A Risky Proposition

Feb. 10, 2009
Global companies evaluate the pros and cons of operating in China.

Everyone knows China has its problems, but that hasn't stopped most multi-national companies from doing business there. When AMR Research asked 130 of them to measure the levels of risk they face in their global supply chains, respondents overwhelmingly chose China as the top contributing region for nine of 15 possible risk factors, which include intellectual property (IP) infringement, supplier and internal product quality failure, and security breaches.

At the same time, the survey also indicates that volatile fuel, energy and commodity prices are top risk factors for those same global companies. And according to Noha Tohamy, AMR's vice president of research, it's this dichotomy that creates a real dilemma.

"On one hand, [global companies] continue to enjoy the advantages of cheaper material costs and labor wages in China as well as the potential to reach vast consumer markets," Tohamy says. "But on the other hand, they must continually reassess the pros and cons of operating in China."

The survey also reveals the following key findings:

The risk of product quality failure and IP violations is growing.

Companies must face the constant challenge of managing product quality across their global supply chains. The risk of IP infringement and the challenge to protect IP rights will only grow in the next few years.

Near-shore sourcing and manufacturing is increasing.

The trend that will witness the highest expected increase in manufacturing and sourcing activities is near-shoring, at a ratio of 5 to 1. Respondents indicate they will increase sourcing and manufacturing activities in Eastern and Central Europe and India at a ratio of 3 to 1.

According to AMR, the three most successful strategies that companies execute in mitigating risk in their supply chains are: performance-based contracts with suppliers or service providers; closer collaborative relations with trading partners; and dual/multisourcing strategies and using redundant suppliers.

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