Analysis: Where next for global sourcing?

India and China's reputations as the heavyweights of the sourcing world is well-established and well-known to pretty much everyone. But as low-cost-country sourcing goes, this hegemony has its rivals in the making. What remains to be seen is which country, or even which continent will be able to compete as more and more companies continue to look global.

Some of the world's largest retail chains, most notably Walmart, are establishing global sourcing centres and effectively cutting out the middleman to get direct access to their market. While they're most certainly not leaving behind the more familiar bases - Walmart recently signed strategic sourcing agreement with Li & Fung in China - this move does put them directly in touch with suppliers in African and South American markets.

The signs are there that this is the cusp of a new generation of sourcing destinations.

China and India are both destinations with strengths and weaknesses in their own rights, but cheap, well-educated labour has seen them dominate as sourcing targets for manufactured goods.

Still, these attributes are increasingly not limited to these powerhouses. Businesses will be aware that South American and African countries offer access to extremely lost-cost labor, assets and materials. Particularly those with strong FDI and an established internal economy have made themselves popular candidates.

Still, when Procurement Leaders magazine, working with State of Flux, ran a survey earlier this year to find out where leading companies were running their international sourcing operations from, the results showed that the top ten is dominated by Asia, particularly the aforementioned pair. Only one South American city (Sao Paolo) makes the top 60. Even more telling was that not one African destination featured.

"Often it depends on the sector you're looking at - IT & technology heavy industries, for example, are far different because they require a specific level of skills and education and there are certain hotspots in the world which are extremely difficult to compete with because they offer that mixture at a lost cost," says Michelle Perkins, head of research at Procurement Intelligence Unit.

Simon Aldred, director of sourcing at ADR international adds: "It's necessary to be aware of whether the location has an inherent capability in the first place. For example, if you think of Morocco, there's a huge textiles industry there so once that's in place and the infrastructure is already there for that industry to be successful, that automatically makes it a strong choice."

The Philippines is another example of a strong prospect, but due to slightly different reasons, according to Perkins. "The Philippines has one of the biggest population of texters in the world.  It is still at a relatively early stage of becoming a big name in sourcing, but it has a good telecoms network and a level of cultural affinity with the US which instantly makes it more appealing to the West as a destination."

Still, for all the benefits of these places, they don't yet begin to register in terms of competing with the giants of the market. This is partly due to the sheer risk associated with doing business in an unfamiliar country.

Perkins notes on the Procurement Intelligence Unit blog that the benefits that these regions offer can potentially hand procurement huge advantages, but with a hidden cost. "Are companies aware of the risks posed by problems such as talent shortages, communication issues, currency fluctuation and supplier liquidity in the emerging markets?"

"There's little doubt that a failure to understand these challenges could pose a significant, and possibly insurmountable, barrier to success," she says.

While these barriers, and there are potentially plenty of them, are essential considerations when making these kinds of decisions, the result of not knowing the answers is frequently a herd mentality among sourcing managers.

China and India have many risks associated with them, but they are far better documented and far more visible than tomorrow's sourcing havens currently are. So, the wisdom of the crowds often prevails.

Simon Aldred agrees that the choice isn't always made based on the capability of the country in question. "Often you'll see immature companies making everything China-centric, rather than looking at sourcing from the best place in the world for their particular needs," he says.

"Low-cost doesn't have to be China and India, it can be the UK - it depends very much on the sector and what you are sourcing."

It seems that the gap between the perception that managers have of these markets and the objective reality, something that is born out in the decisions to frequently use areas that have built up an image in the West as a low-cost destination, is prominent.

A study by Joseph R. Carter, Arnold Maltz and Tingting Yan, all from Arizona State University, and Elliot Maltz of Williamette University, which was recently referred to by Supply Chain Digest, has some key findings which demonstrate this gap.

"Coastal China was rated by the respondents [in terms of labour costs] as very favourable compared with Mexico, when in fact the two regions are quite similar," it said.

One of the authors' key conclusions is that "comparing managers' perceptions with objective data of location attributes clearly demonstrates that perception is biased by cultural insights".

It seems then that the perception of the viability is lagging behind the reality. It's been several years now that Africa has been touted as 'the place to watch', yet only a handful of businesses are beginning to gamble on its potential.

Perkins says: "In terms of Africa, people only often pay attention to South Africa when they're talking Sub-Saharan - East Africa, Kenya in particular, should definitely be in the conversation though. Unfortunately, people can be quite blinkered in their understanding of these less familiar areas."

It's no coincidence that those countries that suffer less from a language barrier and have closer cultural ties to the US and Europe are more popular. Even in basic terms, when doing business together, everyone prefers to be on territory they know.

What's clear is that the opportunities are out there beyond the more familiar destinations and they will be taken and procurement managers trusting the right intelligence and making unbiased choices will be the first to benefit.

"Ultimately, it comes down to many of the same criteria you'd find in any successful sourcing operation - you need a well-functioning operation , good supplier visibility and a real awareness of the risks," according to Perkins.

"Not as many have that as you'd think," she adds.

Procurement Tag - Global Sourcing