A supply chain configuration model for reassessing global manufacturing in China

Global manufacturers have faced unprecedented cost pressures in China because of Chinese currency appreciation, rising labour costs, higher oil prices and reduced value-added tax rebates. This paper aims to reassess the decision of operating global manufacturing facilities in China. A mixed integer programming model is developed for a typical global manufacturing supply chain that includes production in the Pearl River Delta region and trade in Hong Kong. A case study with a footwear product is used to illustrate model application and present detailed analyses. The modelling results affirm the need of relocating labour-intensive production that mainly competes on low costs. Nevertheless, coastal China offers considerable benefits from industrial clustering and a logistics advantage in comparison with inland China and Asian countries where labour costs are still relatively low. Hong Kong remains a robust location choice for trade operations because of its favourable tax policies. Retaining production in China faces high risks from Chinese currency appreciation, while relocation to lower-cost Asian countries is more vulnerable to risks from high oil prices. An intermediate trade operation in Hong Kong can be used to hedge against risks from unfavourable tax policy changes at manufacturing locations. China has risen to an important position in global manufacturing because of its cost advantages. This paper analyzes the new phenomenon of dramatically increasing cost pressures in China. It develops a first-of-its-kind supply chain configuration model for the popular front-shop-back-factory business model in China.