Supply chain in China: From ‘just-in-time’ to ‘just-in-case?’

Supply chain in China: From 'just-in-time' to 'just-in-case?'

Glenn Reynolds, aka Instapundit, wrote a great op-ed piece in the Washington Examiner recently, on the impact the Japanese earthquake and tsunami are having on supply chains around the globe.

Quoting the Professor in full:

Japan’s earthquake/tsunami has occupied the news and also spurred a lot of thought. Among other things, it has underscored the fragile and interconnected nature of modern society, and caused some to question the wisdom of “just-in-time” manufacturing approaches in today’s unsettled world.Instead, it is suggested, we might want to focus on “just in case” approaches designed to be more resilient under stress.

Japan’s earthquake was in some ways a triumph of preparedness: Thanks to strict building codes, not a single building in Tokyo collapsed. But the earthquake, and the tsunami it produced, have had impacts that go well beyond the immediate.

In particular, the damage is exposing the extent to which modern supply-chain management has produced a system that is so lean it lacks the reserve capacity needed to cope with disasters.

In manufacturing, plants have been idled around the world because Japanese factories — or often, a single Japanese factory — serve as the sole source for a vital component. With the factories sidelined by damage or power outages, the components are unavailable, and production has to stop.

Ford Motor Company idled a plant in Belgium for five days over parts shortages; Toyota warned plants in the United States to be prepared to close for the same reason. A U.S. plant making car seats had to close because of a shortage of premium vinyl made only in Japan. Ford has suspended orders for some models in red and black because the paints come from a single factory in Japan, now closed. Tales like these abound.

Even the New York subway system is affected by the parts shortage: As National Public Radio’s “Marketplace” reported: “Steel from the north of Japan can’t get to Suzuki. Suzuki can’t make the parts for Hitachi. And Hitachi can’t send the parts to New York. The global supply chain breaks down with the removal of just one link.”

As Edward Tenner noted in the Atlantic: “The tsunami has exposed a weakness in global logistics long recognized in principle but disregarded in practice. Lean manufacturing plus heavy reliance on a single plant equals vulnerability to disruption.”

With managers under pressure to keep costs down, there has been a tendency to cut special deals with single suppliers, and to keep stocks of parts as low as possible. So long as everything goes smoothly, this saves money: Single suppliers give you the best price, and low inventories keep you from tying up working capital.

The problem is that we seem to be in a period where things aren’t going as smoothly as they did for a while. And when things don’t go smoothly, the lean approach means that it doesn’t take much to bring things to a halt.

I mentioned this to a friend who’s got a custom-car business, and he said his experience with disruptions in getting supplies from vendors has caused him to move from a “just-in-time” system to what he calls a “just in case” system, where stockpiles are bigger and alternative suppliers are identified in advance. I think we’ll be seeing a lot more of this, post-Japan.

But the problem goes well beyond cars and subways. Lots of more important systems are similarly vulnerable. My wife takes a heart-rhythm drug called Tikosyn; if she misses a dose, she could die.

Walgreen’s doesn’t want to keep it in stock, so they order a bottle by air-freight when her prescription is about to expire. Normally, that’s fine — but if something happened to interrupt shipping, she’d be in trouble.

She keeps a backup supply, but what would Walgreen’s do for others in a similar predicament? A few days of shipping problems and many pharmacies would be out of important drugs.

Likewise, grocery stores now keep only a small supply of food on hand, depending on regular deliveries for restocking. When those deliveries are interrupted, shelves start to empty pretty fast. (And government emergency food stockpiles are nothing like they were in the Cold War era).

Power plants used to keep a 60-day supply of coal in stock. Now they typically keep only 30 days’ worth. That saves utilities money but it means that there’s less margin if deliveries get interrupted. In the past, severe blizzards have left some utilities dangerously close to running out. Most cities have only a few days’ worth of gasoline.

