Global sourcing has become less a strategic advantage and more a competitive necessity. Fierce competition is driving many companies to source in low cost countries. The expectations of more return on investment combined with increased competition drive executives to seek reductions in expenditures, making an immediate and direct impact on the bottom line. At the same time, they are challenged to maintain service levels and prevent any loss of control.
Many Western companies are eager to source Chinese parts and products in order to achieve these goals. Retailing giants are buying an expanding range of Chinese-made goods for up to 40% less than the cost of comparable goods made in developed countries. Driven by a continual margin squeeze, an increasing number of industrial players also found their way to source basic chemicals and commodities, small machining, molds, packaging and much more in China. Ford Motors, for example, has spent considerable effort to source more parts in China, but still those goods represent only a fraction of the components used in their vehicles.
Aware of the savings opportunity of sourcing half of their basic parts in China, they plan to vastly increase their purchases of China-made components. Although the opportunity is certainly enticing, the current stage of development creates skepticism about the ability to get right the many pieces of a sourcing operation in China. Some companies reportedly did not meet their target volume of sourcing products from China, largely because the job of evaluating suppliers and establishing and managing supply chain connections was more complex than the companies had understood.
The emergence of sourcing portals and specialized sourcing fairs has facilitated searching suppliers in China. Procurement managers will probably find numerous suppliers that comply with their requirements at first sight. With an attractive website or boot and a convincing sales proposition suppliers may convince companies of their professionalism. But finding high-quality suppliers and negotiating agreements with them are problems many companies face. Difficulties ranging from due diligence or intellectual property infringements and customs delays to poor communication make the sourcing opportunities less appealing. Moreover, the widespread use of trading companies does not offer the transparency companies need in order to monitor the process. Additionally, there are issues such as cultural and language differences that companies rarely face at home.
Many companies have fallen into traps because they only consider the cost factor instead of realizing that global sourcing is only effective when it involves the evaluation of all factors including the cost of materials, transportation, inventory carrying costs, taxes and tariffs, quality and operational risks.
Sourcing in China can certainly create a real competitive advantage, but this does not happen overnight. A company that wants to build value for the future should start to lay the foundations today. Of course, every structure is unique and needs more than foundations alone but these are the prerequisites for success. Considerable time and effort should be spent first to lay the foundation, but those who place their stones in a thoughtful way can create value and competitive advantage for the future.