Separating factsfrom emotions

Separating factsfrom emotions

The sky is falling because of globalization's failings. Headlines such as "The China Misconnection" and "Globalization Comes Under Siege," alongside reports of recalls, counterfeiting, new labor laws and inflation add up to scare tactics and sensationalism. It sounds like we should build walls around North America, begin manufacturing domestically, and live happily ever after.

Independent of what headlines claim, globalization is neither good nor bad - it just is. Globalization drives change, which leads to controversy and fear. Stop acting on emotions. Focus on good business judgment instead.

This discussion is not about "China-ization" or sourcing and selling products. It is about maximizing your company's profits by capturing global market share.

The constant chasing of low-cost countries is killing companies that do not understand total delivered cost. Costs of manufacturing in China, Vietnam or Alabama are insignificant; ultimately, consumers just care about total delivered costs.

The best product sources change as globalization evolves, but only in the context of total delivered costs. For example, last year's new labor laws and subsequent higher labor costs allowed China to force some low-paying, undesirable manufacturing into other countries, while keeping high-paying, desirable manufacturing. Global business costs are dynamic in ways domestic business costs aren't. These types of shifts in strategy by the Chinese government, which affect the dynamics of cost, have ramifications for companies trying to achieve a global strategy.

Questions on costs can be answered based on total delivered costs with the expectation that foreign, not domestic, manufacturing will dominate. Even with high fuel costs, returning manufacturing back to the U.S. isn't possible. The capacity, labor skills and capital required aren't available, and rising oil prices actually preclude manufacturing domestically, as the U.S. is not among the low-cost countries with the lowest total delivered costs. Fuel costs are higher to ship by truck from Tennessee to California than shipping to California from Shanghai via ocean transport.

Globalization requires a complex supply chain. Without a good strategy, this could lead to additional costs. The Supply Chain Consortium, a leading source for supply chain benchmarking and best practices knowledge, notes that it takes an average of 66 days for an order to reach its destination when shipped from an Asian supplier to a West Coast port and on to its destination. If the level of sophistication in planning and executing the supply chain equals its complexity, the cost, risk and potential for disruption can be significantly reduced.

The people with the most to say about quality in China are the ones who have never sourced from China. Poor quality exists, but so does high quality. Asia is like anywhere else: If low price is your priority, someone will sell to you, and you simply get what you pay for.

Price is not the only factor for low quality. Relationships matter. Make sure you are successfully managing your relationships with your suppliers. There are supplier relationship management tools available to help build a bond between supplier and buyer, even over long distances.

If you fail to specify your needs and never forge a relationship, disappointment should not be a surprise. In my experience, your quality expectations can be met by low-cost countries if you invest time in the relationship.

"Globalization is a fact of life for the Fortune 500," writes Fortune magazine. Fortune 500 companies such as Hewlett-Packard, Ford Motor and Dow Chemical gain 50 to 75 percent of their revenue outside of the United States. This market is not just for large corporations. Typically, the percentage of foreign revenue is consistent for large and small companies.

Globalization can also have a positive impact on your bottom line. A study by the American Chamber of Shanghai, China (AmCham) divided firms in two categories: companies that source less than 35 percent of their materials from China and those that source more than 35 percent. Firms that sourced more made twice the average profit than those that sourced less.

AmCham also studied firms that only sourced materials from China versus firms that both sourced and sold materials to and from China. They found the average profitability of firms that applied dual objectives (source and sell) was more than 160 percent above that of companies that only sourced from China.

Globalization is here to stay. The more global you become, the greater your profitability will grow.

James A. Tompkins, Ph.D., is president and CEO of Tompkins Associates, a Raleigh, N.C.-based supply-chain consulting firm with offices in Asia, Europe and Canada. He can be contacted at jtompkins@tompkinsinc.com.

July 14, 2008