Supply Chain Issues from Canada to China

Recently an opening of the economies of developing nations, especially China, has allowed a huge shift in outsourced production. For the most part the products of the outsourcing are destined for North American consumption, which creates interesting obstacles to the realizations of improvements predicted. Mega Bloks Inc is a Canadian example of this trend, having recently made their own foray into outsourcing to China. An examination of supply chain issues reveals the overall complexity and number of issues which could develop for a company like Mega Bloks. More specifically, for Mega Bloks issues of logistics, regulation, control (in general and specifically of quality) come to the forefront. All of these issues can individually and in aggregate lengthen the supply chain and as a result increase costs well beyond the optimistic predictions of the savings to be gained from outsourcing. However, if the issues are identified and analyzed companies like Mega Bloks can control the supply chain.

It can be proposed that the tremendous growth in global trade experienced in recent decades and the liberalization of closed economies were, in large part, correlated with large investments in designing and managing vast supply chains that span countries and continents. The advances in outsourcing (particularly offshoring) and supply chain management have ushered in such immense successes for many companies that it is often depicted as something of a magic bullet - a panacea for all the operational woes of catering to an increasingly fast-paced, competitive, and consumerist market. More and more businesses are buying into this outsource and supply chain euphoria. A study conducted by AMR Research indicates that more than three-quarters of the 300 North American manufacturing and distribution companies surveyed had developed supply chain organizations . Many such deals are big and strategic enough to qualify as "bet the company" arrangements involving a complex mix of people, processes, and assets. Indeed, almost 100 megadeals (contracts with values of greater than $1 billion) have taken place in the past ten years, with 15 in 2003 alone . However, there are many indications, that supply chains when misunderstood and improperly designed can wreak havoc to the operations of a company, which eventually are reflected in the bottom line and the overall financial health of the company. Corporations still rely on a standard procurement approach, with contracts and agreements managed by individual departments--the way they make commodity purchases. This mind-set is underscored by the increasing use of third-party consultancies, which often reduce the bidding process to a commodity comparison of vendors that limits transparency and that uses price as the primary decision-making factor. Many companies with traditional outsourcing agreements have focused only on the embedded value of an agreement-which in many cases is the cost savings realized by the buyer or the new revenue streams created by the vendor. As a result, inaccurate estimates of the total value lead to incorrect revenue distribution between the buyer and the vendor. Not surprisingly, up to 50 percent of outsourcing arrangements fail to deliver the expected value .

With these supply chain issues in mind, we now turn to Mega-Bloks Inc. for a case analysis of a Canadian manufacturer who recently extended their supply chain by manufacturing in China. Mega Bloks is a Canadian toy company based in Montreal, Quebec specializing in interlocking building block and other resin based toys. As of March 15, 2006, Mega Bloks announced that after their acquisition of Rose Art Industries Inc. in July of 2005, they will move their manufacturing to a Rose Art Industries factory in Shenzhen, China, closing all North American production facilities and constructing a new warehouse in Tacoma, Washington. The stated purpose of this move is to "leverage combined strengths....(to) focus on our core competencies.....and to deliver synergies of approximately $7-10 million on an annualized basis ". Mega Bloks has purchased a few product lines, but most importantly purchased an established offshore production facility and established supply chain connecting that facility to the North American market. It is interesting to look at the Mega Bloks case for several reasons. Firstly, Mega Bloks has not yet made the move and therefore the results of this venture are not yet known. We can presume, however, that Mega Bloks has done careful diligence on many of the issues we will propose before entering into such an agreement. The prospective nature also means we can now observe the actual impact in their business versus the outcome Mega Bloks has predicted. Also, the toy industry is going through significant changes that make it more and more necessary for producers to compete on price and innovation. Specifically, children are becoming more tech-savvy at a younger age and have far more toy options . Innovation and low cost are becoming the keys to success for toymakers. By Mega Bloks shifting production to China, they are hoping to reduce costs and be able to focus on their core competencies, which they describe as "new product development and superior customer service " This move to China will have a tremendous impact on their supply chain and Mega Bloks will face many important issues and problems as they move ahead. Finally, the toy industry is one with established offshoring practices, Shenzhen China now being known as the toy production capital of the world. This offers both expertise and competition.

As described by John Manners-Bell , keynote speaker at the most recent Global Supply Chain Conference, with respect to China, these supply chain problems can stem from a number of logistical issues present there, such as government regulation, high level of bureaucracy, insufficient transportation networks, and a lack of distribution networks. Producers of bulk goods and commodities find China's transportation system cumbersome, costly, and slow. For makers of finished goods--whose needs are more complex--the situation is even worse: ships and railroads are slow and inflexible; modern trucking networks are nonexistent at the less-than-truckload level; and cargo planes account for only 20 percent of China's aircraft. Lack of Information Technology and business management training are often causes of distress as well.

Over the last twenty years, container volumes have grown at an average annual rate of 7 percent, but port capacity expansion has not kept pace with volume growth. Several studies indicate imminent container port capacity deficits . Furthermore, containerships in the US continue to get larger with economies of scale, requiring faster turnaround times and increased cargo to benefit from the advantages of economies of scale. A research paper submitted