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The India IKEA puzzle: Is procurement too reliant on global sourcing?


31-Jan-12 11:18

Consider this – the Indian retail market is worth billions and western retailers could conceivably make a killing if they could find the stomach to comply to the Indian Government’s restrictions – so why aren’t they? There’s a simple answer on the face of it, but perhaps there’s something more going on and I think it’s worth asking whether businesses aren’t ready to review their appraisal of their global supply chain strategies.

 

IKEA, the Swedish furniture retailer, would surely love to get its hands on the Indian market; to be able to sell to Indians without arranging deals with Indian companies in order to do it. But it made it clear that it wasn’t prepared to make any sacrifice to the sourcing restrictions that the Indians wanted to impose on this expected influx of foreign investment.

 

The Indian Government was pressured politically into imposing restrictions designed to mitigate the expected job loss and flow of money out of the Indian economy, by saying that a certain percentage of purchases must be from local suppliers. This after a firestorm of rhetoric and much flip-flopping – it’s hard to underestimate how much of a political hotcake the issue is.

 

And while it’s undeniably a separate issue, there are overtones from some of the more contentious issues of the day: Apple’s commitment to a sourcing strategy in China that is beginning to do damage to its once impeccable image, or President Obama’s promise to provide tax breaks for businesses bringing offshoring operations home.

 

Couple those ideas with the rising risk factors associated with global supply chains and their vulnerability to disruption from events they can’t anticipate or react to. I’d argue that while risk management techniques could be improved significantly in certain industries, there’s a level of risk associated with huge global supply chains that is ongoing and extremely hard to mitigate.

 

But businesses persist in sticking to their global supply chain strategies because, let’s face it, they’ve been hugely effective and it’s often key to their competitiveness.

 

What I think procurement execs have to be asking themselves is whether the balance is changing; whether local sourcing strategies are gaining appeal.

 

At the moment businesses are looking to prise their way into foreign markets, rather than quietly adhere to the sourcing laws – look at Walmart’s messy move into South Africa last year, a venture which climaxed in a tribune and an 11th hour turnaround by the authorities.

 

But governments are increasingly serious about sourcing restrictions and they’re wise to the damage that large companies can have on their local economies. Right now, this clash of intentions is something that businesses hold the upper hand on. Witness the response to India’s demands: many businesses said, not in so many words, ‘fine, we’ll come back when you change the terms to our favour’.

 

Perhaps it’s time that businesses considered the competitive advantages to easing the focus on huge global supply chains. Governments seem increasingly likely to legislate to favour their investments if they’re helping the local economy, they’re able to work with local suppliers to cater for local tastes and they eschew some of the risks associated with supply chains stretching from San Francisco to Shenzhen.

 

Fast forward five years, say, and you have to wonder if global companies are going to be able to be so cavalier in refusing sourcing restrictions in potentially lucrative markets?

 

Steve Hall is deputy editor for Procurement Leaders Magazine. Follow him on Twitter at@thestephenhall.


Steve Hall Steve Hall is Editor at Procurement Leaders. Steve oversees the publication of Procurement Leaders Magazine and draws on a decade in business publishing, providing quality coverage to senior business leaders. Follow Steve on Twitter: @thestephenhall

 
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