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PWC Supply Chain Strategies
PWC Supply Chain Strategies
strategies
1. Rising productivity and moves 4. Product quality risks can stem from
inland are offsetting declining cost China’s pricing pressures and low
advantages. profit margins.
2. Due to the country’s size, proper 5. Lower costs, talent, incentives and
location selection for your supply proximity to market are compelling
chain is critical for corporate reasons to move research &
strategies that position China as a development functions to China.
key market.
3. China still boasts unsurpassed
flexibility and robust infrastructure.
Recommendations
1. Make sure you balance your China 4. Work with your suppliers, and
cost considerations against other provide them with the tools to
supply chain attributes such as asset monitor the quality standards of
performance, flexibility and their operations and that of their
responsiveness. contractors.
2. Align tax considerations with supply 5. Be prepared to make commitments
chain models such as SCOR to drive to train new research staff on
operational sustainability and cost practical analysis, standard methods
savings. and processes.
3. Consider multiple manufacturing
hubs as a potential solution,
factoring in global logistics, transfer
pricing and local incentives.
In late 2011, PepsiCo sold its Chinese Prior to this joint venture The following are top supply chain
bottling operations to Tianjin-based announcement, PepsiCo had limited considerations for multinationals in
Taiwanese beverage company, Tingyi access to national distribution networks, China. We’ll address each in turn.
Holding.1 To some, the deal didn’t look a fairly rudimentary requirement for
great on paper. PepsiCo gave up its China’s food-and-beverage market. But 1. Cost
bottling operation, valued at US$600 with the right distribution channels, 2. Location
million, and in return received a 5% PepsiCo could now restore its China 3. Flexibility
indirect stake, worth US$55 million, in growth strategy by improving on the
4. Quality and supply assurance
Tingyi’s affiliate bottling company – a strength and reach of its supply chain,
US$545-million loss on a single deal. and increasing the speed with which it 5. Sustainability
brings its product innovations to 6. Research and development
But this was a strategic sale for PepsiCo market.
– which, after a couple of years of
straight losses in its bottling business, Supply chain performance in China is
had not been faring well in the Chinese important to those who perceive China
market. By having a local Chinese primarily as a low-cost sourcing or
partner take over its bottling services, manufacturing region. But for those
PepsiCo gained Tingyi’s well- targeting the China market, getting
established and extensive distribution your supply chain right can give you a
channel. And with a new channel to sell competitive advantage. Not getting it
more volume, PepsiCo gave itself a right can be the difference between
chance to get its China business back in success and failure.
order.
1. Zacks Investment Research. “Pepsi Partners Tingyi in China.” Zacks Equity Research Analyst Blog, 7
November 2011
1. Zacks Investment Research. “Pepsi Partners Tingyi in China.” Zacks Equity Research Analyst Blog, 7
November 2011
Labour and material costs have been, for Labour productivity growth-emerging economies
many multinationals, the initial driver
of supply chain considerations in China. GDP per persons employed, annual average
Yet these low-cost benefits are eroding
1995-2005
through a combination of cost increases
in China, particularly in the coastal 2005-2009
areas (which are frequented more often
by multinationals), as well as exchange
rate migration. 9.6%
3. Accenture. “Wage increases in China: Should multinationals rethink their manufacturing and sourcing
strategies?” 2011
Plan
Return Return
6. Duhigg, Charles, and Keith Bradsher. “How the U.S. lost out on iPhone work.” The New York Times, 21
January 2012
7. Murphy, Maxwell. “Pitting costs against control.” The Wall Street Journal, February 28, 2012
Making sure data from your suppliers Factory audits and inspections should
are reliable can have an impact on also be thorough. High-profile cases in
product quality. Companies are now the past have involved public discoveries
looking for more quality reassurance of numerous violations of ISO9001
from their suppliers for reliable work standards, despite frequent audits by
flows, quality of work, environmental multinationals. However, primary
and health standards, labour practices, suppliers often contract many sub-
and trust from their business partner. suppliers or parts suppliers, and periodic
and snap inspections can only pick up on
A high degree of vigilance is needed a certain amount of quality issues. And
both within China and foreign markets, these issues may multiply in relation to
and regular audits are recommended. As the technological complexity of your
mentioned, the accuracy of the product. Again, working with your
information provided by your suppliers supplier benefits both parties, and they
cannot be compromised, and should be encouraged and given tools
collaboration with suppliers is important with which to monitor the quality
to ensuring integrity. Levi Strauss, for standards of their own contractors.
instance, has “a zero-tolerance policy” Making quality demands and imposing
for suppliers who provide inconsistent or sanctions may foster an environment of
false reporting. After two or three bad faith, and encourage suppliers to
warnings, the apparel company would conceal and fudge data wherever
end their contract with the supplier. possible.
