The Impact of Procurement and Outsourcing Strategies in the Chinese Apparel Industry



The Impact of Procurement and Outsourcing Strategies in The Chinese Apparel Industry

Abstract

Until recently, procurement was a necessary, but seldom celebrated, component of multinational corporations. But times have changed: These days, procurement organizations within companies are playing pivotal roles in the success of global firms in ways that old-fashioned purchasing managers could never have imagined. In this special report, Wharton faculty and procurement experts at The Boston Consulting Group discuss why the procurement function has risen to such prominence in a highly competitive global environment, and how, as supplies of critical commodities tighten and prices rise, companies can strategize to mitigate these and other risks.

China is one of the world's export powerhouses. Trade with the US continues to grow at double-digit rates, topping $300 billion in 2007. Regional trading partners like Hong Kong, Japan, South Korea and Singapore are also importing tens of billions of Chinese goods each year. But China's export strength doesn't end there - Germany, the Netherlands and the UK also made the list of China's top ten export destinations in 2007, with annual exports surging over 20% in Germany and over 30% in both the UK and the Netherlands. Most of these imports are motivated by anticipated cost benefits compared to procurement locally. But just how economical is the procurement of goods and products in China in real terms, once companies take into consideration related costs and increased risks?

Introduction

China has undertaken economic reforms since 1978, by transforming a centrally planned economy into a modern market economy, restructuring enterprises' ownership and increasing enterprises' technical efficiency in order to improve the productivity of the enterprises and economy. From the years 1978-2000, gross domestic product per capita in China grew 8% annually, which made China the most rapidly growing economy in the world.

A considerable literature has appeared on the assessment of the productive efficiency and technical performance of Chinese enterprises since the late 1980s, which finds similar results, that is, low efficiency levels in the early 1980s and continuous improvement of productivity throughout the 1980s, especially in non-state enterprises. Among them, a number of studies use a production function framework to examine the determinants of inter-firm differences in productive efficiency and technology innovation, including ownership and other institutional factors.

Using panel data, Miyamoto and Liu (2005) examine the determinants of the national and provincial level productivity in China and find that provincial productivity grows faster if provinces absorb more foreign direct investment (FDI), invest more in human capital and have a higher ratio of agricultural employment. While productivity would grow more slowly if the provinces have a higher ratio of the SOEs. Also government investment does not support productivity growth. Zheng et al. (2003) study the productivity performance of about 600 SOEs from 1980 to 1994 in China.

Their regression analyses indicate that large firms, well-developed coastal provinces, wage incentives and capacity utilization have positive impacts on productivity growth. In addition, education has a significant effect on ...