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What drives China’s Supply Chain – Quality, Cost, Time or Flexibility

Fresh from a study tour to China and tired after submitting a lengthy thesis on China’s Industry context, let me quickly pen a few lines on the competitive priorities that drive China’s Operations and Supply Chain.


Pick a random Chinese manufacturing/services firm and you have a 50% probability that it would rate Quality as its prime competitive priority. That is what a survey result, conducted by Tsinghua University in 2007-08 among select firms, states. Of the four competitive priorities – Cost, Quality, Time/Delivery and Flexibility/InnovationManufacturing firms rated Quality (51%) as the highest followed by Cost (26%), Flexibility/Innovation (17%) and Time/Delivery (7%) in that order. Services firms also rated Quality (46%) the highest. A careful reading of the outcome helps in unraveling the under-currents in the country’s supply-chain.

For starters, anything that is “made-in-China” has a strong quality perception issue; so it is but-natural for the Chinese manufacturers to be paranoid about Quality in their Supply Chain. After-all, this plague, thanks to sheer greed or plain ignorance, continues to haunt the country’s manufacturers and consumers alike.    

Interestingly Cost, which comes a distant second (26%) in ’07-08 was in third spot (after Quality and Flexibility/Innovation) when the same survey was done in 2001. What caused the firms to become more cost conscious during this period? A combination of three factors - appreciation of the RMB against the $ resulted in Chinese exports becoming expensive, rising input cost and slower growth in demand – have led firms to extract every possible yuan from their supply chains.   

What can be the reason for the Services firms rating Quality so high? It is because of Responsiveness, one of the sub-dimensions of Quality. The response-time in China’s service industries has much scope for improvement; in fact, Service operations hold a lot of promise given the visibly long queues at public places (banks, super-markets, call-centers, ticket counters..). A study by Wang et al (2003) on Chinese retail banking found that it took, on an average, a ridiculous 86 minutes for a customer to be serviced!!  

What can one say about the future? A safe bet can be on Cost moving down the ratings and Flexibility/Innovation coming up in the competitive priorities. The financial crisis has made the industry shift focus from exports to domestic market. The growing affluence combined with the buying power of the young generation (referred to as ‘little emperors’ courtesy the single-child policy) will certainly make the firms switch from a cost-focused mentality to one that promotes differentiation & innovation. What can be the consequent impact on their supply chains? I leave the floor open for your comments.


Good thoughts..The 4 competitive priorities that you highlighted also are the usual supply chain metrics that firms focus on..Focussing on your thought of firms gearing up on the innovation attribute, i reckon that has to be in every firm's DNA to grow and sustain in the future. But innovation has its own perspective. The BMW's and the Merc's of the world do lot of innovation, but the Tata's have also proved a low cost innovation model. Firms in emerging countries have a huge potential to sell domestic, but they get their margins only through exports. Taking a leaf out of ricardo, countries have to focus on what they are best at.China is a manufacturing based economy and it works best for them and similarly US is a services based economy.Quality of late is considered to be free and taken as the default case to be competitive. China has learnt this lesson the hard way and would not go back on that attribute. Cost would still remain the primary driver for China for it to be a global exporter. Innovation is required and will be nurtured with time.

Well backed up argument, Venkat. You bring in a different and a refreshing perspective …….I do agree that innovation has to be in every firm’s DNA; that margins are there only in exports (who knows that better than the Indian software services companies) and that Quality is considered a given. My argument for Innovation/Flexibility hinges on a rather radical premise: The world post financial crisis is going to be an altered world; that protectionism will exist albeit in a subtle form and that the surfacing of the domestic economy as a savior for export-oriented economies in this crisis will compel companies to change their outlook towards domestic market. Given this, I feel the basis of the competition in the Chinese market - increasingly dictated by the young generation - would be innovation with cost (and other competitive criteria) as given. Akin to the strategy adopted by the domestic Chinese mobile manufacturers to wrest a large piece of the Chinese mobile market from the MNC’s.

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