Category Management : Dynamic Arbitrage – More than 50 MAJOR Companies Shift Production from China

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Let me build on the discussion started by Anne last week because it is such a critical topic.  While the trade war, tariffs etc. are clearly in the headlines and are having a major impact on these companies who are shifting production, this should not be a surprise to anyone.  The concept of finding and exploiting arbitrage (and it’s not just cost) is not static and Category Management (CM) must incorporate the dynamic nature of that.  We have used the slide below to help clients use this when building offshore COEs for them.  Far too often, clients focus on the execution of their offshore strategy (QA, inspections, logistics etc.) and lose sight of ensuring that the arbitrage is still sustainable.  While it’s fair to say that the tariffs etc. might be the trigger for the shift from China, the other structural shifts in China have as much to do with the shift in arbitrage and therefore the decision to look elsewhere.  According to (MSN) mounting manufacturing risks in China mean Apple will be shifting out of the country regardless of whether a trade agreement is reached “A lower birthrate, higher labor costs and the risk of overly centralizing its production in one country. These adverse factors are not going anywhere,”.  And, by the way, Apple is talking about 15-30% of its production!

When developing your CM strategy (in this case there is an offshore component), you need to ensure that your stakeholders understand and validate your potential exit strategy (although the logic applies generically as well?).  At what point does the arbitrage become un-sustainable for your company (and it is at different points for different companies)?  Your CM strategy must not be just about entering an offshore location, but it must also contain the exit criteria – otherwise it is not complete; it’s not CM anymore. The Category Manager then needs to monitor and keep the stakeholders updated so that appropriate decisions can be made and executed on a timely basis.  Early adopters who are willing to take on more risks get rewarded for that and each company will have a different appetite and it may even differ for different categories.

Category Management

For those who are looking for the difference between Strategic Sourcing (SS) and Category Management in the domain of Globalization, this would be a big one.  As pointed out in Anne’s last blog, the 1st characteristic we look for when conducting Category Management assessments is: Global CM approach is one of dynamic arbitrage. Country of origin & supply base may change frequently. 

By the way, some of you may remember the whole controversy when we declared the death of Strategic Sourcing 😊.  One of the premises there was that if everyone is doing SS, then the market pricing normalizes thus eliminating any advantage created by SS?  Similarly, as the slide above says, “as more companies enter the country, they change the business climate.”

This also provides an opportunity to highlight another big difference between SS and CM – the types of competencies needed to succeed.  The competencies needed to find a supplier in China, develop the contract and monitor delivery are all critical to the execution of the strategy – the functional or tactical skills.  The competencies needed to develop the strategy, get the stakeholders aligned and get decisions made on a timely basis – those are strategic competencies (Consulting, Change Management etc.).  So if you’re serious about getting to Category Management, then you must ensure that your organization has the strategic competencies necessary to help you get there.

So, while the headlines are all about the trade war and tariffs, I would like to think that a number of these companies that are looking to exit China are doing it because based on their exit strategy developed way back when, the indicators are that the arbitrage has shifted.

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Dalip Raheja
Dalip Raheja is President and CEO of The Mpower Group (TMG). Dalip has over 30 years of experience managing large organizations and change initiatives. He has worked across the spectrums of supply chain management, strategic sourcing, and management consulting.
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