Identification of Supply Chain Risks in India and China with Proposed Solutions
Introduction
As the business world is getting more complex with the rise of globalization pressures and increasing intensity of the global competitive forces, it is critical that organizations must deal with certain risks they are exposed to. Operating in multiple markets with integration into the global economy, businesses face enormous challenges and risks that not only raise the cost of doing business but also cause the loss of competitive edge in the respective market arena. It is necessary that organizations willing to expand their operational activities in other countries should anticipate different risks they are going to face while predicting their likely impact on the cost structure.
One of the major risks faced by manufacturing entities with operations in multiple markets concern the challenges of supply chain and logistics as well as distribution activities. In this regard, this research paper is written to make an important discussion about the supply chain risks which any U.S. consumer goods manufacturer would have to face while operating in India and China. A fact-based analysis is performed in this research paper followed by proposed solution implementing which the U.S. based manufacturer could deal with supply chain risks in India and China.
Reason for which Supply Chain Risks should be studied by the U.S. Manufacturer
If the U.S. manufacturer is able to access resilient and secure supply chain, it will be able to derive enormous competitive edge for competing with local as well as international business rivals. When the U.S. manufacturer would be able to deliver product when its competitors cannot, the former can win a larger group of satisfied customers and will gain an opportunity to access a broader target market at the same time. This competitive edge may be lost if any sort of disruption occurs in the supply chain.
One of the fastest growing economies in the world is India where the economy is expected to grow every year by more than nine percent. As far as worldwide trade logistics performance is concerned, India ranks as 46th country whereas, in the case of GDP growth, India ranks as 13th on a worldwide scale. Even though Indian economy has always posted positive economic outlook, yet the economy suffers from $65 billion in losses due to inefficiencies in the supply chain and distribution network.
In India, supply chain related costs count up to around thirteen percent of the Gross Domestic Product (GDP) which is double than the figure posted by any other country in the world. Even in the United States, the costs of supply chain make up to eight percent of the GDP. If the United States manufacturer wishes to study the supply chain risks in India, it is imperative that such challenges be categorized into two broader groups in the following manner:
Demand Side Risks
The supply chain risks in India could be divided on the basis of demand side challenges which mostly concerns with availability of the variety of options (alternatives) as well as price stability. As India contain twenty-eight states and seven union territories, the manufacturer from the United States must take into account that people differ from one another on the basis of purchasing habits, traditions, customs, food tastes, and dress. Therefore, the U.S. manufacturer will face enormous supply chain risks to be able to successfully address different customer needs on a regular basis.
There is a supply chain risk that due to the decline in supply and demand, the U.S. manufacturer may lose its worth in the Indian market due to less knowledge about the local dynamics. Therefore, it is imperative that the manufacturer from the United States should partner with domestic retailers and distributors in India who can facilitate the foreign investor n developing products that are appealing to local customers at a reasonable price.
The majority of the suppliers in the supply chain industry of India are successful in marketing standardized products to their target market in rural areas. The names of Hero Honda, Tata Motors, Maruti, Hindustan Unilever, and Big Bazaar are quite notable in this regard. Since the rural segment in India is highly price-sensitive, there is a supply chain risk that the U.S. manufacturer might lose demand of its products and might not be able to cover the supply chain costs. Much of its failure in India may also stem from inefficiencies in the supply chain.
Supply Side Risks
The risks associated with the supply chain industry in India mostly originate due to the weak distribution system, complex tax infrastructure, poor infrastructure, lack of local industries to adopt technology at a faster pace as well as the fragmented market. Even though India possesses 2nd largest road network all across the globe with a total of 4.2 million kilometers, yet this facility tends to be of a poor quality.
The manufacturer from the United States should keep this in mind that despite the fact that national highways of India account for less than two percent of the total road network, yet it carries more than forty percent of the total local traffic. There is a supply chain risk that either the products being sent to the market may get damaged while in transit or the U.S. manufacturer may be unable to deliver the end-product to the market on time for meeting ongoing demand.
Just because India has a very complex tax structure, the products supplied and sold by local manufacturers and distributors are taxed twice by both the federal (central) as well as the local government bodies. Provision/receipt of services, manufacture sale of goods, and import/entry make up the major portion of transaction taxes and add up to the costs of manufacturing and supplying a certain product or service.
