Raw Materials – the Heart of Economy in China

Statement of the topic

‘Raw materials’ and ‘energy’ are two factors that I would like to explore in Shanghai during my visit to China. The subject of raw materials is relevant to be because of the problems I am facing in my business in the context of raw materials while the latter issue is important because of its universal significance to industrial progress and the current global focus on it. We have had a Chinese business supply partner for the past twelve years and they are our long term partner by agreement. The partnership has worked very well so long but due to the changes in the business environment last year, there have been problems. Our company has manufactured a patented product that has been a good source of revenue and as this product is coming to the end of its patented protection period, many competitors are waiting to get into the same business. We had entered into negotiations with our Chinese partner that they would manufacture the product and our company would purchase these from them and receive a license fee for any they sold to other manufactures. Problems emerged when sales dropped and we could no longer afford to make huge purchases. The supplier company suffered as a result of Chinese policy that did not allow raw materials to be shipped back. This has caused me great reflection into the policy of China and raw materials.

Analysis of the current state of how organizations address this issue

Raw material requirements of a manufacturing plant may be met through domestic sources or through imports in which case they will be subject to the regulatory requirements of the government. According to Drozda et al (1996), the design of the raw material system has a major impact on the plant’s ability to achieve low manufacturing costs. Moreover they suggest that the raw material system must have allowances for expansion in future requirements of raw materials. Generally speaking there must be proper planning to ensure there is deficiency of raw materials that can stall production activities or no overstocking of raw materials that can freeze up working capital. Successful organizations manage the flow of raw materials by using smart inventory management. Just in time inventory management is a method whereby orders for raw materials are placed only after the orders are received for finished products. In a JIT environment, raw materials, once entering the manufacturing plant are not recorded again except when they leave as finished goods (Young and Nie, 1996). JIT can be a solution during times of recession when organizations tend to reduce the manufacturing levels. Japan has always depended on foreign sources for critical aw materials and it has always relied on straight purchase agreements with foreign suppliers without equity participation. However, with increasing demand for raw materials in recent times, Japan is now investing in exploring and developing critical natural resources (Plasschaert and Dunning, 1994). In the context of energy, in recent times, rising prices of energy are increasing the operating costs of a factory. Moreover, in the general interests of the country, the government through its laws focuses on energy conservation. The government has passed several bills focusing on utilization of waste energy, producing electricity through industrial cogeneration, using alternative materials and maintaining process efficiencies at high and low temperatures (Morrison, 1982). Many companies, to cope with increasing energy costs, are shifting to less energy intensive products while others are changing their production techniques, shifting from batch processing to continuous processing (Rice and Rice, 2003). Apart from technological measures, it has been found that even simple measures such as having a more efficient lighting system can reduce energy use. Some companies use sophisticated computerized energy management systems which reduce energy consumption (Rice and Rice, 2003).

My current perceptions on Raw Materials and Energy

I personally feel that in the realm of raw materials, the global recession has created a lot of problems. There is overstocking of raw materials in many industrial plants. When the raw materials are being imported, just in time inventory is difficult to implement. This problem needs to be addressed by the governments who must ensure that industries do not suffer as a result of overstocking. There must be a provision for returning raw materials that are not converted to finished goods within an extended time frame in the event of an economic recession. As for energy costs, my perception is energy costs can be checked by adopting suitable methods. I believe that industrial cogeneration where electricity is produced along with useful process steam is a very promising technology improvement. But in order to have a new energy vision, a lot of money must be spent into efficiency improvements and renewable energy sources.

Two or three specific questions that you want to find answers for when you travel to Shanghai.

What is China’s strategy in the context of raw materials and energy? The country has natural recourses but is importing them at a devouring rate. Due they have a long term plan and if so what is it? Could it truly be a lack of infrastructure as they claim? What is their long term strategy for providing the electrical energy necessary for continued growth? Has this economic and huge success of growth and increase in GDP from China, came from just good timing, and cheap labor or do they have a much bigger plan?

Strategy for exploring your topic or problem

I hope to explore this topic in Shanghai by visiting several manufacturing plants, and seeing how they cope with raw materials and what they do to raw materials that are not converted to finished goods. I would also observe what they do to manage power shortages. I would like to talk to a government official regarding Chinese policy on issues of imports of raw materials and energy. I hope to study these issues by direct observation, formal and informal meetings with officials in the industry and in the government and keeping myself updated on business environment in China through local magazines and newspapers.

Conclusion

I hope by gaining a better understanding of these two critical elements – raw materials and energy – I will better be able to understand the current challenge we have with our partner in China and together be able to come to a solution to this short term problem. In addition having a better understanding of their plans and challenges we will be able to better format a strategy for future negotiations and business dealings in this very unique and diverse country.

Bibliography

Drozda, Tom; Philip E. Mitchell; Charles Wick; John T. Benedict; Society of Manufacturing Engineers; Raymond F. Veilleux; Ramon Bakerjian (1996). Tool and Manufacturing Engineers Handbook: Plastic part manufacturing. SME Publishers.

Morrison, L. David (1982). An assessment of the industrial energy conservation program: final report. National Academy Press.

Plasschaert, R. F. Sylvain and Dunning, H. John (1994). Transnational corporations: transfer pricing and taxation. Routledge Publishers.

Rice, A. K. and Rice, A. L. (2003). The Enterprise and Its Environment. Routledge Publishers.

Young, T. Scott and Nie, Winter (1996). Managing Global Operations: Cultural and Technical Success Factors. Quorum Books, Westport, CT. Publication Year.

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