Shippers are unprepared to deal with offshore sourcing

Feb. 7, 2005
The dramatic increase in sourcing of goods and services from low-cost supply markets such as China and India has not been matched by growing knowledge and understanding of these markets

The dramatic increase in sourcing of goods and services from low-cost supply markets such as China and India has not been matched by growing knowledge and understanding of these markets, according to global management consulting firm A.T. Kearney.

A.T. Kearney’s study of procurement practices at 275 international companies finds that as companies 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% of companies plan to source from China, a rise from less than 30% 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 reveal they are not prepared to manage this increased sourcing from low-cost countries effectively. Only 53% have category strategies that indicate a clear understanding of the supply chain and logistics costs associated with emerging market alternatives. Just 41% of companies make emerging market skills and language capabilities a high priority for their sourcing organization. And just 39% 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,” says 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 U.S., 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% 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%.

* 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% 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 of 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 says. “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 was developed by a global A.T. Kearney team. This study, fifth in a series since 1992, elicited responses from procurement and supply chain executives from more than 275 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.