27 February 2009
Could low-cost country sourcing be the latest victim of the credit crunch?
Andy Allen asks if domestic sourcing will make more economic sense
The appetite to cut spending led to the rise of low-cost country sourcing (LCCS). Ironically, the global economic downturn may cause its downfall, some experts believe.
Steve Varley, Ernst & Young head of advisory, says he has detected a move back to domestic sourcing (in the UK) at the expense of LCCS (News, page 8).
"One reason is currency - the pound doesn't buy that much abroad any more. The other is the supply chain risk of failure of delivery," Varley says.
Citing the difficulty companies have in assessing the financial risk of suppliers based in countries such as China, he adds some companies are increasingly consolidating supply chains in the UK.
Meanwhile, risk management consultancy AON has identified growing risks in low-cost countries as vendors come under financial pressure.
"You'll see suppliers cutting corners. You'll see them trying to subcontract or use temporary labour," says Alex Hindson, AON head of enterprise risk management.
Robin Jackson, CEO of ADR International, agrees that there could be a move back to domestic sourcing - at least in the short term.
He says the weakness of the sterling may make Britain more attractive to investors from elsewhere: "The UK could be considered a low-cost country by some nations."
However, many procurement experts believe there is no longer enough manufacturing capacity within the UK to allow buyers to move supply chains back onshore - even if they wanted to.
Emma Ormond, an international trade consultant for PricewaterhouseCoopers, says: "If you look at clothing and footwear, for instance, the manufacturing capacity has virtually disappeared."
Shipping costs from China that fell dramatically in 2008 will also compensate for unfavourable currency rates, Ormond points out.
Michael Walsh, head of value chain at the Home Retail Group (HRG), which includes Argos and Homebase, says he envisages more HRG business going to UK suppliers because of the risk of supply disruption.
But he cautions the company will continue to source extensively from low cost countries,especially in labour-intensive product areas such as furniture.
"The UK doesn't have the supply base in some of the verticals [categories] we would look at - such as electronics."
Ben Schmittzehe, chief executive of Schmittzehe & Partners, notes that orders to Chinese factories have dropped significantly but he also believes the UK has lost the ability to substitute for LCCS sourcing deals.
According to Schmittzehe it will be painful and time-consuming for buyers to strike up long-term relationships to replace LCCS partnerships.
"You can't base your whole sourcing strategy on a change in the exchange rate," he says.
He believes there are dangers to buyers from the risk that suppliers will take shortcuts in areas such as corporate social responsibility (CSR).
"In these situations a lot of the desirable things go out of the window. CSR has a tendency to take a back seat."
But like many others he considers that these dangers will not be enough to persuade buyers to forgo the advantages of cheap sourcing arrangements.