There have been a number of reports of late that are noting that inflation has become a significant challenge in China’s economy, and this situation is already motivating some industry supply chains to shift component and finished goods sourcing strategies involving China.

A recent Bloomberg BusinessWeek  article notes that pay among China’s migrant laborers rose by 40 percent in 2010, and is expected to climb an additional 20 to 30 percent in each of the next three years.  Predictions are that all of China’s 31 provinces and regions will likely have to boost minimum wage levels in 2011.  Wage increases are not just confined to the high manufacturing concentrated global regions, but within some interior regions of China as well.  Meanwhile, a building global-wide food crisis along with international pressures directed at accelerated de-valuation of China’s currency, adds additional fears for social unrest along with possibilities for further inflation.

Economists are already speculating that China’s economy may be in the lens of the termed ‘Lewis turning-point’, when surplus labor dries-up and hikes in wages, inflation and prices ensue.  The open question is when does this occur.

As BusinessWeek notes in its article, wage sensitive producers involving global apparel, retail and specialty goods are already in-process of re-evaluating or shifting their China sourcing strategies, in favor of other lower-cost regions. Other industry sectors may selectively follow, depending on their individual business needs and circumstances.

In our Supply Chain Matters 2011 Predictions for Global Chains published this past December  (available in our Research Center drop-down page), we predicted that the landscape for global outsourcing of components and finished goods would shift in 2011, and much more attention will be placed on outsourcing strategies.  We however did not anticipate that changing global dynamics would come so quickly in 2011.

There are some important considerations that readers should ponder in these quickly changing forces.  First, sourcing and supply chain planning teams will need to have more sophisticated analytical tools to analyze their options.  Consider that even as I pen this commentary, continuing social turmoil in Libya and the Middle East have caused oil prices to spike to a high of $115 per barrel. Where the price of oil will eventually land in the coming months is open to speculation and debate.  If there is one significant lesson that can be derived from sourcing decisions made in the past is that sourcing teams cannot just view direct labor costs as a sole determinant in any sourcing decision.  There will always be a need to balance considerations for transportation with corresponding needs for servicing geographic fulfillment, including China itself.  Another consideration is the speed of which the analysis, actual decision, and re-deployment takes place. The ability to shift sourcing quicker than the competition can be an important competitive advantage, while having flexible options may be another factor in assessing options and industry competitiveness factors.

The situations surrounding China and other global regions is once again in flux, and now is the time for sourcing and supply chain professionals to exercise smarter, and more intelligent supply chain management sourcing, decision-making and deployment capabilities. Our global world is getting much more complex, and supply chain sourcing decisions will continue to require more sophisticated analysis tools.

Bob Ferrari