Executive Briefings

In Modern-Day Global Sourcing, Diversity Rules

The dynamics that have long favored China as the world's center of low-cost manufacturing are changing. And no one - not even China - seems to have a problem with that.

In Modern-Day Global Sourcing, Diversity Rules

Adam Brosch speaks and writes Mandarin Chinese for a reason. The director of global sourcing and custom tooling for Berlin Packaging is naturally "China-centric," given that nation's plentiful supply of cheap labor and massive manufacturing infrastructure.

Berlin Packaging is a $1.4bn supplier of rigid packaging, primarily for finished product that ends up on the retail shelf, along with a host of related services, including design, financing and quality control. It outsources manufacturing to more than 7,000 partners around the world.

Brosch is well aware of the complex factors that go into deciding where its product is made. That's why global sourcing is the one major function within the company that’s centralized, at its corporate office in Chicago. Berlin's 24 branch offices throughout North America are otherwise run like small independent businesses, each managing its own sales, operations and profit-and-loss statement.

Overseeing the entire global sourcing process, Brosch is quick to detect shifts in the manufacturing landscape. Between 15 and 20 percent of Berlin’s product today comes from countries outside North America, and a significant portion of that volume originates in China. Like many suppliers, however, Berlin Packaging has been reconsidering its global sourcing strategy, motivated in part by dramatic changes taking place within the Chinese economy.

China’s rulers are attempting to steer the country away from a heavily export-oriented economy to one that places a greater emphasis on domestic production. At the same time, they’re encouraging the rise of a middle class that demands higher wages, and can therefore afford the products that are being made for local consumption.

The change is driving out some Chinese factories that have specialized in the making of low-value goods with cheap labor. At least some of that work is moving to developing countries such as Vietnam in Asia, and Mexico in Latin America. In many cases, the wage disparity between China and the West has been virtually wiped out, especially when elements such as logistics cost are factored in.

Brosch says China is not an ideal source for manufactured product that’s destined for the U.S. East and Gulf coasts. For points east of the Mississippi River, shippers must take into account costs that stem from spanning the additional distance, including those of transiting the Panama Canal.

In recent years, says Brosch, Berlin Packaging has been turning its attention to manufacturers in Eastern Europe and South America. The decision is partly dictated by the ability of certain U.S. ports to handle the latest generation of mega-containerships. In addition, the weak euro is making parts of Europe a cheaper source of product than China, even for relatively inexpensive items.

“China isn’t becoming the silver bullet in terms of low cost anymore,” Brosch says. He might even be able to obtain a cheaper price for packaging from a U.S. producer, depending on the volume, materials, shipping terms and manufacturing run rate.

Shifting exchange rates are drawing Berlin to new manufacturing sources such as Poland. Additional areas of promise include Brazil, South Africa, the Philippines and Thailand, although the final decision depends on a range of factors, including inflation rates, political stability, government regulations on imports and exports, value-added taxes and concessionary trading policies that can lower the total cost of a given item.

Companies cannot, of course, flit from country to country according to the trends of the moment. In looking to justify investment in a new manufacturing location, Berlin typically takes a five- to seven-year view. For exclusive deals with suppliers, it will sign five-year deals with evergreen clauses. With any deal, the company wants to know precisely which of its branch offices will be supported by the manufacturer in question, so that it can calculate the total cost of shipping.

Despite the allure of manufacturing in the U.S., Berlin finds itself growing faster globally than domestically. One reason, says Brosch, is the consolidation of American glass manufacturers, limiting local options. But there’s no automatic formula for deciding where product gets sourced. “That’s something we evaluate with every new project and customer,” he says.

Two big free-trade agreements currently under negotiation – the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (T-TIP) – promise to further spur global sourcing. Brosch expects them to become “a major factor” in future decisions. Customs practices and duties can be a key aspect of total landed cost, he says. While manufactured glass is essentially duty-free in the U.S., other items made in China can carry stiff import duties.

That said, don’t count China out as an important source of imported product anytime soon. These days, Berlin is splitting some of its manufacturing processes between China and other countries, combining China’s expertise in complex tooling with cheaper end-product manufacturing costs found elsewhere.

Predictions that the company will entirely abandon China within five years have repeatedly failed to come true. “There is indeed a shift away from China,” says Bosch, “but it’s not a simple decision.”

