Assessing and Developing Supply Chain Maturity for your Chinese operation

1. Assessing and Developing Supply Chain Maturity for your Chinese operation Rob Handfield, PhD Bank of America University Distinguished Professor of Supply Chain Management North Carolina State University Director, Supply Chain Resource Consortium Partner, Supply Chain Redesign, LLC Editor-in-Chief, Journal of Operations Management

2. Objectives • Review key areas of Chinese supply chain and assess maturity • Identify problems to watch out for • Review opportunities to develop long partnerships with key Chinese operations

3. Establishing a Chinese Operation • Be prepared to spend a lot of time to meet with people and get to know them. • Do not delegate this to a third party – you need to personally visit and meet with the people who will be running your operation • Look for a Chinese manager that you can trust to work with you closely and assist you in learning about how business and government works • “Guang-zhi” is a term you will come to know the full meaning of over time and will come to appreciate

4. Senior Leadership Interest in SCM • Many Chinese CEO’s focused on sales growth and volume • There is not a deep understanding regarding the readiness of their supply chains to deliver these results • SCM executives have a difficult time getting an audience in the executive board room – and thus need to build a business case around the need to expand supply chain capabilities and knowledge

5. Visit the Facility • Large factories are incredible in their size and scope • State of the art process technology, new machines • Medium and smaller facilities may have unsuitable working conditions • Even though they are capable, the working conditions may be terrible. • Be aware of environmental infractions and child labor issues

6. Manufacturing Capabilities • Biggest problem is consistency and quality • Samples may be perfect – but when larger orders come in, on-going production may not produce similar results • Chinese workers are extremely efficient and are quick learners • Even as wages rise, China will continue to remain a leader in manufacturing cost efficiency • Importance of retaining skilled workers through development and promotion, with the right incentives, is critical to success

7. Manufacturing Expansion • In the Suzhou industrial park, one new multi-national manufacturing plant is opening every day • Just about every major Fortune 500 company has a facility in the park • Fastest growing foreign direct investment site in China

8. Supply Chain • Supplier • Inland carrier • Consolidator • Freight forwarder • Ocean/air carrier • Domestic customs broker • Deconsolidator • Domestic carrier • Buyer EVERY NODE IS A POTENTIAL OPPORTUNITY FOR DELAY AND LONG CYCLE TIMES!

9. Global Supply Chain Hot Spots Security : Robert C. Bonner, US Customs Commissioner: develop secure “supply chains from factory floor, to loading dock to transportation to our border.” Real time visibility of shipments, trade compliance processes and historical audit trails of parties who handle goods through the various legs of transit. CTPAT approved consolidation (Customs Trade Partnership Against Terrorism) Compliance Screening : Screen shipments for valid HTS (Harmonized Tariff Schedule) product classification number, license and document requirements, trade advisories, embargoes, controlled countries, and denied parties. Correct documentation : In international forwarding, average piece of freight handled 36 times; most shipments require at least 12 different pieces of paper and rely on manual processes for finding and documenting shipment information; accurate shipment documentation must follow physical flow of goods to avoid border delays Accurate total landed and delivered costs: Hidden costs of calculating total landed costs (costs to port of entry) and delivered costs (transportation cost to final destination) for different sourcing or sales distribution scenarios involving trade-offs between geography, cost and time; regulations involve tariffs, taxes, freight charges, insurance and assessorial premiums for multiple inter-modal legs Inbound and outbound visibility : Knowledge of status and process variations in both transportation and customs Global agility : Ability to handle midcourse changes, based on alterations in customer requirements, inventory levels, business conditions; redirect information, redraft compliance documents, alter shipment paths/carriers

10. Payments • Do not pay just because the material was shipped. • If you have an agreement that states “payment upon shipment”, it is worthwhile to spend some time negotiating terms where payment occurs after receive, inspect, and approval of the product in the US. • Otherwise, they have your money, and you have a product that doesn't work! • People assume everything is okay, and it's not. In a worst case situation, a customer in the US gets the unit, and discovers a defect.

