Companies Seen Unprepared to Manage Increased Sourcing from China and India

Greater use of low-cost countries not matched by growing knowledge and understanding of these markets, A.T. Kearney study finds

Greater use of low-cost countries not matched by growing knowledge and understanding of these markets, A.T. Kearney study finds

Chicago  February 2, 2005  The dramatic increase in the sourcing of goods and services from so-called "low-cost" supply markets such as China and India has not been matched by growing knowledge and understanding of these markets, according to a new study from management consulting firm A.T. Kearney.

The consultancy's latest Assessment of Excellence in Procurement study, covering procurement practices at 275-plus international companies, found that as enterprises chase offshore sourcing savings, they are not effectively evaluating the risks nor cultivating the necessary skills associated with overseas sourcing efforts.

The number of companies sourcing from China, Eastern Europe and India has increased significantly in the last five years and will continue to rise in the future: by 2009, 72 percent of companies plan to source from China, a rise from less than 30 percent in 1999. Fifty-nine percent of companies plan to source from Eastern Europe by 2009, an increase from one-in-three five years ago. Half of companies surveyed plan to source from India in 2009, nearly tripling the number sourcing from there in 1999.

Yet companies surveyed revealed they are not prepared to manage this increased sourcing from low-cost countries effectively. Only 53 percent have category strategies that indicate a clear understanding of the supply chain and logistics costs associated with emerging market alternatives. Just 41 percent of companies make emerging market skills and language capabilities a high priority for their sourcing organization. And just 39 percent have formal plans in place to increase their supplier base from global sources.

"Companies are chasing savings through overseas sourcing, but their internal structures are likely to prevent the full benefits of these savings from occurring," said John Blascovich, an A.T. Kearney vice president and leader of the study. "They need a sharper understanding of these new markets. Waiting too long to develop the right strategy or skill set could mean losing access to scarce, capable resources and the competitive edge they provide."

The study finds that North American companies expect to decrease their sourcing from the United States, Canada, Mexico and Japan in the next five years, while sourcing from Western Europe will remain constant. North American companies plan to significantly increase their sourcing activity from China, India and Eastern Europe. In fact, the study anticipates that by 2009 more North American companies will source goods and services from China than from Canada, Western Europe or Mexico.

Additional findings from the study include:

  • Procurement continues to shed its back-office reputation, with 60 percent of companies now using their procurement expertise to help set, rather than just execute, corporate strategy.

  • Two-thirds of companies surveyed said their procurement organizations were actively pursing goals in value creation through approaches such as product and service innovation, advanced cost management, risk management and supply continuity and value chain optimization. In 1999 this number was only 28 percent.

  • CEOs see procurement as an increasingly important and strategic capability and are looking to their procurement organizations to create value in their organizations beyond cost-reduction efforts. Two-thirds of companies in the study include at least one senior procurement executive on the executive management team, an increase from 40 percent in 1999.

  • Companies using advanced supply management techniques such as collaborative cost reduction, tiered sourcing and design-to-cost generate nearly twice the rate of savings on their procurement of direct and indirect materials and services than companies solely relying on traditional sourcing methods.

  • Electronic procurement systems continue to fall short of their potential. More than half of respondents reported tools for market analysis, contract management and product lifecycle management are not meeting all their expectations. Leading companies are focusing on the end-to-end integration of their e-sourcing tools by fitting IT components together into a complete system solution for category management.
"It is no longer enough to capture cost savings through traditional sourcing strategies," Blascovich said. "Today's CEOs expect procurement to help drive other operational benefits, such as improved working capital or increased quality of products and services. But many organizations are falling short."

The 2004 Assessment of Excellence in Procurement study, fifth in a series since 1992, elicited responses from procurement and supply chain executives from more than 275 leading companies, with average revenue of nearly $10 billion, in 25 industries. The perceptions of the procurement and supply chain executives participating in the survey were compared against senior management's expectations through a follow-up CEO-level survey at select companies.

A.T. Kearney is a subsidiary of EDS.

For more information on the challenges and opportunities presented by increasingly global supply chains, see the special in-depth report in the August/September 2004 issue of Supply & Demand Chain Executive, which includes the following articles:

For more information on the global supply chain, with a focus on security issues, see "Building the Secure Supply Chain," the Net Best Thing article in the June/July 2003 issue of iSource Business (now Supply & Demand Chain Executive) magazine.

For a look at how Tyco Fire & Security is tackling trade compliance issues in its global supply chain, see "Turning Global Trade Compliance Into a Competitive Advantage," in the August/September 2004 issue of Supply & Demand Chain Executive.

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