Global sourcing drives down costs, but it makes for more complex supply chains. When you can source from anywhere, can you be confident you understand the risks?
The world may not be getting as flat as Thomas Friedman famously predicted, but for many businesses it feels as though it is becoming smaller. The internet has put companies in contact with each other on a global basis, allowing them to source components and sell products thousands of miles from home. Increased manufacturing capability in emerging economies, particularly China, has made them viable suppliers for Western companies. And high-tech products, from mobile phones to wind turbines, can do more than ever before, necessitating more suppliers and tougher specifications.
Capgemini’s 2009 report on Global Supply Chains underlined their worldwide nature, with 81% of UK companies sourcing at least 10% of their components from abroad. Apple doesn’t release detailed supplier information, but tech experts believe the iPhone – which is assembled in China – relies on inputs from the US, Japan, South Korea, Germany and the UK. That is by no means untypical for a high-tech industry leader.
For Western companies, this presents a particular quandary. Anticipating growth largely from emerging economies, they must create products cheap enough to flourish there without having the penetration or expertise in those markets to control production sufficiently. Outsourcing becomes the order of the day, with myriad suppliers spread over huge distances.
Smarter logistics will become increasingly important, says Andrew Leahy, Vice President of Product Development at DHL Supply Chain: “As product costs rise, you need to be even more focused on issues such as load fill and packaging, which needs to be optimized so you aren’t shipping thin air. Freight cost also increases with supply chain complexity – are you consolidating volumes across multiple sourcing points? And do you have the expertise in-house to understand and manage these issues?”
Risk, says Leahy, is an equally vital consideration. Global recession and recovery has led to market volatility among suppliers. This calls for risk management and a clear understanding of the supply chain, but with suppliers located thousands of miles away, it can be hard to achieve true clarity. Many companies do not understand where their supply originates from: in some cases, the “dual source” suppliers they believe they have in place to hedge risk turn out to be sourcing from the same primary supplier. Clearly, it is attractive for businesses to try and source directly, cutting out the middle links and their associated margins in the supply chain – but this brings challenges of its own.
With more than 85% of companies expecting supply chain complexity to increase, according to PRTM Consulting, these issues will remain to the fore. Executives anticipate a greater number of brands and product lines, with more complex specifications. Consultants at Deloitte who have studied the phenomenon pinpoint the ‘bolt-on’ nature of the growth of many large companies as the source of their frustrations: each new product, market or sector sees more manufacturing capability and, in many cases, more outsourcing added to the supply chain.
For European companies, the long-term future may involve less globalization. As Indian and Chinese companies learn to market and manufacture their products to higher standards, they will grow at home and abroad and Western companies will no longer be able to rely on cheap parts. The upward trend in oil prices is already eating away at the margins in global supply chains. ‘Near-shoring’ functions in Eastern Europe may gradually become more attractive. Until then, however, executives must continue to unravel and understand the workings of their supply chains if they want to unlock genuine value.