We’ve come off a period of several decades in which weather was better than average, and in which other forms of societal disruption were fairly minor. The 21st century looks likely to be less placid.

As we make all sorts of plans, at the governmental, the business, or the personal level, it will pay to think more about the likelihood that things won’t go smoothly, and about ways we can prepare now to deal with the inevitable problems ahead.

A new subdiscipline called “resilience engineering” looks at how systems can be made more resistant to failure, and better able to recover when they do fail. That kind of thinking, it seems to me, is relevant to all of us, not just engineers.

The ride seems to be getting bumpier. In all sorts of areas, we need more of a cushion.

This advice is similar to advice I’ve been giving for years when it comes to a supply chain in China. Simply put, “your order will be late; plan accordingly”. When I was supplying parts to a large American motorcycle company, I knew that I had to buffer uncertainty with inventory. They often couldn’t give reliable forecasts (or I should say, their forecasts didn’t always filter through the other supply chain members reliably), so I had to keep weeks or months worth of product on the floor to compensate. And that was just the customer – the suppliers were a whole other ration of uncertainty. This is the dirty little secret of the JIT revolution – the inventory levels are often still there, just held by someone other than the OEM.

If you actually both to read past the first chapter in any book on JIT, you will see that stability is a prerequisite for a JIT system – stability in demand and in supply. The system can’t work in chaos. Most Chinese supply chains are far too chaotic to be part of a JIT system (for Apple this is not the case, but chances are if you are reading this blog, the rule applies).

I could go into the math of how to calculate an inventory level based on your target fulfillment goal, but suffice it to say, you are wise to keep some stock on hand. Much cheaper than airfreight.

As for single sourcing, some products don’t have the volume to have multiple sources, but whenever we have a client with substantial order quantities, I always recommend having at least two sources for each component. I also encourage clients to develop domestic sources to support 20% of the normal production, and make sure they have capacity to handle increased orders if there are problems with the Chinese suppliers.

So, when you come to China, do NOT expect to run the supply chain the way the new text books say. Go old school and put some fat in the system. Just in case.

Assorted dumplings and fried goodness, plus lots and lots of meat (including horse and donkey meat)

Day 26 honey hebe are horrified that bees were ordered 1024x768

I had the opportunity to speak to a group of students the other day about doing business in China and Asia in general. As always, the subject of food and alcohol came up. I explained the business banquet and the rules of consumption, which in my experience are:

  1. There is no such thing as a glass of wine with dinner. If you say you don’t drink for religious or medical reasons, they will accept that, but if you start drinking, you are on a bus with no brakes, next stop Hangover Town.
  2. Everyone smokes, everywhere, all the time. Whether or not you smoke is irrelevant. At table, in the restrooms, in elevators, they will smoke. There will be smoking at dinner, and the further the drinking goes, the more smoking and the more they will encourage you to smoke. If you are a professional athlete, not the place for you. On that note, Chinese cities probably aren’t the best place for you anyway.
  3. You should eat anything put in front of you. As above, unless you have solid religious or medical reasons to say no, you WILL be eating whatever is ordered, especially if you are with me. No sissies at my table.

These ground rules established in the audiences’ heads, I recounted the epic drinking contests, food poisoning, hangovers, food poisoning, blackouts, and yet more food poisoning. You might think that with this track record I would be gun-shy trying new things but it is exactly the opposite. The most exciting cuisines in the world are in Asia, and good food is everywhere waiting to be tried. Including honey bees.

On my last trip to China, the highlight was donkey meat – best red meat I’ve ever tried. The Chinese have a saying, 天上龙肉,地上驴肉, “tiān shàng lóng ròu, dì shang lú ròu”, or “the best meat in heaven is dragon meat, the best meat on earth is donkey meat.” I have to agree.

Day 26 honey hebe are horrified that bees were ordered 1024x768

Day 7 donkey meat 11 1024x768

Day 7 donkey meat1 1024x768

PassageMaker‘s Director of New Project Development, Dave Learn, is an adventurous traveler and an exceptional photographer. I live vicariously through Dave’s Flickr page, and his photos of his recent trip to Mongolia inspired the title of this post.

