For many, the decision to "go global" has two strategic goals: take advantage of low-cost production opportunities, and to boost revenues from developing markets. General Motors (GM) recently broke ground for a green-field assembly plant in St. Petersburg to capitalize on the rapidly expanding Russian market for automobiles. By boosting domestic Russian assembly capacity, the new Chevrolet facility will not only lower GM's cost to serve. It will also increase GM's supply in a market where the carmaker has enjoyed record sales over the past year.
Chart 2, at the top of this page, illustrates actual landed cost savings on representative direct material categories across a range of Accenture industrial products and automotive global sourcing projects. Across all categories, clients can expect net direct material cost savings from 10 to 20 percent, with an average net savings of about 15 percent.
By using low-cost contract manufacturing, you can change the underlying economics of low-margin products. If it is no longer cost effective to manufacture your own products, consider outsourcing these products to a contract manufacturer in a low-cost region, then brand them as your own and sell them on to your customer through your current distribution channels rather than exiting the products completely. This strategy helps you protect current revenue while improving margins and prevents competitors from stealing market share and gaining a foothold with your established customers.
"Buy-brand-sell" strategies can also help you tap into the power of your brand to fuel growth by adding complementary products to your portfolio without incurring the usual product design and development costs that result time-to-market delays.
Complementary items needed for the aftermarket service of your products may be good candidates. One global manufacturer sources and re-brands the consumable supplies used for servicing its aftermarket parts, effectively extending its product offering. Everyone wins in this scenario — the customer gets a set of products he needs from a company he trusts, the third party gains access to an established distribution channel, and the manufacturer provides richer solutions and generates new revenues.
Taking Procurement to the Boardroom
By elevating procurement to a strategic function, high-performance businesses can flex their global-sourcing muscle in support of top-level business strategies.
When procurement ceases to be just an order-taking activity and becomes part of a cross-functional team, on par with engineering and product development, supply chain and logistics, true category expertise in direct materials can be developed and leveraged. Procurement's prominence, moreover, becomes more pronounced as the global sourcing capability strengthens.
A local procurement presence in key emerging markets targeted for sales growth can also be important — and not just because it helps to diversify suppliers and thus mitigate volatility in supply. Local knowledge can stay abreast of developing market conditions and help prevent the loss of market share to cheaper local producers. Some companies that recognize the importance of local procurement presence but cannot afford the time to establish local operations are actually outsourcing this function, letting others act as their international procurement office in China, for example.
When procurement is a strategic function it can drive component and module standardization as well. High-performance businesses maximize their use of standard components, as well as strategic partners and suppliers — a critically important capability in an industry where so many direct material purchases support new products, platforms or projects that require custom engineering.
Indeed, because it shares equal status with product development, the procurement function in a high-performance business can play a pivotal role in decisions about how products should be designed. By driving more extensive supplier involvement in your design process, for instance, suppliers get a better understanding of the customer problems you are trying to solve, while they bring a fresh set of design ideas and access to their latest technologies. The upshot: Your product is easier to manufacture, assemble, deploy and service in the field.
As key technical services like design and engineering — the "crown jewels" of many industrial products companies — become candidates for outsourcing, procurement's function becomes more strategic still. The Boeing Co., for example, contracted out the technical design and engineering work on its new 787 Dreamliner to 1,600 Russian engineers — a clear recognition of that country's unparalleled expertise in titanium technologies.