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Globalization trends in Supply Chain … Its just getting riskier! Are we seeing a turn-around in supply chain thinking?

Reasons such as low cost of resources and labour and favorable exchange rates have driven globalization of supply chains with many manufacturing and retail companies moving their sourcing strategies eastward for several years now. Well, do we see the paradign change now? The venerable Supply Chain Management Review is carrying out a survey (http://www.scmr.com/article/CA6594832.html) on US becoming a low cost country sourcing hub! And why not? The last few years have seen the risky side of low cost country sourcing from China and the far east catch much business and media attention. From toys to milk products, multiple product recalls and severe brand reputation damage are taking their toll (Reputation and Financial Damage) and are forcing companies to rethink their sourcing strategies.

Of course, the reason why companies went east in the first place was to lower costs and tap into emerging markets. While the second is true, the first reason (the superordinate reason!) has often been questioned. What is the true cost of sourcing from a alternative supply sources that promise tremendous cost advantages, scale and flexibility advantages, etc? The determination needs to consider multiple challenges (that can be quite dynamic!) such as Quality (product and process) risk, Solvency risk, Intellectual Property protection, Reliability of supply and default risk, Compliance to environmental protection regulations and norms, and Logistics and transportation costs escalation etc. Getting a handle and more importantly a control on all of these is an ask particularly keeping the volatile currency and commodity markets. Does this translate into greater maturity in global sourcing processes far beyond the establishment of a sourcing outpost? More investments on process, organization and technology perhaps. Greater structure in processes with more powerful risk management frameworks (Everywhere I see, research investments on making supply chain risk management frameworks more robust are being made by corporates and academics). More technology play for integration and decision support in an environment that is susceptible to many many supply chain events that can cause disruption and financial havoc.

Final musings … While the process of globalization is irreversible, is it true that the pace is slackening and possibly herd mentality fading out? Thoughts and opinions?


Comments

Sandeep,

Good thoughts and it has come at a time when the global financial turmoil is changing the entire perspective of outsourcing. With soaring oil prices and fluctuating exchange rates, firms in the US are rethinking their policies and thoughts towards buying goods from the East.

http://bloomberg.com/apps/news?pid=20601109&sid=aDjmJpYwglIA&refer=home

This Bloomberg article reaffirms our thoughts on the turn around process of supply chain thinking. But are these things a temporary phenomenon? The US has always been a consumer for the world and the emerging economies have built their factories for the ever consuming western economies. PRTM did a small survey and tried to form a relationship between potential savings and the approach followed by firms when it came to sourcing from china. http://www.e2open.com/resources/download.php?&br=1title=Hitachi_PRTM_Webcast&id=156

Risk management has always been the key priority for western firms when it came to doing business with china and the approach followed by various firms has directly given them the results. Moreover with growth flattening out in the western world, firms are seeking towards emerging economies for growth. The US automotive market is expected to fall to 13 million units from the current 16 million by the end of this year. With GM and Ford having huge investments in China, will they use them as bases to achieve economies of scale?

At the end of the day, cost matters the most. Firms doing business in China have taken the needed risks to gain and over a period of time will have to invest time and money to meet their objectives in terms of all associated risks. As you had mentioned, the pace might have got slackened and would improve once US starts consuming again.

Can we give another angle to it? China has US 2 Trillion dollars…Will they dictate terms in the near future to ensure that their businesses don't fail?

Thanks
Venkataraghavan

Venkat,
The PRTM findings are quite interesting and also lend credibility to the "cautious optimism" (an oxymoron if there ever was one) trend we are witnessing.I would agree with the observation that as consumption in the US picks up these strategies would pick up steam again. An opportunity that the disruptions in the financial markets (coupled with escalating supply chain risk profiles for low cost country sourcing )provide would be to drive greater maturity and sophistication in the sourcing approaches. Sometimes the pace of growth is so frenetic that process and infrastructure often get lag far behind (Bangalore and its oft quoted traffic problems is an example to that!).As the PRTM findings also indicate, sourcing initiatives that are more deep rooted and more designed as globally integrated practices are the ones that would deliver on their cost savings objectives successfully. Your point on China extends to all emerging economies. My personal view is that consumer segments are shifting - Automotive is a great example where all US majors are looking to the emerging markets to help sustain growth (or remain in business?). And so would supply bases. Market theory would drive businesses to find the markets where their volumes and margins are the highest and find the supply bases which are most cost optimal.

Sandeep,

Its a vicious circle. Emerging economies depend on western countries for growth and the booming middle class in India and china cannot initiate growth in their countries without the westeners helping them. Majority of the IT firms still get more than 80 % of the revenue from the west(US & Europe). The rupee has already fallen to 48 to a dollar and this is going to further attract exporters to sell goods to the west.Your view clearly reflects the China price attribute that Infy project's and i completly agree to that. But if US sneezes, the world catches cold. For the emerging economies to be healthy, US has to consume.

Agree with Venkat … However it does look that consumption patterns are shifting across the world and the US may not really spur the consumption demand the way it did in the past.

An interesting perspective from an interview I recently saw on TV with Fareed Zakaria, editor of Newsweek was that we will see the gap between the developed and developing countries decrease more rapidly in the current economic scenario. Local demand in the emerging markets is what will really drive and stimulate economic growth for these countries.

Couple this with an interesting study by AMR Research (http://www.amrresearch.com/Content/View.asp?pmillid=21659) that lists US and China as the two geographies with the highest supply chain risks for Manufacturers. Clearly, a lot of sourcing strategies are under review for (a) move to closer to the markets (Globalization comes home to offset supply risk?) or (b) for move to new sources of supply (Rebound benefits for India, Eastern Europe, Brazil and some others as part of LCCS strategy?) or (c) to dig in their heels and back their existing supply strategies (Invest and grow your suppliers … the Maruti way in India or the GM way in China?).

A pioneer in China Sourcing, a retail icon, is probably reviewing its Low Cost country sourcing (LCCS) strategy … a strategy long based on least cost bidding and tactical supplier relationships that consistently drove prices down year on year and really did not invest in strategic supplier relationships. Today with higher awareness on risk incidents and the associated financial and brand implications, the company is probably thinking of moving significant part of its sourcing operations east to help develop and nurture supplier relationships and make sure that its CSR obligations rub off on its suppliers as well in addition to managing product innovation and quality better. As an aside, I saw the term “Knowledge based sourcing” come into supply chain literature!
Another example is of a company I admire and I believe is moving the right way. The company, a telecommunications major is going the “Knowledge based sourcing” way to help realize its globalization strategies but with significant investments in first analyzing the market, identifying potential sources and assessing their capability and developing supplier blueprints that ensure success for not only itself but also for the supplier. In an IP driven business, their success revolves around the collaboration models (around product development and engineering, manufacturing, and product quality and reliability) they can enter into with their supply chain partners and investment in time and critical organizational resources is key to the realization of the same.

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