce firms guarantee same-day delivery and there is even an online bookseller in Beijing that delivers books in less than an hour, something inconceivable in most other countries.

“A key advantage for e-commerce firms in China is speed — they can do things quickly,” says Chen. “They sell all kinds of things, they deliver very quickly and they provide great service. The big winning strategy for these e-commerce firms is actually supply chain management. If you manage your supply chain well, you manage your quality well, and you manage your delivery well, you gain comparative advantage.”

With foreign examples like FedEx and domestic examples from the e-commerce sector, there is clearly opportunity for China to get supply chain management right. This has left Chen hopeful about the future of this market.

“I think that companies are making changes in supply chain management, and that going forward, the next step will be to use information to rationalize decisions on the supply chain.”

Professor Chen Fangruo shares his thoughts on how China can shake up the global supply chain management field. He also addresses the implications of the rise of e-commerce and product-services on the Chinese manufacturing industry.

Q. What is the significance of the upcoming Supply Chain Thought Leaders Round Table at CKGSB on July 20 – 22, 2011? What role will this topic play in determining the sustainable development of Chinese businesses?

A. The Supply Chain Thought Leaders Roundtable was started in 1998. It is a small, intimate conference of top scholars in supply chain management from around the world. This is the first time the roundtable is coming to China and I have received great support from CKGSB and Dean Xiang Bing.

This conference is very forward-looking – it is about looking for the next big thing in supply chain management with a focus on China. My personal goal of organizing this conference is to give this group of top scholars some exposure to China. The conference will give them the opportunity to look at the supply chain problems here in a systematic way. It will be a group of top scholars discussing supply chain challenges in the context of businesses in China. As you can see from the program, we have many speakers who are experts from China.

The roundtable can play a significant role in both the way companies practice supply chain management as well as in how supply chain management is researched and taught. I think indirectly it will influence how Chinese firms think about these problems and how they will meet supply chain challenges.
China is such an important part of the global supply chain. Many of the attendants are already thinking about partnering with local universities or local businesses so hopefully this round table will connect people. I hope that will lead to more collaboration, more research and more attention to China.

Q. What are China’s main supply chain challenges and what do you think needs to happen structurally in the next five to ten years to address these issues?

A. Supply chain management has not been on the top of many companies’ agendas but I think increasingly it will be. The era of cheap labor is gone and manufacturing, logistics and distribution people have been looking for new ways to reduce costs, and I think supply chain management offers a great opportunity.

I think Chinese companies are beginning to see that it is not just about managing your operations well and reducing costs, but it also means to work well with upstream and downstream partners. The first step is to change your mindset and think about how you can reorganize your activities along the supply chain. The mindset change requires thinking about the supply chain as a unit of management instead of just within the four walls of your own organization.

The key difference is that you are thinking not just within your organization but actually thinking about the different partners along the supply chain. From the very top upstream of the supply chain to the downstream, and these parts of the supply chain may involve many different companies. A big challenge is that many companies are used to thinking about what makes sense for them but they also need to think about what makes sense for their partners. How to get these companies to coordinate their decisions is a big challenge, but if you do it well it is a great opportunity to save costs.

I think companies are making that change and that going forward, the next step will be how to use information to rationalize the decisions on the supply chain. Increasingly, firms are collecting a lot of information due to new and constantly changing technologies. The next challenge is how to make use of that wealth of information to improve supply chain management.

Q. What are some common problems MNCs face in developing sustainable supply chains in China? How do they differ from the problems that local companies face?

A. In general, the problems they face are similar but MNCs might have some prior experience they can bring to China. Local companies are starting from scratch especially considering their supply chain management. I think that the key difference is the ways of doing business. In the U.S., there is a fairly consistent way of doing business along the supply chain so it is easier to coordinate. But in China different parts of the supply chain have different ways of doing things so they will have their own ways of coordination. That is a challenge MNCs will face in doing business in China. Though they have experience that may work in overseas environments, it may not work directly here so they also need to adapt.

I have seen instances where MNCs have a hard time finding and developing qualified suppliers in China. They may have brought final assembly to China but they might still need to source key components from local suppliers in China in order to make their business model work. If you don’t have the right components here, the components still have to come from the US and then you do assembly here in China, then you ship it back to the US – it is not what they had in mind when they first moved their final assembly operations to China.

Some Chinese suppliers have stepped up to the plate. What makes them successful is their attention to quality and because of their high quality, they can charge a premium price. They see the long-term impact of quality production.
Another challenge for some MNCs now is that some companies are moving their production to inland China because of government incentives. Increasingly they will find that when they move their company’s productions to Sichuan or Wuhan or a western part of China, the first challenge is that the supply base is still along the coast, so in the short term it is very difficult. They need to develop incentives for the suppliers to move with them.

Q. What are the implications of the current trend towards servicization in China? How does the shift to a product-services business model affect China’s manufacturing industries?

A. IBM is a great example of successful servicization. Five to ten years ago, they started shifting to a service company. More than 50% of their revenue comes from services so this has been a huge shift for them. Manufacturing is a low margin business and they find that service is a great place to be. Companies like IBM they will still sell their hardware but that is a small part of their business. They might do a project for a client – they will need hardware and software, and sometimes even construction design of a building. Their business model has evolved from selling products to selling services.

With the service component, the complexity of the operation is very different. You are dealing with clients in a much more intimate way. You are dealing with human resources, the entire supply chain, where to get the necessary components, then managing the project, and delivering it on time and within budget. It gives great profit opportunities, much higher than manufacturing. Companies might outsource manufacturing to other suppliers and focus their attention on getting those projects, and then managing and delivering these projects on time and within budget.

The implications for manufacturing include the different capabilities and challenges of a company. How do you manage knowledge within the company? You accumulate experience from projects and the experience stays with the people who manage these projects. If they are gone, then your experience, expertise, and capabilities are gone. How you improve learning and retain knowledge becomes a key challenge. As the business model evolves from primarily manufacturing to service to service plus manufacturing, firms need to update their knowledge and think about how to develop their key capabilities.

Q. Could one of the implications also be talent? If companies are switching to services, they will require a different kind of skills set. Talent is currently a big challenge for CEOs of MNCs as well as domestic companies. Will this be an added challenge for these companies? 

A. Managing manufacturing companies and managing service-oriented companies will require a lot of management talent and for service-oriented companies, the knowledge resides in that employee. Sometimes it is very hard to codify and retain that knowledge. As firms move to more services and project management, retaining talent becomes more important. Developing and retaining talent are becoming very difficult. It is related to IBM’s dilemma now – they need to think about how to retain knowledge.

Q. How does the rapid rise of e-commerce in China affect the way we look at supply and delivery systems and operations functions of businesses operating in China? How does the rise of ecommerce shake up the supply chain network here?

A. A key advantage for e-commerce firms in China is speed – they can do things quickly. They sell all kinds of things, they deliver very quickly and they provide great services. They try to eliminate any risk the buyer may have so they put a lot of burden on themselves. It seems like the big winning strategy for these e-commerce firms is actually supply chain management. If you manage your supply chain well, you manage your quality well, and you manage your delivery well, you gain comparative advantage.

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