As India owns a weak supply chain and distribution network, there is a possibility that the U.S. manufacturer may need to maintain higher levels of ending inventories in the warehouse than necessary. There is a risk that warehousing (storage) costs might increase dramatically, products may be lost in the warehouse as well as items stored may get damaged or become obsolete. Apart from this, the organized retail industry of India accounts for a total of ten percent in country’s trade, it is a highly fragmented market. When it comes to supply chain and logistics, it might be very difficult for the U.S. manufacturer to manage an excess of carriers for handling the higher shipment volumes in an effective manner. The U.S. manufacturer should bear in mind that although such supply chain and logistics related activities may be outsourced to any third-party contractor, yet there are few organized firms to handle this situation.
In India, the supply chain industry is facing an enormous difficulty in adopting new technology. There is a supply chain risk that the production process and supply chain knowledge brought by the U.S. manufacturer may quickly become irrelevant in India due to lack of awareness in India about advanced systems and technologies. Investments in the development of Information Technology (IT) infrastructure for handling production and supply chain processes may not prove to be fruitful for the U.S. manufacturer at all.
Supply Chain Risks in China
The U.S. manufacturer must realize that China is exposed to increased number of significant natural threats, including tsunamis, floods, windstorms, and earthquakes. Not only the foreign but the local entities are also facing this difficulty since it is more likely that the regional supply chain activities in China face disruptions in business operations due to the occurrence of natural disasters. The supply chain related risks in China are also significant because the country the country has not yet realized advanced risk management practices as followed in the United States and Europe .
As the local suppliers in the Chinese market are greatly concerned about natural disasters, they tend to collaborate with one another for mitigating supply chain risks inherent to their respective locations. In China, supply chain disruptions caused by natural disasters have always resulted in long-lasting and far-reaching negative consequences for the Chinese economy. As the U.S. manufacturer is planning to start operating in China, it should consider a supply chain risk that natural disasters would slow down the economy.
The troubled debt market of China is also considered an imminent threat to the worldwide supply chain activities. There is a risk that the local supply chain entities may fall into disarray overnight and may default on their commitments. The U.S. manufacturer must realize that due to rising debt in China, suppliers with good credit rating may also face difficulties for which they may either compromise with the supply chain quality or delay their shipments to the targeted areas if these suppliers gain limited access to finance.
The U.S. manufacturer will face an enormous supply chain risk if the local suppliers default on their commitments, thereby, resulting in dislocations in supply chain activities. There is a supply chain risk for the U.S. manufacturer that the local suppliers collapse frequently as credit availability in China are tightened. Due to this, there is a risk that financial records may be tempered in China to get the higher credit rating and more credit from the financial institutions. Apparently, the U.S. manufacturer would find it almost impossible to monitor the supply chain and other activities of its local partners. In China, interruption in the lower part of the supply chain will bring about disruptions in the higher levels of hierarchy as well.
Proposed Solutions for the U.S. Consumer Goods Manufacturer
If the U.S. Manufacturer is planning for expansion in the Indian and Chinese marketplaces, it must realize its limitation that the detailed highway data cannot be fully accessed and applied until the company is established in the region. It is imperative that the U.S. manufacturer should enter into partnership agreements with the local suppliers for mitigation of supply chain risks. Increasing safety-stock levels, design to inventory strategies, building a proprietary transportation network, factoring in contingency plans and linking network can help the U.S. manufacturer in maintaining service levels and effectively access marketplaces all across the globe through imports and exports.
Whether the U.S. manufacturer decides to operate in both the countries or in any one of them, it should integrate inventory management and transportation activities. Transparency into transportation and logistics schedules could surely provide a clear understanding of the worldwide movement of goods either imported or exported. These activities will facilitate the U.S. manufacturer in maintaining optimal inventory levels in its supply chain activities in the Indian and Chinese marketplaces.
In an infrastructure-challenged country like China, the U.S. manufacturer should consider hedging against supply chain risks as significant part of logistics costs. If the U.S. manufacturing firm is planning to produce goods in either India, China or both and exports them back to its country of origin, the United States, it should consider the supply chain problems as well. For instance, exporting goods from India and China may take forty to sixty days to transfer inventory or finished goods to the U.S. territory.
Comparatively, exporting finished goods from South American countries or Mexico will require the U.S. manufacturer to transport goods on average of thirty business days. In China and India, of the U.S. manufacturer carries an additional inventory of inputs as raw materials, it would help the business avoid excessive transportation and logistics costs in the face of strict trade barriers as well as in the event any calamity arises. The U.S. manufacturer will be able to transport shipments on time and avoid delays even if there is a natural disaster in China or strike all over India.
