Industrials

Modern Supply Chain Lessons From The Ancient Chinese Silk Route

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<p>Silk Route, is the ancient trade route, linking China with the west, that carried goods and ideas between Rome and China. Silk went westward, and wool, gold, and silver went east. Nestorian Christianity and Buddhism (from India), also traveled the Silk Route.&rdquo; &ndash; Encyclopedia Britannica</p><p>This ancient trade route connected China and Japan &amp; Korea in the east and Eurasia (mostly Venice) in the West.&nbsp;&nbsp;It was primarily an over-land trade route in the early years with many intermittent stops and evolved to include the maritime routes in the later years. &nbsp;&nbsp;The significance of the route is that the Silk Route and another similar route, the Spice Route, were the two main trade connections between the East and the West, ten centuries ago.&nbsp;&nbsp;&nbsp;Pioneer stories of the early silk salesman, including the chinese are legendary. They made the world a smaller place hundreds of years ago.</p><p>In recent years, China has promoted the belt and road initiative, a modern trade route. Understanding the old silk route, provides insights to the scope and the future of the new initiative.</p><p><strong><u>Connectivity Is Everything</u></strong></p><p>Two major industrial areas of China, the Pearl River delta in the Southeast and the Yangtze River delta in the east are well connected by China&rsquo;s top volume ports. More than 70% of China&rsquo;s exports are from these regions.&nbsp;&nbsp;However, most interior parts of China, have not benefited from industrialization and are landlocked.&nbsp;&nbsp;So, China is proposing a massive infrastructure project to build an ambitious scheme of rail and road, combined with air and sea routes to connect these far-flung areas to their intended product markets.&nbsp;&nbsp;This is a major undertaking with a USD $4 to $8 Trillion commitment (Source: Ejinsight.com).&nbsp;&nbsp;&nbsp;However, even a cursory review of these projects shows a low ROI, that cannot be justified by economics alone.&nbsp;&nbsp;China is banking on the quality of life improvement at these far-flung areas, to justify these investments.&nbsp;&nbsp;This project cannot work anywhere in the world, other than in China.&nbsp;</p><p><strong><u>Product complexity &ndash; Can products be Good, Cheap and &hellip;&hellip;&hellip;. Fast:</u></strong></p><p>The first and most obvious difference between the centuries-old trade and today is the product variety is more complex than ever before.&nbsp;&nbsp;China, as is the case of many rapidly industrialized nations, presents many perspectives of this complexity.&nbsp;&nbsp;Each suppliers&rsquo; experience is very unique, so there are many views of the operational capabilities necessary to achieve the target performance for the sourced product.&nbsp;&nbsp;</p><p>Over the years, I have seen cases of poorly run facilities being run with state subsidies and heard stories of equipment loss due to power failure and other infrastructure issues.&nbsp;&nbsp;In contrast, the good suppliers in China, need to be sorted out with diligence.&nbsp;&nbsp;The product output, quality and technical capability vary widely from suppler to the supplier. The buyer has the hard task of evaluating each for their long-term supply needs, based on their one-on-one assessment.&nbsp;&nbsp;This can be achieved only with the right support and &ldquo;boots on the ground&rdquo; approach.</p><p><strong><u>Delivery Timing - Batch Goods vs JIT</u></strong></p><p>In the old Silk Route, the goods were delivered on a cash transaction or on barter for other goods.&nbsp;&nbsp;Today, the goods are procured on credit, just in time for usage or in time for further processing into final products.&nbsp;&nbsp;Product availability and timing is everything.&nbsp;&nbsp;A dynamic supply chain requires a good logistics chain and predictability in the processing, shipment, and tracking mechanism.&nbsp;&nbsp;&nbsp;Supply chain transparency is key to this execution.