They do, however, offer its full support
and cooperation to suppliers who flag Overall, it’s now much easier to find a With food and drug safety concerns also
their problems.8 partner that can deliver quality than it trending high in China, consumers are
had been 10 or 20 years ago, as markets increasingly looking to foreign
gain greater transparency and multinationals for their perceived higher
efficiency. But concerns over the quality safety standards. Preserving consumer
or standards of goods produced in China trust and confidence should take priority
still loom large, as procurement over price concerns in an environment
departments demand faster turnaround in which safety and quality
times, lower prices and increasing considerations are rising in tandem. But
volume. Cutting corners can be the multinationals should be aware that
result of the pressure of meeting many product quality risks are also
demands in scaling up, accelerating linked to China’s high-inflation
production or cutting costs. More risks environment.
can also crop up over time, even for
those with supplier relationships
maintained over long periods. Ensuring
there are plenty of backup suppliers can
be critical in case quality problems need
to be remedied on tight deadlines.
8. MIT Sloan Management Review. “Improving environmental performance in your Chinese supply chain.”
December 21, 2011
As China becomes a major component of Fortunately, lowering greenhouse gas Li & Fung, for example, installed
many global supply chains, ensuring emissions and bolstering environmental upgrades to their lighting technology,
that your China suppliers are aligned records is still a comparatively easy win ventilation, heating and air conditioning
with your sustainability agenda can in China. A BSR Insight report estimates at factories where it does business, while
make a difference to your energy that Chinese factories use approximately implementing other energy efficient and
efficiency strategies and green 11 times more energy than their water management measures. Carrefour
reputation. According to Hewlett- Japanese counterparts.14 Moving China is also conscious of its
Packard’s supply chain policy, the operations to Leadership in Energy and sustainability practices, introducing
company is prepared to terminate Environmental Design (LEED)-certified recycled shopping bags, and adopting a
contracts with suppliers who do not premises could position you at the new purchasing model for buying
comply with its corporate policies and forefront of sustainable practices. The commodities directly from farmers.
code of conduct on energy efficiency and Ministry of Housing and Urban-Rural
corporate footprint management.12 It Development (MOHURD) is also China is central to Walmart’s
pioneered a China-specific energy promoting their own 3-Star system, sustainability strategy, which it relies on
efficiency initiative in 2010 to engage its which is quickly gaining momentum to boost its reputation globally.
major suppliers in developing their because of increased enforcement and Approximately 20,000 Chinese suppliers
energy improvement plans and sharing 3-Star specific subsidies. However, account for 70% of American-owned
best practices. Currently, 76% of its according to the 2012 China Greentech Walmart goods sold globally every year,
suppliers have greenhouse gas reduction Report, green building materials are and in 2002, the company moved its
goals, while close to 50% are looking at often not available in China, and many global sourcing headquarters from Hong
their own supply chains, an impressive products are prohibitively expensive.15 Kong to Shenzhen in mainland China.16
achievement in this market.13 Nevertheless, a focused energy and In 2008, Walmart announced that it
sustainable procurement programme would improve the energy efficiency of
could reduce costs and overall energy its top 200 Chinese suppliers by 20% by
demand by a large margin, boosting the the year 2012. They would eventually
environmental sustainability of your require these suppliers to be subject to
supply chain practices, your bottom line third party audits. In April 2011, it
and your relationship with the announced 119 factories had surpassed
government. that target.17
21. UNESCO. “UNESCO Science Report 2010: The current status of science around the world.” 2010
22. PwC. “Global R&D Tax News: Issue 5.” 2011
23. China Daily. “China plans to enlarge talent pool to 180 million by 2010.” 15 May 2012
24. PwC. “2012 outlook for the retail and consumer products sector in Asia.” 2012