By Paul D. Loftus
Leading organizations on the path to high performance are accelerating their global sourcing strategies, driving more aggressive cost reductions and looking to contract manufacturing to leverage and expand the value of their brand. Most significantly, these organizations plan to double spend on low-cost country sourcing in the next three years. (See Figure 1.)
Accenture research also reveals that high-performance businesses in your industry are masters of five procurement-related capabilities. They:
- Source more direct materials globally and in low-cost countries to improve gross margins
- Combine low-cost contract manufacturing and "buy-brand-sell" strategies to cut costs on low-margin products and fuel new growth by extending into complementary product lines
- Elevate procurement to a strategic function to increase overall supply chain reliability and minimize total landed costs
- Integrate purchasing earlier in the product development process to take maximum cost out of product design
- Deploy consistent processes and tools across business units and operating companies to aggregate and standardize spend data and improve compliance
Many companies do not yet view procurement as a strategic function and source of value. The typical smaller- and medium-sized company lags far behind the largest industrial products and automotive companies in its use of global and low-cost country sourcing. Most take a fragmented approach to procurement, which leaves individual operating companies to pursue autonomous procurement policies and procedures with largely domestic suppliers.
Yet, experience shows that you do not have to be huge to have a successful global sourcing program and improve business performance as a result. For a typical industrial products company, the impact of global sourcing on profitability can be substantial: $100-$200 million in annual savings (for a $5 billion company spending $.50 cents out of every sales dollar on direct materials). (See Chart 1.)
For a typical $5 billion industrial products company operating at a 10 percent EBIT margin, sourcing 40 percent of direct material spend globally at 15 percent savings will drive an additional $150 million annually to the bottom line (EBIT increase of 30 percent).
The time is right for companies to take a closer look at expanding their global sourcing efforts. Here's why.
Re-evaluating Global Sourcing
Global sourcing of direct materials is no longer an option. It's a competitive necessity, thanks to the rapid rise of low-cost emerging nations as both sources and consumers of direct materials.
Newly industrializing countries are now the world's biggest manufacturers and consumers of steel. And China is an infrastructure giant in terms of both supply and demand. China's current Five-Year Plan calls for the construction of an additional 6,000 km of rail track, 200,000 km of road, 141 deepwater ports and 57 airports. Its projected energy requirements will necessitate an additional 500 gigawatts of capacity — 80 percent of Great Britain's total capacity — every year for the next 10 to 15 years.
Growth at this speed and on this scale spells enormous opportunities for global industrial products manufacturers, as well as for potential domestic suppliers and competitors.
Leading industrial products companies of all shapes and sizes are beginning to source more and more direct materials, including critical components, from low-cost regions. Witness Cooper Industries', the $5 billion manufacturer of electrical products, tools and hardware for industrial applications, recent decision to source some 35 percent of direct material spend with low-cost countries in 2004 — more than $350 million in China alone.