&nbsp;&nbsp;</p><p><strong><u>Relationship Manager</u></strong></p><p>The ancient silk route was driven by the trader, who acted as the relationship manager between the producers and the customer. He (ie mostly they were male traders) would enable the producers by identifying the customer needs, assist in some financing for the producer for raw materials, and making sure that the product is saleable in trade.&nbsp;&nbsp;He would be the front face of the producer, when he visits the customer or his middlemen, the Customers representatives.&nbsp;</p><p>In the current supply chain context, the supply chain is continuously under cost and unreasonable timing pressure, which may unduly damage an otherwise healthy supplier relationship.&nbsp;&nbsp;I recommend that you have a relationship manager, a middleman, especially if you are a small to medium volume customer.&nbsp;&nbsp;</p><p><strong><u>Buyer Beware To A Buyer&rsquo;s Agent</u></strong></p><div class="slate-resizable-image-embed slate-image-embed__resize-full-width"><img style="display: block; margin-left: auto; margin-right: auto;" src="https://media-exp1.licdn.com/dms/image/C5112AQHfOcFpLgrQXg/article-inline_image-shrink_1000_1488/0/1521980413969?e=1643241600&amp;v=beta&amp;t=-YB8BRh1hxqRKMLo5IQfQR4Wjco7kNCl4dypBHz7qO8" data-media-urn="" data-li-src="https://media-exp1.licdn.com/dms/image/C5112AQHfOcFpLgrQXg/article-inline_image-shrink_1000_1488/0/1521980413969?e=1643241600&amp;v=beta&amp;t=-YB8BRh1hxqRKMLo5IQfQR4Wjco7kNCl4dypBHz7qO8" /></div><p>&nbsp;</p><p>In his famous book, &ldquo;Poorly made in China&rdquo;, Paul Midler, the veteran China expat author outlines many cases of product quality issues, many even beyond the normal expectation of the average consumer in the West.&nbsp;&nbsp;In China today, there are many cases of lead paint in Children&rsquo;s toys, fake plastic eggs sold as real eggs and Cow dung manure fed to farm-raised fish.&nbsp;&nbsp;Unfortunately, the prevailing thought is that buyer beware.&nbsp;</p><p>In the old days, this buyer beware translated into the tendency of the buyers to take someone familiar with the product for the purchasing process.&nbsp;&nbsp;This &ldquo;friend of the buyer&rdquo; would evaluate the quality of the product before the purchase.&nbsp;&nbsp;In today&rsquo;s world, the products shipped from China, may be too late for rejection at your incoming quality.&nbsp;&nbsp;If the shipment is paid by the customer, by the time that the product is in your warehouse, the material is far away from the onboarding point and represents a considerable waste of shipment and resources.&nbsp;&nbsp;</p><p>This is a business risk and must be planned in the sourcing stages.&nbsp;&nbsp;Many opportunities exist to mitigate this risk, including independent local quality expertise that has to be considered in the purchase-sourcing process.&nbsp;&nbsp;Many such enterprises are available in China or near China locations.</p><p><strong><u>Product Standardization</u></strong></p><p>The Chinese salesman in the Silk Route will typically bring 3 or 4 varieties of Silk products, in multiple colors and options.&nbsp;&nbsp;In the modern-day equivalent, China has standardized in steel, copper and other raw materials in the same way.&nbsp;&nbsp;By targeting a few high volume raw material commodities, the price variation is kept low.&nbsp;&nbsp;So, a china producer can produce a few hundred or a few thousand or a 10s of thousands for almost the same cost of raw material.&nbsp;&nbsp;This is a great supply chain innovation but causes strain when you need something other than is commonly available.&nbsp;&nbsp;All non-standard commodities are almost always not available in the China market.</p><p>In summary, it is clear that the new Belt Road initiative is here to stay, and will contribute heavily to supply chain infrastructure over the years on a constant improvement basis.&nbsp;&nbsp;Therefore, I believe a thorough review and a boots-on-the-ground management, is necessary to keep the dynamic supply chain responsive to the needs of your customer.&nbsp;&nbsp;The Yellow Brick Road of grand success in the supply chain will follow the new supply chain routes.</p><p>The author is a veteran of the Detroit Automotive industry with Engineering, Quality and Supply Chain assignments with over 25 years of experience. His expat assignments include China, S.Korea, Germany and India.</p>
KR Expert - Dr. Surendar Shawn Paul