David Dayton of Silk Road International, a good friend of all of us at PassageMaker, says that there are really several different Chinas. The interior (where 400 million people live on a dollar a day or less) is a different world from the conspicuous wealth of the Bund in Shanghai. You need to get out and experience all that the Chinas have to offer, and the same applies to Asia in general. A friend of mine once said the cuisine is the principal art form of any culture, and nowhere is this more evident than Asia, and China specifically. So if you are going to go to the trouble to journey to China, do NOT eat all your meals in the hotel or at McDonald’s. Get out and risk food poisoning, because the rewards are worth it.

Election Night Predictions!

In honor of my friend, Morgan Griffith, who just defeated 14-term incumbent Rick Boucher in the Virgina 9th Congressional District, let me make the following brief prediction.

Morgan will be a good and responsible Congressman. He will stay true to himself and not become enamored of life in Washington, DC. We will all miss him when he is away and I know his wife, Hilary, is probably cheering and weeping at the same time as this means she will see even less of him once he takes office. Congratulations Morgan and Hilary. It could not have happened to two better and kinder people.

On the subject of whether the new Tea Party flavored Republican House will have a negligible impact on the America’s trade with China, I will make the following prediction:

Nothing will change.

Not because it shouldn’t, but because it can’t. Not yet. Not for a long while.

As long as the USA is borrowing money in shiploads from the Chinese, there will be little to no leverage. As long as the USA continues to pursue policies that make the USA an unattractive place to start a business, there will be no hope of changing the rationale for doing business in China.

I approach this as someone who watched his Father start a metal stamping company in the USA during the 1980’s. That company, still in business today, would never be started today. The parts would be outsourced to China, because that’s what the math would tell you to do.

I write this with no special joy, despite how I earn my living. It is simply a recognition of the reality of my surroundings.

The USA will be gridlocked at the federal level until at least the 2012 elections. Having a bulwark in the House to stop the anti-competitive agenda of the last two years will be a good thing, but the numbers are not there to start turning the ship.

If the USA wants to compete with China, tax policy will have to change. Trade policy will have to change. Health care, OSHA, EPA, Department of Education, on and on and on, will have to change. And this won’t happen with a divided Washington.

Will the GOP House be better for PassageMaker’s business? I firmly believe it will. Entrepreneurs and small-to-medium businesses are risk averse. Now they can sleep a little easier that they will get to keep some of their earnings. Gridlock is at least stable, and even a less than optimal stability is preferable to the roller coaster we’ve been on the last few years. We’ve had a number of projects stall out because of clients who weren’t sure of the business climate. I am betting this changes for the better.

So, Congratulations Morgan! And on what other China business blog are you going to get a Fishbone reference on election night? I know that they didn’t mean it when they wrote the song, but listen to the lyrics – is there a better Tea Party anthem?

I am betting I can beat Dan Harris and Renaud Anjoran at pool…

Only because I can’t beat them at blogging. I am daily reminded of how badly I am outclassed at blogging by the China Law Blog and the Quality Inspection Tips blog. I get daily gems from these two blogs, and these days if i post once a week I am lucky. Needless to say, I recommend you subscribe to both.

I am not nearly as erudite as these gentlemen. They daily manage to serve up something worth reading, and by that measure, if I produce something worth reading once a month, hallelujah.

I titled this post as I did, because it is a daily discipline that I play 4-5 games of 8 ball on my home table. I have a fine old AMF pool table and shoot a few games each night as I complete my daily correspondence with PassageMaker’s clients around the world. If you are ever in Salem around 10 PM – 1 AM Eastern, be sure to stop by for a game. This is nothing more than relaxation, so I shouldn’t read too much into it, but I will anyway for the sake of this blog.

