Tag: Chinese supply chains

Teaching Tip: Ethics and Chinese Suppliers

Each of the 17 chapters in our OM text ends with an “Ethical Dilemma” made for classroom discussion.  In these days of “woke” campuses, we tread lightly, but still believe students need to be prepared to face some unpleasant realities in the world. For example, in Chapter 1, we note how the U.S. sends many batteries to Mexico for the dirty job of recycling. In Chapter 6, it is a coffee spill lawsuit at McDonalds. In Chapter 7, it’s pig slaughtering.

So the headlines about Chinese factories that supply Apple, Nike, and other products now shunning Uyghur workers from Xinjiang provide another example of difficult decisions facing operations managers. The issue, writes The Wall Street Journal (July 21, 2021), is that Western countries are increasing scrutiny of forced labor from the remote region where Beijing has been accused of committing genocide against local ethnic minorities.

Chinese PPE mask producer Hubei Haixin no longer employs laborers from Xinjiang. Lens Technology, a Chinese maker of smartphone touch screens for Apple, is phasing out Uyghur factory workers transferred from Xinjiang.

The about-face by Chinese suppliers that have collectively hired thousands of Xinjiang workers through government-backed labor programs highlights the growing pressure that firms face as Western governments push multinationals to eliminate forced labor from their supply chains in China. Rights groups have accused Xinjiang authorities of mass internment and exploiting what the Chinese government calls “labor transfer” programs to force Uyghurs and other Muslims from the region to work at factories around the country. Former detainees of Xinjiang internment camps are also sometimes funneled to factories around the region in the name of poverty alleviation.

A bill in Congress would ban goods produced by Xinjiang workers in state-run programs unless importers prove otherwise.  Companies with suppliers in the region face a difficult choice. They can risk being associated with forced labor or take steps to ensure that their supply chains are relying on other sources.

It is not just the U.S. firms under the gun. France opened a “crimes against humanity” probe into four well-known fashion brands including Uniqlo and Zara. Roughly 84% of Chinese cotton production comes from Xinjiang, and is known as being among the world’s best. Transferring supply chains is no easy task, given that other major cotton producing regions such as Uzbekistan have a checkered past with human rights issues.

To retaliate against foreign pressures, many Chinese are now boycotting Western manufacturers such as H&M and Adidas that have spoken publicly.

Classroom discussion questions:

  1. As head of manufacturing, summarize the situation for your CEO  and advise a strategy.
  2. How can firms like Apple control their 2nd and 3rd tier suppliers?

OM in the News: Where Will the Toys Come From?

Toy companies are delaying shipments and new product launches and struggling to fill retail orders as the coronavirus epidemic disrupts the industry’s supply chain, reports The Wall Street Journal (Mar. 2, 2020).

Some toy factories in China, where around 85% of the world’s toys are made, remain closed and others are operating at a fraction of capacity, either because of worker shortages or difficulties securing raw materials and molds to make their products. The disruption is threatening the carefully orchestrated schedule of manufacturing and shipments that delivers Barbie dolls and Nerf blasters to shelves. Some large retailers are searching for alternative products to fill holes in their inventories and considering delaying setting their shelves for the holiday season by a month.

Many toy companies have convened war rooms with daily calls to their Chinese manufacturers for status updates. Some have said they might see their expected output fall by around 25% in the second quarter of the year. Zuru, which makes X-Shot blasters and Bunch O Balloons water balloons, said its factories have reopened in phases over the past few weeks. Zuru installed dividers between workspaces, added extra sanitation stations and implemented other precautionary measures. But the company is thinly staffed due to restrictions on China travel and is operating at just 20% of capacity.

Some larger companies have worked to reduce their dependence on Chinese factories in recent years, with trade disputes recently creating the need for a more diversified base. Hasbro gets about 2/3 of its products from China and aims to reduce that to 50% over the next few years. Mattel makes less than 2/3 of its products in China and most of its two largest brands, Barbie dolls and Hot Wheels cars, are made elsewhere.

Even if the factories start churning out toys faster soon, another challenge will be getting them out of China, as toys will have to compete with iPhones and other consumer products for transportation.

Classroom discussion questions:

  1. What model in Supp. 11 (Supply Chain Analytics) did Hasbro and Mattel follow?
  2. What logistics issues does the article refer to?

OM in the News: Tariffs and Global Supply Chains

The potential costs of tariffs being discussed by the U.S. and China have prompted many firms to get creative with sourcing strategies, reports Supply & Demand Chain Executive (March 29, 2019). Oftentimes, that means working with Chinese suppliers to find alternative countries to buy from to avoid the tariffs. The same factories that were relied on in China are now shifting to countries like Thailand and Vietnam, a move that’s expected to take at least 6 months — and increase prices. Companies that have simply accepted tariffs as a new way of doing business are taking control of their own supply chains instead of waiting for a political solution. The challenges are especially great for American companies with manufacturing hubs outside of the U.S.

“We have heard that it takes at least 2 years to get manufacturing up and running someplace else, but its closer to 5,” said one industry exec. The diversified supply chains have made the shift particularly expensive and lengthy for tech companies. Apple, for example, sources parts from 43 different countries to assemble its iPhones. Late last year, its key assembler, Foxconn, announced it would invest $230 million in factories in India and Vietnam to expand its presence outside of China amid the trade spat.

The global rethink of supply chains goes beyond the tech space. In a recent McKinsey report, 33% of companies surveyed said uncertainty over trade policy was a top concern. Nearly half said their companies would shift their global footprint in response, and expected to invest more in local supply chains. Trade uncertainty has only accelerated a trend that began well before U.S.-China relations turned frosty. Rising labor costs in China have been a key driver for the shifts, especially among apparel makers. The China exit is seen as a bigger hit to the domestic economy there, with factory activity shrinking to a 3-year low. Exports slumped to the worst in a decade. Unfortunately, the China slump hasn’t led to a significant bump for the U.S.

Classroom discussion questions:
1. How does the trade war impact global supply chains?

2. Where does a firm like Apple fall in the “Four International Operations Strategies” graphic in Figure 2.9?

Good OM Reading: The Greening of the Chinese Supply Chain

Given how much of the world’s manufacturing takes place in China, and the damage it has wrought on that country’s environment, more and more multinationals are under pressure to clean their supply chains, writes MIT Sloan Management Review (Winter, 2012). For companies that ignore the problems, the costs can be considerable. Just last August, a group of 5 Chinese environmental NGOs focused attention on our beloved Apple for using suppliers with public pollution problems. The international headlines forced Apple to immediately tackle its–and its suppliers’– act.

This  excellent article says that even industry green leaders such as Nike and Adidas may never completely cleanse their supply chains . But rather than just monitoring Chinese suppliers compliance with health, safety, and environmental standards, top US firms are giving them tools and incentives to improve independently, helping use energy, water, and materials more efficiently. They are also reaching deeper into 2nd and 3rd tier suppliers, where the greatest damage occurs. Nike, for example, sends environmental engineers to 40 footwear suppliers to help them set targets to reduce waste and scrap, and improve efficiency. Instead of auditing, the Nike team spends 80% of its time driving new green initiatives.

The MIT Sloan piece points out that audits alone are very limiting, as factories have become adept at hiding problems from auditors. There is even an indigenous consulting industry designed just for that purpose. (Auditors are also commonly susceptible to bribery.) “Corruption is widespread,” says a former rep for Wal-Mart, which has 20,000 tier 1 suppliers in China alone!

The lengthy article includes a 12 point plan for companies to follow to deal with this major supply chain issue. It makes for valuable reading as you cover Chapter 11.