11. When Problems Arise • In situations when there a problem arises - have the agent explain to you exactly what the legal issues are. • Have you had other cases when there was a problem? The manufacturer can generally get out of these issues in a court of law. • That is why it is very risky to write your own contract, which may not be recognized in a Chinese court of law. • For that reason, you may want to include an arbitration clause that specifies arbitration in a particular state - New York. Of course, the manufacturer will argue that should be in China. Stay firm on this point: "do you want the business or not?"

12. New Product Agreements • When developing a new product for manufacture, ensure that the progress payments are written in stone. • This is one of the biggest sources of dispute. You need to have “rock solid” performance payments or progress payments in place. • The contract must have specific milestones and payments associated with each milestone. • It is always important to stand firm to get the manufacturer to agree to these milestones, and then you must carefully approve each milestone one by one - so they know you are watching them like a hawk.

13. Logistics in the Retail Environment • Largest retailer is Carrefours – which is highly profitable, yet squeezes suppliers • Distribution for CPG is extremely complicated – most of the stores are tiny shops that may sell a handful of your products per day • Largely manual inventory stock checking and cash payments to CPG companies

14. Challenges of moving work to China • Supplier selection (finding a supplier, verifying that they will be a good partner delivering quality products on time) • Logistics partner selection • Supplier quality management (production quality) • Supplier communications (communicating order and design information) • Supply monitoring (monitoring status of orders at the supplier and in-transit) • Documentation and regulatory compliance • Customs clearance and security process • Intra-china transportation issues • China to North America transportation issues (including consolidator and de-consolidator) • Letters of credit and financial process • Cycle time management • Reaction time management • On-time, complete delivery of quality products • Total delivered cost calculation • Cost overruns • Unexpected administrative burden • Challenges with internal systems to manage process holistically and minimize human oversight and data entry • Shrinkage or security issues • Regulatory blocks or delays from China or US

15. Deliver • Road networks clogged in major cities (Shanghai, Beijing) • Rail bottlenecks and railcar shortages on state railway systems • Tight relationships between suppliers and trucking companies • Chinese government is investing >$300B in next three years to increase highway systems • Result will be a major north/south east/west grid of highways in five years linking major regions of China • Access to far west mountainous regions will remain problematic • Often expect delays when switching carriers that are shipping across provincial lines

16. Capacity Planning • Growth is explosive • 50% growth per year long-term expansion • Little to no expansion plans for how to expand production and distribution networks in Chinese manufacturing enterprises • CEO’s tend to focus on marketing and sales, with little understanding of implications for supply chain planning • Party government efforts to curb GDP growth projection violations are challenged • 2004 planned was 7% vs actual of 9% (planned = 4% in 2005) • Halted construction on 10 BN RMB Huanjou project!

17. Sales and Operations Planning • Even in Western JV’s, only 10% have formal S&OP processes • Even in companies with an S&OP, forecasting consists of predicting total volume growth of X% across all product lines – with no breakdown by SKU • Little planning for obsolescence and inventory levels • Poor communication between sales groups and their end customers • No evidence of market intelligence units for capacity and inventory planning

18. Accounting • Seven sets of accounting audits: • One for the superior government organization they report to • One for the tax authorities • One for the Securities Commission for their planned listing • One for the public record • One for internal profit distribution • One for employees • One for foreign investors • You want the last set, right?

19. Purchasing • Strong price-focused approach • Great deal of backdoor buying occurs • Deals are struck based on favors and who you know • Critical to write good contracts to avoid risk exposure – hidden nuances in the language of contracts • After satisfactory business established, lengthen contract to show trust and commitment

20. Types of Solutions Applicable • ERP’s • PDM, PLM, CRM, SCM, WMS, TMS • Shipping Management • Automated Carrier Selection • Centralized rules databases • Total Landed Cost Calculators • PO and Freight Tracing Systems • GPS • Global Trade Management • Global Drop Shipping • Wireless (PDA’s, cell phones) • RFID

21. Writing Contracts • Simplicity and clarity are of utmost importance. • There should be performance metrics for those characteristics which you feel are key to your business. • Schedule, with intermediate timelines are very important. • How payment is to be made is also an important element. • Since relationships are the most important issue, penalty language should be avoided.