Next: Robots instead of humans in Chinese factories?

Comment on This Article

Adam Brosch speaks and writes Mandarin Chinese for a reason. The director of global sourcing and custom tooling for Berlin Packaging is naturally "China-centric," given that nation's plentiful supply of cheap labor and massive manufacturing infrastructure.

Berlin Packaging is a $1.4bn supplier of rigid packaging, primarily for finished product that ends up on the retail shelf, along with a host of related services, including design, financing and quality control. It outsources manufacturing to more than 7,000 partners around the world.

Brosch is well aware of the complex factors that go into deciding where its product is made. That's why global sourcing is the one major function within the company that’s centralized, at its corporate office in Chicago. Berlin's 24 branch offices throughout North America are otherwise run like small independent businesses, each managing its own sales, operations and profit-and-loss statement.

Overseeing the entire global sourcing process, Brosch is quick to detect shifts in the manufacturing landscape. Between 15 and 20 percent of Berlin’s product today comes from countries outside North America, and a significant portion of that volume originates in China. Like many suppliers, however, Berlin Packaging has been reconsidering its global sourcing strategy, motivated in part by dramatic changes taking place within the Chinese economy.

China’s rulers are attempting to steer the country away from a heavily export-oriented economy to one that places a greater emphasis on domestic production. At the same time, they’re encouraging the rise of a middle class that demands higher wages, and can therefore afford the products that are being made for local consumption.

The change is driving out some Chinese factories that have specialized in the making of low-value goods with cheap labor. At least some of that work is moving to developing countries such as Vietnam in Asia, and Mexico in Latin America. In many cases, the wage disparity between China and the West has been virtually wiped out, especially when elements such as logistics cost are factored in.

Brosch says China is not an ideal source for manufactured product that’s destined for the U.S. East and Gulf coasts. For points east of the Mississippi River, shippers must take into account costs that stem from spanning the additional distance, including those of transiting the Panama Canal.

In recent years, says Brosch, Berlin Packaging has been turning its attention to manufacturers in Eastern Europe and South America. The decision is partly dictated by the ability of certain U.S. ports to handle the latest generation of mega-containerships. In addition, the weak euro is making parts of Europe a cheaper source of product than China, even for relatively inexpensive items.

“China isn’t becoming the silver bullet in terms of low cost anymore,” Brosch says. He might even be able to obtain a cheaper price for packaging from a U.S. producer, depending on the volume, materials, shipping terms and manufacturing run rate.

Shifting exchange rates are drawing Berlin to new manufacturing sources such as Poland. Additional areas of promise include Brazil, South Africa, the Philippines and Thailand, although the final decision depends on a range of factors, including inflation rates, political stability, government regulations on imports and exports, value-added taxes and concessionary trading policies that can lower the total cost of a given item.

Companies cannot, of course, flit from country to country according to the trends of the moment. In looking to justify investment in a new manufacturing location, Berlin typically takes a five- to seven-year view. For exclusive deals with suppliers, it will sign five-year deals with evergreen clauses. With any deal, the company wants to know precisely which of its branch offices will be supported by the manufacturer in question, so that it can calculate the total cost of shipping.

Despite the allure of manufacturing in the U.S., Berlin finds itself growing faster globally than domestically. One reason, says Brosch, is the consolidation of American glass manufacturers, limiting local options. But there’s no automatic formula for deciding where product gets sourced. “That’s something we evaluate with every new project and customer,” he says.

Two big free-trade agreements currently under negotiation – the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (T-TIP) – promise to further spur global sourcing. Brosch expects them to become “a major factor” in future decisions. Customs practices and duties can be a key aspect of total landed cost, he says. While manufactured glass is essentially duty-free in the U.S., other items made in China can carry stiff import duties.

That said, don’t count China out as an important source of imported product anytime soon. These days, Berlin is splitting some of its manufacturing processes between China and other countries, combining China’s expertise in complex tooling with cheaper end-product manufacturing costs found elsewhere.

Predictions that the company will entirely abandon China within five years have repeatedly failed to come true. “There is indeed a shift away from China,” says Bosch, “but it’s not a simple decision.”

Next: Robots instead of humans in Chinese factories?

Comment on This Article

In Modern-Day Global Sourcing, Diversity Rules