Has low-cost sourcing lost its lustre?

21 August 2012
Procurement strategy has bizarrely become caught up in the US presidential election, with both candidates engaged in a bitter fight over the outsourcing and offshoring of US jobs. But while the politicians focus on the employment issue, for most companies manufacturing or suppliers location is a complex evaluation of cost, risk and lead-time.

A recent Gartner survey showed that in just two years’ time, 20 per cent of finished goods sourced and assembled in Asia for sale in the US will have shifted to the Americas. Even Google’s new Nexus tablet is designed and manufactured in the US close to its headquarters. It judged proximity of the designers to both its customers and the manufacturing process was crucial if it was to generate an innovative product with a short time to market.

So is this the end of low-cost country sourcing? Certainly not, although it is clear to me that what was once an accepted wisdom is becoming more complex. Rising inflation, corruption, poor legislative frameworks, infrastructure and rising logistics costs are all having an impact. Sourcing decisions are now also being increasingly influenced by environmental, ethical and labour considerations. This means that strategies are becoming more sophisticated and are often segmented or differentiated based on both product and complexity. Companies are looking to differentiate their supply chain and procurement strategy. At a finished product level, the goal is often to make it local to local, with main manufacturing in one location and then customisation nearer to the market. This means that while globalisation will continue to drive global sourcing, the need to find and develop local suppliers will also increase. There will be a split of products: those with high volume and stable demand going to low-cost sourcing environments, while fast changing fashion-orientated ones or those that need specialised manufacturing remain nearer to their key markets. Procurement has a huge opportunity to contribute to the development of these increasingly complex supply chains with well-thought-out strategies that consider all the contributing factors to developing competitive advantage for their companies’ products. ☛ Tom Woodham is a director at Crimson & Co
Darmstadt-Dieburg, Hessen (DE)
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