As far as supply chain risks in India are concerned, the U.S. manufacturer could meet most of its challenges if it integrates sound supply chain strategies. Implementation of an automated inventory handling and transportation system would give this company a competitive edge in the face of ongoing local and foreign rivalry in the Indian marketplace. Despite the fact that the supply chain industry of India is very complex and overwhelming, as discussed in one of the previous sections of this research paper, it is important that the U.S. manufacturer should understand and master the local dynamics in an attempt to serve the diverse population of India. As a general plan of action, the U.S. manufacturer should review the design of local supply chain industry for carrying out detailed study and analysis. This study and application of learned information would help the U.S. manufacturer gain a better position in a highly competitive marketplace.
As an offshore manufacturer from the United States, the company should realize that the how much intensive and devastating a catastrophe could be just as Japan was hit by an earthquake and tsunami in the year 2011. The U.S. manufacturer can mitigate supply chain risks associated with natural disasters by installing production facilities across different locations and enter into a contract with multiple suppliers. This would surely increase the supply chain costs but the benefits usually outweigh this problem. Instead of doing nothing, the U.S. manufacturer could resort to the reconfiguration of the supply chain activities in China to handle disruptions in a far more effective manner.
It is proposed that the U.S. manufacturer study the Chinese environment, forecast the likelihood of any natural disaster and its likely impact on the local supply chain activities for risk mitigation. Apart from this, since the businesses in China have limited access to credit after the stock market collapse at the start of the year 2016, the U.S. manufacturer should examine/study the credibility and reliability of every supplier the company is planning to partner with. This will help the U.S. manufacturer to determine creditworthiness and operational efficiency of every supplier.
As stated earlier, the U.S. manufacturer should segment the supply chain instead of struggle with daily fluctuations and delays in shipping goods to the targeted areas. This could be done by entering into supply chain contracts with small and low-cost distributors all across the Chinese boundaries while keeping the supply chain flexible and highly responsive to any disruption due to a natural disaster. By implementing this proposed solution, the U.S. manufacturer in China could limit or isolate the possible impact of disruptions while creating a supply chain backup to keep the transportation cost low .
Conclusion
After carefully analyzing the supply chain risks associated with Indian and Chinese market platforms, it is observed that both the countries contain different level of uncertainties which the U.S. manufacturer has to deal with. As far as India is concerned, its supply chain industry contains valuable opportunities the essence of which is jeopardized by the inability of the local suppliers or vendors to adopt advanced technology in the supply chain and logistics. Implementation of IT infrastructure is the major solution proposed to the U.S. manufacturer for dealing with local supply chain risks prevailing in India.
With regards to the supply chain and logistics risks in China, they are mostly driven by uncertainties concerning the occurrence of natural disasters and resulting disruptions. Therefore, it is proposed to the U.S. manufacturer to not only resort to the supply chain segmentation by contracting with low-cost vendors but regionalizing the logistics activities is also proposed for limiting the disruptions caused by natural disasters. In this concern, it is proposed to the U.S. manufacturer to installed multiple production lines or facilities in different locations.
This will not only help the U.S. manufacturer reduce transpiration cost when fuel prices are rising but will also cause its supply chain activities to become highly responsive to disruptions translated by any strike or any natural disaster. Adopting and implementing advanced solutions in both of these countries is also imperative if the U.S. manufacturer wishes to derive competitive advantage and become successful in no time. Partnering with local supplier forces after carrying out detailed vendor analysis is also critical to supplement such a success.
However, there is a risk, particularly in China, those vendors or suppliers may gain either little access to funding or may default on their financial commitments. Due to this, there is a supply chain risk that those suppliers may either delay product shipments to critical areas or may refuse to continue supply contract. The U.S. manufacturer can deal effectively with this problem only if hires multiple vendors for distribution by keeping the supply chain activities regional.
It is equally important that for the U.S. manufacturer of consumer goods to satisfy the local demand prevailing in the Indian and Chinese market for gaining competitive advantage. It is also proposed that not only should the U.S. manufacturer account for uncertainties or risks in the supply chain while operating in India and China, but it is critical that the likely impact of such vulnerabilities must be carefully anticipated in advance.
Works Cited
Chopra, Sunil and Manmohan S. Sodhi. Managing the Cost of Risk Reduction in the Supply Chain. 20 August 2014. 21 May 2016 <http://www.europeanfinancialreview.com/?p=3307..
FM-Global. Supply Chain Risk Study: Natural Disaster in China Could Impact Global Economy and Pose Greater Threat than Japan Earthquake and Tsunami. 05 December 2011. 21 May 2016 <http://newsroom.fmglobal.com/releases/supply-chain-risk-study:-natural-disaster-in-china-could-impact-global-economy-and-pose-greater-threat-than-japan-earthquake-and-tsunami..