I am a better than fair shot, and 5 and 6 ball runs are common in my game. I have only ever had one 8 ball run off the break, and my opponent in that blessed game has refused to play me ever since (nearly 20 years and counting).

The reason I torture you with such an agonizing metaphor, is that pool tables are NOT the same in China. You would think that pool is pool around the world, but as with so many things, local differences make ALL the difference.

I am a pretty good shot, but when in China, I have to adjust my game. Chinese pool tables have rounded bumpers around the pockets, versus the standard angled bumpers on American tables. This means that a shot that would go in in America will bounce out in China. This has taught me to have a gentle hand and plan my shots better than is required in the USA.

This is an apt metaphor for doing business in China. What is easy and straightforward in the USA is a miss in China. Not a week goes by that I don’t have a client that wants to cut corners and do things “quick” in China. I always push back, insisting that they take their time, whether that means finishing their design database (rather than leaving the engineering up to the Chinese suppliers) or taking steps to properly protect their intellectual property by filing for Chinese patents and trademarks.

My point is that you always have to assume that doing business in China will take longer and be more difficult than the same task in your home market. 99.9% of the time this will be the case.

China is the way to go for inexpensive tooling and production parts, but it is NOT always the easiest way to go. Before you decide to work in China, you need to make sure you understand the difficulties involved, something PassageMaker can help you with.

Because those round pockets are a bitch.

Mike Rowe of “Dirty Jobs” talks about the nature of work

This video is actually over a year old, but the message resonates nonetheless. I am a bit of a paradox – someone who is obsessed with Asia, who spends my days lethargically tapping away at my MacBook Pro (fantastic device), helping companies do business in China, often to outsource the “jobs Americans won’t do anymore”. Yet I still have interests in two successful American manufacturing companies that make 90% of their product in the good old USA, and we are in the process of moving some of those products back to the America from China. That’s what the math is telling us to do, and I know it is the right move. I have an MBA, but some of my fondest career memories are of manual labor, working in a small brewery and various factories. I hate going to the gym (as anyone who’s ever met me can easily attest), but I love yard work – pruning trees, weeding, splitting firewood, etc.

Rowe’s point delivered to Congress, is worth quoting:

Rowe explained that “dirty” jobs, like those in manufacturing and farming, used to mean success, but now look like settling. He wants that to change.

“I don’t think the country is going to fall back in love with manufacturing and I don’t think these policies are going to change, until or unless we reignite a fundamental relationship with dirt, work, and the business of making things, as opposed to the business of buying them,” he said.

He said one of reasons this is occurring is because community colleges and vocational education have taken the backseat to four-year college degrees.

“It’s not happening because people hate community colleges, it’s not happening because people hate the trades, it’s happening because we’re promoting a very specific kind of education at the expense of the others,” he said.

I’ve written before about the higher education bubble (here and here) and thoughts on American competitiveness and the attitudes towards work, but Mr. Rowe does a better job of laying out where we’ve lost our way a bit. Convincing people that the only path to wealth is $120,000+ in debt for a degree in liberal arts or the soft sciences seems further from the mark than ever.

China has built serious capabilities in the last 30 years, skills and knowledge that many parts of the developed world have allowed to atrophy. Part of the attraction to doing business in China is price, but increasingly it is because the domestic industries have shrunken to the point that China is the only place you can get it made, whatever “it” is. That is why PassageMaker is there, so that if you are forced to do business with Chinese suppliers, you have an advocate that understands your concerns and requirements, and has your success as our primary objective.

Weekend notes

Couple of articles and points of clarification:

  • In my post on Foxconn founder, Terry Gou, I pointed out that the romanization of his family name should be Guo. I assumed that it was the magazine that made the mistake, but since information on Mr. Gou is sparse, I cannot be sure. Since Taiwan does not use pinyin, it is possible that is how he spells it. Certainly he has enough money he can spell it anyway he pleases.
  • If my recent post makes it sound like Mike and I drank our way through school and are still burning the candle at both ends, that is an inaccurate portrait. We are both responsible family men. But I will say that drinking is a business skill in Asia, and we do have mad skills.
  • A good article on the higher education bubble I mentioned in the post linked above – The Bubble: Higher Education’s Precarious Hold on Consumer Confidence.
  • Chinese think tank warns US it will emerge as loser in trade war – interesting counterpoint at the end of the article.
  • Shenzhen is getting the world’s second tallest building.

