Game changes in quest for low-cost sources

BEIJING - The days of reducing costs simply by sourcing from China are probably over. Global companies will have to rely on a more diversified base of low-cost suppliers across multiple countries and regions in the future, said a report released by the Boston Consulting Group (BCG) on Friday.

The model of sourcing in the East and selling in the West will likely give way to a networked model of supply hubs in different regions to quickly penetrate fast-growing emerging markets, the report, entitled Global Sourcing in the Post-downturn Era, said.

"The interest in global sourcing has not diminished after the financial crisis although depressed demand, quality concerns, increasing labor and input costs, volatile raw material prices and growing protectionism have introduced greater risk and uncertainty," said David Lee, partner and managing director of BCG.

But the focus of global sourcing continues to move away from savings on labor cost alone to total-cost or best-cost country sourcing, Lee, also one of the primary authors of the report, added.

He said globalization has opened up substantial opportunities for multinationals to capitalize on global sourcing for both market access and cost reduction. Best-cost country sourcing is one of the most direct ways for companies to improve their cost position by leveraging the advantages of different regions around the world.

According to the report, many global companies have begun shifting other parts of their value chain besides sourcing - such as research and development (R&D) and manufacturing - to best-cost countries to further develop their design capabilities and manufacturing networks.

"This theme of global leverage embodies the evolving best-cost country sourcing," said Lee.

"By providing access to local markets, helping establish relationships with government officials, and demonstrating innovation throughout the supply chain, best-cost country sourcing can create significant top-line and bottom-line advantages," he said.

The report also showed that some global companies are seeking ways to make their supply chains more flexible and agile in the face of variability and disruptions.

Some are "stress testing" their supply chains to evaluate the likely impact of scenarios such as supplier quality problems in one country that require finding an alternative supply base, port congestion or other logistical problems that lead to shipping delays, or a major increase in the landed cost of globally-sourced products due to currency appreciation, wage inflation, logistics costs or tariffs.

Others are going so far as to rethink their existing global supply chains in light of the new realities.

China Daily

(China Daily 10/30/2010 page10)