Today, we continue our multi-part series on Supply Management: Big Trends & Predictions for 2013 with a look at globalization. Click to read Part One of this series focused on Big Data.
Big Trend #2: The Impact of Globalization on Business Gets Broader, Deeper, and Much More Nuanced
In early 2004, I helped a global manufacturer (a multi-billion dollar revenue company) develop a sourcing strategy that required 40% of total spend to be sourced from China within two years.
Q: Why China and why then?
A: The company’s CFO had recently read an article in the Wall Street Journal covering a main competitor’s recent success with its China sourcing program.
Q: Why 40%?
A: According to my client (a Sourcing Director), “The CFO said that number ‘felt’ right.”
In a few short months, my team and I had set in place a plan for the company to develop a robust China sourcing program and a prioritized pipeline of categories that we would help source.
Many (but, not all) companies that made their move to start sourcing from China nine years ago saw their cost of goods decrease and gained a competitive advantage to boot. Companies that moved 10, 12, and 15 years ago to start sourcing from China were even more likely to see a drop in their costs and gain an advantage from their sourcing strategies.
Companies that made their move to start sourcing from China in 2012 may have seen initial cost savings; of course, the volatility in oil prices (and thereby shipping costs) makes it harder to know how sustainable those savings are. When it comes to competitive advantage however, the likelihood that a company in 2012 was the first in its industry to source from China (or any other low-cost country) is doubtful.
A decade ago, low-cost country sourcing was a daunting new foray for many companies, but at the same time, it was also easier. A decade ago, low-cost country sourcing basically meant sourcing from China and you could literally throw darts while wearing a blindfold and hit savings – the opportunities were that big. Additionally the suppliers were all located in the same general region so calculating TCO (if it was done) was easier since bids had roughly the same tax/tariff/logistics costs.
Today, there is much greater complexity when it comes to low-cost country sourcing, now referred to as global sourcing. This is driven by the simple fact that other low-cost regions of the world are developing manufacturing expertise and an ability to deliver. For example, in many different categories, Chinese suppliers are no longer the lowest-cost global providers nor are they competitive from a quality standpoint.
Globalization has also drawn companies, supply chains, and economies into an interconnected web where events in one part of the world can have a significant impact on other regions, thereby increasing complexity.
The greater complexity in global sourcing and the increased linkage between regions leads us to several regional predictions that will have a global impact in 2013.
Globalization Prediction #1: Africa Rising in 2013 (and the Next Decade)
For years, corporations and countries alike have been investing in Africa to buy, access, and use its rich stream of natural resources. This massive investment over the past five or ten years has helped develop a basic infrastructure of roads and communication (in some regions). That investment will continue to grow but the next area of investment and growth in Africa (and the main point of this prediction) is that we will see a phenomenal investment in the development of manufacturing (and services) expertise. Many of the world’s largest corporations have already taken steps forward and are salivating when they think about the potential there is in Africa from both a supply chain and customer standpoint. Over the next decade, the investment in Africa will be dramatic, but, it will not be linear. There will be many large issues that arise within the region and beyond it (like the next 2 predictions) that will at times slow or thwart growth, but ultimately, we believe that Africa is the next great frontier for supply markets.
Globalization Prediction #2: There Will Be Economic Trouble in Europe in 2013
Many of the Chief Procurement Officers who I spoke with in Q4 of 2012 were actively planning for a European recession in 2013. Many are expecting a deep recession that will linger and serve as a drag on other regions of the world. A few are expecting a worst-case scenario in which Europe in 2013 looks like the US did in late 2008 – in this scenario, Europe reaches the brink of total disaster and brings the rest of the world down with it creating a global recession. We are not sure which scenario will occur or how deep the problem will be for Europe in 2013, but far too many smart CPOs have are expecting serious issues to believe that things will be fine. This will adversely impact the supply markets in Eastern Europe and it will adversely impact China which brings us to…….
Globalization Prediction #3: The Slowdown in China Will Accelerate
China’s fast growth is unsustainable; even if the reasonably resilient global economy of 2012 repeats itself in 2013. China’s economic connection to the West means that potential problems in Europe are potential problems for China. So, if prediction #2 above is correct, China will have a more difficult year than 2012 or 2011. The recent slowdown in China will accelerate.
But, more broadly, China is facing a new set of challenges or more accurately a new set of challengers as more low-cost countries/regions begin to develop supply expertise. In the next few years, Africa’s growth and the growth of other low-cost regions (in Asia, Eastern Europe, and South America) will come at the expense of other regions and China in particular. As these new low-cost regions begin to develop and mature, they will become new markets for Chinese products; but, that will happen slowly and over many years. As a result, China will feel some pain during this transition and in 2013 in particular. All hope is not lost because China will continue to grow over the next decade, just at a slower rate than what they have experienced over the last decade.
Prediction #4: You Can Go Home Again – Manufacturing and Other Jobs Come Back to the US
When companies began their initial foray into global sourcing, the per piece/weight/etc. cost savings was so dramatic that many considerations, tradeoffs, and risks were never factored (or modeled) into the final sourcing decision. With a longer track record of global sourcing and a better understanding of all of the associated tradeoffs, considerations, and risks, more procurement groups have a more comprehensive understanding of the total cost of ownership linked to global sourcing. For example, they understand that:
- The cost of raw materials and labor in many global supply markets has increased over the past 8-10 years.
- The cost of transport and oil has increased significantly over that same time frame
- Volatility and uncertainty are real global sourcing considerations
- There can be a negative business and/or cost impact caused by longer lead times
- There are different risks associated with different suppliers, regions, and categories that must be tracked and evaluated
- Etc.
When all of these different factors are weighed, many of the sourcing decisions made between 2000-2007 should be reevaluated, if they haven’t already. Change is at hand for some categories and suppliers.
How will this net out?
- Some sourcing teams will chase the lowest cost to places like Africa (prediction #1).
- Some will keep the same sources of supply but begin working more aggressively with their current global suppliers to streamline their operations, drive innovation, and improve performance.
- Others still will evaluate the risks, perform scenario analysis, and do a detailed cost/benefit analyses and determine that the smartest long-term decision (and often, smartest short-term decision) will be to bring the supply back to the home country – back to the US in 2013 and back to Europe when their economic troubles have passed.