Have a good weekend!

Ennui, information overload, and Happy Birthday Shenzhen!

I have become ferociously bored with blogging of late. Part of it was summertime, with its combination of oppressive heat and other, more enticing diversions. Part of it was (and is) the absolute avalanche of business we’ve been getting – there is a bad economy out there, but people still need help in China. And part of it was (and is and I fear always shall be) the crush of sheer stupidity gushing out of Washington daily. It just is more than I can take most days. It says quite a bit when the business climate is more stable in an ostensibly communist country than a nominally capitalist one.

However, when the IT team is motivated to re-post a sales brochure to freshen up the homepage, I guess that is a sign I best get moving on the blogging front.

I will try to re-establish my blogging discipline, with at least a few posts per week.

In the meantime, here is the article that got me off my duff (hat tip to Dan Beach, aka, “Canada Dan”):

China’s ‘miracle’ Shenzhen marks 30 years. I first visited Shenzhen in 1994 and at the time never imagined it would become my second home. How different it is today than the ugly, gray city 16 years ago. China has a long way to go, but the distance it has traveled has been astonishing.

Other fun stuff:

  • There Are Now Enough Vacant Properties In China To House Over Half Of America – bubble, anyone?
  • Obama Added More to National Debt in First 19 Months Than All Presidents from Washington Through Reagan Combined, Says Gov’t Data – hmmm…wonder how the Chinese feel about that?
  • China’s UN diplomat in drunken rant against Americans – well, at least we are clear on how China’s UN ambassador feels about it.
  • Report: Castro says Cuban model doesn’t work – reaaaaaally, you don’t say. As unsurprising as this is, imagine if Cuba tries a “Shenzhen Special Economic Zone” 90 miles off the coast of Florida to turn things around. Another interesting interview with Castro (nothing to do with China, but very interesting what he has to say about the Jews, Israel and Iran).
  • You Know The US Is Screwed, When China, Gambia, And Jordan Have Better Property Rights – I’ve felt this in my bones for a while. The USA has been acting for some time as though it didn’t want to be an economic powerhouse, and this is just another example. More on America’s competitiveness here.
  • Buck Up, America – for a much more optimistic take. The points he makes about China and India strike me as valid.

More blogging soon, I promise. I really mean this time. Seriously, quit laughing.

Account Manager- take 1

For my internship I’ve been given 3 duties- this blog, getting the “China Sourcer” magazine launched ( and assisting my boss Pramod with vendor coordination as an account manager. Fortunately I’ve been assigned to a small account for the time being (per my request as I desire to learn, and not completely screw something major up!) that is starting to get into crunch time. Just being attached to this case a week, I can see how PassageMaker has continuously been able to grow these past few years.

My client, a good guy from Canada, found his own supplier here in China (something that PM also does, but is able to do a much more thorough job of investigating as it’s a backbone of the business). And of course, the supplier has not really been a good fit so PM has been hired to help clean up the mess, and get his project finished and sent out.

I feel for our client, as he’s spent a lot of money on what I would call a very luxurious model in this particular market. He’s gonna have to spend a lot more money to get this project out of china and into the stores. He himself has seen the light and will most likely use PassageMaker for any future orders he may place.

I don’t really think it’s a situation that the supplier doesn’t care, but I also don’t get the feeling that my client is this supplier’s biggest customer either. My client is a good source of some money, but certainly not the big fish in the pond so to say, and so things get done, just slowly and not as thoroughly as it could be. But soon enough this project will be done (knock on wood) and the client can move to a better situation via PassageMaker. It’s a good account to start with, and I see things only getting harder from here.