22. Sales • Important to recruit sales force with strong ties to local officials • Some firms will hire a “communications” firm when bidding on large contracts • Contracts frequently changed after negotiated and signed

23. CHINESE MANUFACTURING CHINA 104 CHINA 43 CHINA 50 CHINA 102

24. Sales and Operations Planning Practices Maturity China 2005 v. Database 150 Advanced Institutionalized 105 China – 101 2005 Advanced Non-institutionalized BM Mean - 91 S&OP Practice Institutionalization 60 Foundation Overall Supply Chain Process Performance Note: BM Data represents 55 Supply Chain Councilfirms, from various industries, that were examined using the SCM best practices survey.

25. SCM Internal: (2.6/17.3) China 2005 -19 The SCM Framework – Leadership and Organizational Alignment Maturity Leadership & Organizational Alignment Advanced (Leveraged) Basic (Measured) Foundation (Defined) Rsq=0.7927 LOA Process Performance

26. SCM Internal: (2.8/16.3) China 2005-19 Supply Chain Enablers Maturity Advanced (Leveraged) Enablers Basic (Measured) Foundation (Defined) Rsq=0.8085 Enable Process Performance

28. Disruption Discovery Supply Chain Redesign Disruption Recovery China Sourcing Risk Management Framework Three key elements of supply chain disruption management. • Disruption Discovery: What type of detection / intelligence does a firm need to detect disruptions? • Disruption Recovery: Once the disruption is discovered, how does a firm effectively recover from a disruption? • Supply Chain Redesign: How can a company strategically re-design its supply chain over time to become more resilient and avoid or easily mitigate future disruptions? Supply Chain Triad

29. Disruption Discovery and Recovery Impact (B) Disruption Amplifiers (Globalization and Complexity) Impact of Disruption ($, Customer Account, Market share) Disruption Discovery and Recovery time (B) Disruption Discovery and Recovery time (A) Excess Resources Impact(A) Visibility Systems DISRUPTION Discovery(A) Recovery (A) Discovery(B) Recovery (B) Time

30. Figure 4 – Risk ManagementApproach Improve Visibility And Event Management Measure Risk & Collaborate with Key Suppliers / Distributors To Prevent Similar Problems and Improve Discovery/Recovery Cycle Disruption Discovery Supply Chain Redesign Disruption Amplifiers Increase Impact and Time to Respond! Disruption Recovery Excess Resources (Manpower, Capacity, Inventory)

31. Quantitative Tools Must Be Aligned With Business Processes

32. Summary - Key Challenges in Sourcing in China • Supplier selection (finding a supplier, verifying that they will be a good partner delivering quality products on time) • Logistics partner selection • Supplier quality management (production quality) • Supplier communications (communicating order and design information) • Supply monitoring (monitoring status of orders at the supplier and in-transit) • Documentation and regulatory compliance • Customs clearance and security process • Intra-china transportation issues • China to North America transportation issues (including consolidator and de-consolidator) • Letters of credit and financial process • Cycle time management • Reaction time management • On-time, complete delivery of quality products • Total delivered cost calculation • Cost overruns • Unexpected administrative burden • Challenges with internal systems to manage process holistically and minimize human oversight and data entry • Shrinkage or security issues • Regulatory blocks or delays from China or US

33. Areas of Inquiry • What are the best practices to address these challenges? • Which areas have you made the most improvements? • Which technologies have you used to help automate and manage the outsourcing planning and day-today execution process? Sensing devices, RFID, GPS, adaptive planning tools, wireless, • Which overall technology approach is being used

36. Thank YouXie xie