Supply Chain Risk Management: Risks of Relocating a Business ‘China to Vietnam’

According to Lambert and Cooper, accelerating globalisation and propelling innovations have been responsible over the past years for developing market competition. As a result, the focus for enterprises has moved from contending between them on conveying better quality products to reforming their respective supply chain networks.

Effective supply chain design and management thereof allow companies to become leaner and more productive business operations in a stable climate. Yet supply chains’ inherent vulnerability often ultimately brings unexpected risks. This is especially true as companies have increasingly resorted to outsourcing activities  in production and research and development (R&D).

Considering operational supply chain issues around the globe. Ecommerce businesses are being overwhelmed by these concerns. Customer service, parts shortages, unprecedented inventory growth, and warrant management can actually take up internal sources and affect profit margins. This makes it difficult to focus on the business itself.  Another problem is the political aspect of the country, which may affect the transition of business to another country.

For example, in the year 2019 the trade war between the US and China was dragged on for more than a year resulting in 25% tariffs placed on US$200 billion of Chinese goods. As a result of the intensifying battle, more and more companies announced plans or are considering shifting manufacturing from China. According to Nikkei, the Asian Review, HP and Dell could move up to about 30% of their production from China to India. Japan’s Nintendo also pulled out some of the portion of its video game production from China to Vietnam because of the ongoing trade wars.

One of the risks of outsourcing supply chain management (SCM), miscommunication by the partner company or a retailer from another country. This could cause failure to manage inventory, causing disruption to the business, resulting in stock-outs. This would lead to poor customer service experience that will affect the brand image of the organisation internationally.

There could also be lengthy onboarding where SCM partners would take time to be aligned to model, especially when they are just new to the field itself. This would give rise to unexpected costs. Shifting to a foreign country can be expensive. The SCM provider needs to be transparent about their costs since hidden charges can weigh heavy on the business. According to Global Edge, this does happens in Vietnam.

Vietnam’s risk assessment of their weaknesses is the shortcomings in the business climate led by concerns surrounding data transparency. Connected to the political issues of the country are also perceptions of corrupt practices. Migrating costs to low cost countries (LCCs) has moved from being an “interesting idea” to an imperative for most industrial companies. But it’s a “must do” that too often is managed with ambivalence.

On the one hand, companies see it as a critical part of their cost strategy; on the other, too many firms seem to attempt it only half-heartedly. They aren’t sure which costs to shift elsewhere, where to shift them or how to go about the organisational changes that such “cost migration” imply. (Vestring et al. 2005)

Apart from all the political issues, according to Thai Enquirer manufacturers in garments, plastic and electronic industries are continuing to move out of Thailand to Vietnam to gain benefits from trade deals since Vietnam now is part of the Comprehensive and Progressive Agreement for Transpacific Partnership (CPTPP) as well as the European Union Vietnam Free Trade Agreement (EVFTA).

Shifting production to or from other Asian countries like China and Vietnam can be a painful and difficult process. China has a huge workforce of skilled workforce and its infrastructures is resilient and less prone to electricity problems and moving out production from them can have serious consequences for large manufacturers like Apple, since they’ve employed around 10,000 people directly in China and would be losing at least 15 to 30% of production. Moving out production may lead to a diminished quality of products and services.

As the pandemic hits globally, manufacturing in Vietnam is experiencing continued and unprecedented growth relative to other low-cost countries. International investors are increasingly choosing Vietnam as a China plus one destination to combat rising costs in China and other unpredictable scenarios. Although Dustin Daugherty, Head of North American Desk says “Vietnam has uniquely strong advantages as an investment destination for US Companies rise steadily over the past half-decade or so, it’s important to remember that it is still a rather unfamiliar market for new investors.”

Thought processes that should be considered during relocation in Vietnam should include:

  • Market study;
  • Initial Screening;
  • Preliminary due diligence and long-list locations;
  • Detailed due diligence;
  • Comparison model development;
  • Final site selections; and
  • Organizing a visit

Source: Vietnam Briefing

As Vietnam expands as a manufacturing hub, it relies on imports.

However, outsourcing businesses in foreign countries can have some pros as well that works towards profitability and focusing on your core competencies.

  • SCM gives competitive advantage
  • Reduces overall costs
  • Ensure on meeting customer demand
  • Increase flexibility and adaptability
  • Reduce overhead and risk
  • Increase capabilities and resources

As Vietnam provides several options for market entry, companies should have a clear understanding of the production that they intend to carry out in the market. Having a representative office offers a low-cost entry for companies seeking to gain a better understanding of the Vietnamese Market. Also, having a branch office and a joint venture can be an advantage a there will be a public-private partnership that entails a foreign or domestic enterprise and the government of Vietnam.

Though majority of the countries and businesses are still very much in crisis management phase of COVID-19, more businesses and organizations are already exploring and planning up their future into moving out production to Vietnam because of the US and China trade wars that’s still going on. This includes contemplating the course corrections they need to make given technical developments, the evolving actions of consumers and workers, the need for operational mobility and resilience to the supply chain, and the state’s expanded position.

Tony Lugg

Founding Member, Supply Chain Innovation Network™

Tony Lugg is a Board of Advisor for the International Supply Chain Protection Organization and also a Founding Member, Supply Chain Innovation Network™ at KATALYST. Tony has lived and worked in China for a total of 9 years and previously in Singapore for 5 years. He is a Digital Champion transforming the P2P process in a Tier 1 Automotive supplier.

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