The Challenges of Moving Supply Chains from China to Southeast Asia/South Asia

Reading time:  4 min 15s 

Over the past two decades, China has gone on to expand its economy and become very sophisticated and integrated into global supply chains. Right now though, it appears there’s a global ‘over-dependence’ on China for manufacturing and many businesses are considering reallocation of production units outside of China.

Southeast Asian countries such as Thailand, Vietnam, Cambodia, etc seem the next reasonable choice for businesses considering moving manufacturing from China. But there’s actually more to this than many businesses and individuals are able to see.

 

Moving your supply chain to Southeast Asia

The recent coronavirus outbreak seems to have shown just how critical the Chinese manufacturing market is to the global supply chain. However, a few events, with some even preceding the recent outbreak, like the prolonged trade war between the US and China, have had many businesses considering diversifying their supply chain out of China.

Diversifying the supply chain out of China seems the next easiest thing to do to avoid disruption to your supply chain. The only problem is that it’s not near as easy as it seems.

Here’s why;

 

After dealing with Chinese suppliers and manufacturers for more than three decades, many businesses and individuals have become accustomed to doing business with Chinese companies so much so that they expect this would be a similar experience with the other Southeast Asian countries.

While we’d agree that Chinese suppliers are not perfect, a lot of improvements and changes have taken place over the past thirty years. A lot of the manufacturers and suppliers have been trained by their buyers on so many areas aimed at meeting buyer expectations.

Today, Chinese manufacturers are at a greatly improved level as far as quality control, as well as in compliance with globally accepted standards of ethics and sustainability. The opposite is most often the case with the Southeast Asian countries.

 

Challenges of moving manufacturing to Southeast Asia

The truth is that many buyers are not prepared for the challenges and efforts required to make the move to Southeast Asia as successful as the China experience.

This often requires a new kind of training, monitoring, and, some other commitments that most buyers and businesses are often not prepared to handle. There are four main issues most buyers have to contend with. These challenges are outlined below;

 

1. Quality control challenges

If you’re new to the Southeast Asia manufacturing market, you’ll find that the defect rate here is far worse than what happens in China. While China itself used to be very poor at this, a lot has improved over the years and product quality has now been considerably improved as well.

But that’s not the case in Southeast Asia.

Product quality in this part of Asia has not seen a significant increase as it had seen in China. The recent exodus of companies to these markets has even caused a greater decline in product quality as the local manufacturers struggle to keep up with the demand from foreign buyers.

 

The holiday seasons are the most challenging times here.

Some buyers have reported up to 40% defect rates as manufacturers get very busy during these periods. There’s, therefore, a need to have a proactive plan to deal with defects. The best you can do is to get your inspection right, and this is even different from how it’s done in China.

In Southeast Asia, all inspection must be done before your supplies leave the factory for your overseas facility. So, what happens when you discover product defects after the whole production has been concluded?

 

2. Costs of inspection in South East Asia

A high defect rate can always eat deep into your company profits and revenue.

This is why your best bet when sourcing products from Southeast Asia is a thorough, continuous, ongoing inspection throughout the entire production cycle.

Rather than just discovering defects after your supplies have been transferred to your warehouse for shipment, this type of inspection helps you identify defects at any point in the production process.

 

For effective inspection, you may need to hire the service of a product inspection agent who would have to visit the factory regularly to monitor production. For very large orders, this may be required every day. The only other option is to get an international inspection company for regular on-site visits.

However, both of these inspections have huge costs and can be unreasonable for most small to medium-sized businesses. More inspection costs add more to product’s costs so the products become more expensive than normal.

 

3. Scheduling and delivery delays

It’s a common thing for many companies in Southeast Asia to accept order deliveries without any regard for schedules. Many of these manufacturers don’t respect delivery deadlines and may only deliver your supplies long after the most reasonable time.

This is most common during holiday seasons such as the US holiday season.

This late delivery issue has become even more problematic recently with the influx of more buyers into the market. So, if you would be moving manufacturing from China to Southeast Asia, how can you ensure that orders due for delivery by October do not take until late December to arrive?

 

• First, you need to adopt a realistic approach to your order delivery expectations. This can be done with the knowledge that your order will very likely be delivered late. You may consider cushioning this effect by ordering early. But if your orders arrive very early, you’ll incur additional warehousing costs.
• Secondly, you should consider discussing the issue of late delivery with your manufacturer or supplier beforehand. But many suppliers in Southeast Asia tend to shy away from issues like this. When this happens, you know there’s a high likelihood that your orders will be delivered late.
• Finally, you can get your supplier to commit contractually to a deadline while incorporating some forms of penalty into the contract for late delivery. An example of such a penalty can be in the form of reducing the final purchase price.

 

Assuming your Southeast Asian supplier will keep to their end of the bargain as far as delivery timing is concerned does not work most of the time. You can also put a monitoring process in place via inspection. This will, however, increase the costs of inspection to make production costs even more expensive.

 

4. Protecting your product designs

If you’re buying an off-the-shelf product from your manufacturer, you don’t own the design so you don’t have to worry about a thing.

But what if you’re customizing a particular product for your own use, using your own design? You likely would want to enforce a restriction so this design can be exclusively yours. But this can be pretty challenging in most Southeast Asian countries, compared to what you might have been used to in China.

 

In most cases, there’s no formal arrangement for IP protection.

If you want proper protection for your intellectual property, you may need a separate written contract for this. This arrangement will help you maintain ownership of your product design to effectively prevent the manufacturing company from producing products for itself or other buyers using your own design.

Anything short of this will be like giving out your product design (intellectual property) away to the manufacturer on a platter.

 

Bottom Line

Your ecommerce business needs a very efficient supply chain for success.

Markets have become globally intertwined nowadays. And while this presents major opportunities for growth, you also need to put in a very effective supply chain management framework to overcome the associated complexities.

Whether you’re sourcing products from China or considering moving manufacturing from China to any of the Southeast Asian countries, ZhenHub offers a range of services such as software services to shipping, warehousing, order fulfillment, and inventory management services that will give your ecommerce business a competitive boost.

 

If you need assistance with reducing logistics costs, you can reach out to our specialists – hello(a)zhenhub.com or submit an enquiry here.