Supply Chain: Making It in China

When Arvinder Surdhar traveled to China in 1990 to form a joint venture between IBM and a Chinese manufacturing company to produce PCs, he wound up manufacturing something he hadn’t expected: cardboard boxes.

"When we opened up those first shipments from China, there was more dust in the boxes than anything else," recalls Surdhar, who is director of global logistics for IBM’s integrated supply chain division. Many of the PCs were damaged due to problems endemic to doing business in China, problems that still plague American companies 15 years later: bumpy, dusty, overcrowded roads (and train tracks); a fractured logistics network in which shipments are loaded and unloaded at the whim of provincial border agents; overburdened ports where products languish in humid containers for weeks waiting to board a ship. "We had to come up with special shrink-wrap and unique, thicker boxes and packing materials that absorbed shock and resisted dust and humidity," Surdhar says.

IBM’s new boxes did not wipe out the cost advantages of making PCs in a country where factory workers, truck drivers and longshoremen make one-tenth the salary of their counterparts in the United States and Europe. But they could have. According to research by consultancy Booz Allen Hamilton, the logistical costs of getting products into, around and out of China may end up outweighing the cost advantage gained by going there in the first place; if the labor costs of manufacturing the product in the West account for 25 percent or less of the total product cost, it may be to companies’ advantage to keep manufacturing in the West.

Besides logistical complications, other factors—such as inflexible production lines and limited ability for many Chinese factories to handle last-minute design changes—can also make the risk of going to China bigger than the potential savings. Broken, dusty, improperly specified or delayed PCs don’t sell, no matter how little it costs to produce them. IBM’s joint venture thrived after its initial logistical hiccups, according to Surdhar, and the joint venture eventually began making higher-end servers for IBM. (The PC part of the business was sold to Chinese giant Lenovo earlier this year.) Other companies haven’t fared so well with their joint ventures. Making sure that products built in China look, function and arrive as promised remains a tremendous challenge today.

1 2 Page 1
Page 1 of 2
7 secrets of successful remote IT teams