At the Top of the Slide

Think you have a good read on what's happening on the ground with your offshore supply base? Most procurement executives probably think they do. Sure, they have their teams of supplier-quality engineers checking in a continual basis with their suppliers. They keep up with all the economic news coming out of China and other export-oriented Asian nations. And from those perspectives, things probably look good: their suppliers continue to meet production schedules and quality targets; and China seems poised for some sort of rebound given all the stimulus money the government is injecting into the economy. Supplier viability appears good.

But supply-chain executives should bear all this news with caution. Your staff in China are likely focused only on your own products. Supplier-quality engineers are not inclined to be tuned in to how suppliers are faring with their other customers. And despite signs that China's public spending may help sway its current economic downturn, other economic data out of China point to tough times ahead. How do you expect your suppliers to react in the face of a downward spiral? How will you react?

The unemployment rate in China is on the rise. And nowhere is this being felt more acutely than in the eastern provinces that helped fuel so much of the country's recent growth. Government figures place the unemployment rate at 4.2%, but according to The New York Times, this number "excludes more than 100 million workers who have migrated from rural areas or between cities to find jobs, often in the export sector, and are now feeling the brunt of dismissals, pay cuts and sharply shortened work hours." These are the workers who have been making your parts and assemblies at such low cost over the last several years.

So, what should you be prepared for in the coming months? One thing is a continuing wave of factory closures (or, at a minimum, some form of supply-chain disruption). Factory managers that lose (or simply fear losing) one or two key customers may decide to shut down their operations and walk away entirely (or shift to making higher-margin products).

From its network of sources in China, SupplyScope is getting word of suppliers actually turning away business--despite the current economic climate--for fear of not getting paid by those potential customers. These suppliers are accepting that it would cost them less to refuse an order than to accept one and never receive payment for their services.

With rising unemployment you can expect an uptick in crime in areas hard-hit by the recession. While the Chinese government does not publish crime statistics (for fear of facing embarrassment for its inability to contain crime), local news sources indicate that crime in Chinese factory towns is on the rise (that Guangdong Province officials recently mandated the installation of a vast network of security cameras should be a good indicator). Consider the risks that crime can pose to your suppliers' workers, to your suppliers' operations and their ability to get your goods from their loading docks to nearby ports.

And there is a human side to all of this that relates to corporate social responsibility. If you don't have a good sense for which of your suppliers is required to (or unwilling to) comply with recently-imposed labor laws in China that protect worker rights (i.e., privately-owned factories are not affected by the laws), you better begin to understand your risks in this area. This doesn't only apply to your China-based suppliers. Tough economic times are going to lead to some harsh decisions by factory managers in all countries. Taking the necessary steps to understand your suppliers' business conditions and plans for responding to the current economic crisis will make you better prepared to manage your supply-chain risks.