Industrial Manufacturing

The quest to produce or provide a product at the lowest possible price, while simultaneously maintaining product quality and integrity, has driven many North American enterprises overseas, particularly to Asia. While outsourcing overseas is not a new phenomenon, it has now become possible to analyze and qualify the processes that have made these offshore ventures successful and profitable. This study aims to identify the specific impacts to the physical distribution supply chain of North American businesses when outsourcing to China and India. By interviewing high-level executives from North American companies currently operating in China and/or India, this document provides a lessons learned guide focusing on the current state of operations, risk mitigation and predictions for future developments.

Outsourcing manufacturing to China to reduce costs in the supply chain is by no means a new development. In fact, there are companies in North America that have been successfully offshoring to China for as long as 40 years. Their unique challenges have evolved as the capabilities within China have matured. By comparison, the outsourcing of manufacturing to India is relatively new, gaining a foothold within the past seven years. While India has become a master in the area of information technology outsourcing, the supply chain processes related to manufacturing outsourcing continue to be a challenge and obstacle for many North American companies.

The growth of manufacturing outsourcing in China is having an impact on the physical distribution components of the supply chain. One primary concern relates to the logistics infrastructure within China, which is considerably less developed when moving away from the economic hubs, which are primarily in the coastal provinces. There is a growing need for a broader physical infrastructure, as well as more well-educated, skilled human resources in areas outside the current business hubs, which suffer from overcrowding, traffic congestion, air pollution and rising costs, particularly for skilled labor and raw materials. Many companies have learned to leverage their own size across China and have established partnerships to ease some of the impacts of these issues. Many companies that have been in China for some time have seen significant rewards for their investments, and therefore a high percentage of their overall profits are dependent on successful offshoring in China. In turn, these companies are associating a greater and greater significance to guaranteed and uninterrupted product flow. Add to that the recent headlines regarding quality and safety concerns for North American products manufactured in China, and the need for risk mitigation is quite high. However, China has shown a willingness to address these issues head-on both financially and with government oversight. China has made major investments in the past 10 years, has changed laws and has encouraged a business culture that will continue to foster growth. These are all positive signs for companies either considering China for the first time or hoping to grow their current investments.

In India, two primary concerns arise time and again infrastructure and taxation. North American companies outsourcing to India struggle with the movement of goods between states due to India's unique state-to-state taxation regulations. In addition, significant investments need to be made to the internal infrastructure in order to streamline supply chain logistics. India holds excellent potential as a low-cost player, but state-to-state road infrastructure and restrictive taxes for interstate movement of goods currently limit how much a North American company can accomplish there. For India to achieve supremacy in manufacturing outsourcing similar to its achievements in the field of information technology (IT), and to keep pace with countries like Vietnam and Thailand, it will have to make substantive improvements in infrastructure and the ability to move product state-to-state without significant financial penalty. When the VAT (value added tax) replaces the multitude of state and central government taxes as expected, the efficiency of supply chain logistics will be significantly improved in India. Such changes will encourage growth for manufacturing outsourcing and for third-party logistics providers, both sectors that have enormous potential for growth.

This study is a summary of detailed personal accounts of the physical distribution aspects of the supply chain in China and India, provided by executives from 12 North American companies currently outsourcing in these regions. Together, the interviewees provide an outline of the current state of their distribution operations and processes, the lessons they've learned and the risks they face, and, lastly, the trends they are observing that will create future changes to the outsourcing model.
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