World Trade - August 2008 - (Page 39)

9 to 14 percent. That was eye-opening for executives. A handful of MNCs are lifting their aspirations, and over the next few years will serve as models to the others. General Electric, for instance, set its sights in 2002 on doubling sales from its various businesses in China to $5 billion by 2005 and to sourcing $5 billion in components and goods from China by the same target date—a very aggressive target. The company hit its sales target, but achieved only three-ﬁfths of its sourcing target at that time. Today, GE has shifted much of its decision-making responsibilities regarding sourcing to China, greatly improving its ability to make sourcing decisions quickly. IBM has also raised the bar significantly on its sourcing aspirations in China. In 2006, IBM moved its global Bringing China-made procurement headquarters to Shenzhen—the ﬁrst time an IBM products to market enterprise function has ever been located outside the United more quickly would States. At the time of the move, IBM already had over eighteen have a radical impact hundred procurement employees in China, and was sourcing on a company’s about one-third of its $45 billion economics. annual procurement spending from suppliers in Asia. Competitive Advantage agents). The few retailers that do some of their own buying in China directly from the manufacturers (thereby dis-intermediating the middle market) save at least an additional 10 to 15 percent above what agents get there, and often more than that. One Fortune 500 company that sells wholesale and retail goods does a limited amount of sourcing in China. We looked closely at a representative sample of more than two dozen of the company’s SKUs (which the company’s executives helped to identify), and found that sourcing these SKUs in China could produce savings of over 20 percent on a total landed cost basis (even factoring in increased shipping, insurance, and inventory costs). Extrapolating these ﬁndings, the company realized that if it systematically sourced from China the relevant product categories involved, the company’s net income could increase by 50 percent. Similarly, a large American retailer estimates that if it direct sourced “clean wins” in China, saving a conservative 10 percent on the cost of these goods, it could boost the company’s net income by at least 30 percent. A global industrial company that does some manufacturing in China recently estimated that its China sourcing roughly amounted to nearly 10 percent of global cost of goods sold. If it tripled the amount of sourcing it did in China, ﬁguring an average savings of 20 percent on what is sourced here, the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) could rise from Over the longer term there are even greater advantages— competitive advantages—to be gained by setting (and achieving) high aspirations for sourcing in China for global as well as local markets. For instance, a few companies intend to shift design approval and ordering decisions from corporate ofﬁces in the home country to China. They also would like to integrate design and manufacturing functions and co-locate them in China. These broader organizational changes won’t happen overnight. But when they do happen, we think the impact could be enormous. Companies that get it right will be in a position to establish a long-term source of competitive advantage by taking the operations they build in China today to the next level. One way would be to cut cycle times. By locating sample and speciﬁcation approvals in China for products in industries ranging from casting to machined parts to clothing to consumer electronics, the turnaround time for getting a product or component into mass production can be dramatically shortened. Pushing this further and allowing the China ofﬁce to handle prototype approval and ﬁnal product ordering would add even more value. Currently, most procurement ofﬁces in China still rely on headquarters for these decisions. Bringing China-made products to market more quickly would have a radical impact on a company’s economics by improving its understanding of consumers, increasing the accuracy of forecasts, and reducing stock-outs and markdowns. The executives we’ve talked with who are considering these moves do not underestimate the difﬁculties involved. We frequently hear executives in China say that the hardest part of sourcing in China is headquarters. Aspirations to WWW.WORLDTRADEMAG.COM 39 http://WWW.WORLDTRADEMAG.COM

Table of Contents Feed for the Digital Edition of World Trade - August 2008

World Trade - August 2008 Contents Weathering the Storm Helping the World’s Poorest Nations Benefit from Global Trade Supply Chain Watch Tradewinds World Trade’s Top U.S. Trading Partners LTL Shipping ‘On the Fly’ Air Cargo Flies a New Heading Getting More from China Sourcing Why 3PLs Need a Seat at the C-TPAT Table Performance-based Supply Chains Drive Total Lifecycle Value SmartWay Navigates Sustainable Transportation Around the World in 80 Days—Hours—Minutes

World Trade - August 2008

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