Why resist an audit?

Twice in as many days, I’ve had clients who tried to book Simple Factory Audits (sample report here) with our sister company China Quality Focus, only to have the vendors refuse. They are happy to have the client fly half way around the world for a visit, but no doing for a professional 3rd party auditor to set foot in the building.

Ladies and gents, this is a three-alarm fire bell. You are not dealing with a reputable firm if they won’t stand an independent audit. They are a trading company or a bad factory, plain and simple.

I came out of the automotive industry, which the best crucible for grown-up business I know. I can remember auditors from Mack Trucks, Peterbilt, etc., showing up unannounced to inspect our facility. We even had an ISO audit starting when OSHA showed up for a surprise inspection. I stood two audits in one day on my facility and passed both with flying colors. So don’t give me your *bleeping* sob story.

A Simple Factory Audit is the cheapest insurance policy you can buy. If your supplier won’t allow it, run screaming in the other direction. It is only going to get worse if you stick around.

China’s Mexico is inside China

300x250 run backup

This analogy has a number of problems with it (like most analogies), but I got the point the first time I heard Mike Bellamy make it.

Too many American industries rely on illegal labor to remain cost competitive, thus the constant drama on the border issue.

The China nearly every Westerner sees is the coastal veneer. The majority of China still dwells in the poor, mostly agrarian interior. Their source of cheap labor in internal.

And as this article in Slate by Brett Edkins points out, in a sense, many of those Chinese migrant workers are “illegal” anyway. Key paragraphs:

The United States could begin by conceding one of China’s principal arguments: Human rights are not just about individual liberty, but also economic opportunity. The Chinese “economic miracle,” which lifted 500 million people out of poverty in just one generation, is itself an unprecedented human rights achievement. Yet it gave rise to other pressing human rights concerns, including an issue that threatens to destabilize China’s Communist regime—growing discrimination against the roughly 200 million Chinese citizens who left their rural homes to find jobs in China’s booming cities.

In many ways, these rural migrants resemble undocumented immigrants in the United States. In China, they provide indispensable labor for vast urban construction projects and work in menial jobs as guards, waiters, cooks, or barbers. They are often mistreated by employers, generally live in poor conditions, and receive few social benefits and limited protection from the police. And their children are regularly denied public education.

Chinese newspapers, “Netizens,” and even Communist officials are calling for reforms. Their main target is China’s 50-year-old household registration, or hukou, system. Began as part of China’s state-run economy, the hukou system labels individuals as “rural” or “urban,” indicating their proper place of residence and binding laborers to the land. Today, rural residents are permitted to travel to the cities, but they can still be fined or forcibly returned home if they are caught working or living outside their designated hukou. Obtaining a temporary urban-residency permit from the police is beyond the means of most migrants, requiring a fee and employment documentation. Permanently changing one’s hukou by attending university or joining the military or the Communist Party is similarly out of reach.

Life for a city dweller with a rural hukou is difficult. Their hukou denies them urban welfare and access to public housing. It also excludes them from publicly funded health-insurance schemes. Since fewer than 3 percent can afford health insurance, most avoid medical care altogether. City judges often impose harsher sentences on rural migrants, and employers frequently withhold wages, knowing undocumented workers cannot complain to police without risking exposure.

I will admit I not a fan of the author’s wording, “undocumented migrants”. If you illegally cross a national border anywhere else in the world (including Mexico), you’ve broken the law. Only in the modern American journalist and politician world does that deserve an obscurant euphemism.

However, the point of the article is that despite the rapid advances, parts of the Chinese state are stuck in the Maoist past. One good thing about dealing with PassageMaker, you know our employees are treated well and legal. As a foreign owned firm, the government would come down on us like a ton of bricks were it otherwise.

Regardless, I am happy to see people in China, including members of the Communist Party, start to address the problem.