Procurement Trends: From Outsourcing to Near Sourcing

It wasn’t so long ago that procurement professionals automatically sourced many parts and components (and products) from China without a second thought. “It’s always cheaper in China” as an operating philosophy prevailed until recent events and changing circumstances called that approach into question:

• Highly publicized quality issues caused great harm to company reputations and customer confidence
• Rising labor rates in China (20% per year) have lessened the cost advantage
• Rising and unpredictable oil prices make transportation costs a more critical concern
• High inventory requirements and long lead times are a challenge in light of shrinking product cycles and increasing demand volatility
• Companies are becoming more aware of the risk and cost of supply chain disruptions

Studies by the Boston Consulting Group and others indicate that total cost for procuring many products from Mexico are now on a par with China, and it is expected that the U.S. will reach parity in 2016. Using near-by sources reduces lead time and increases flexibility while reducing risk. Thus, many companies are shifting from a stance of sourcing from China by default to a preference for regional sourcing.

There are great benefits to producing products where they will eventually be sold, and procuring needed parts and materials where they will be used to make those products. This isn’t really new, but is becoming more widespread. All of the world’s major automakers build cars for the North American market in North America. Many of the components that supply these plants are also produced in North America. And, this is not just a North American phenomenon; Ford builds cars in China to sell in China. And the list goes on.

We live in a global market and large areas of the planet are evolving from relatively undeveloped and agrarian societies to big markets for manufactured goods. China’s manufacturers are transitioning from being the world’s factory to serving the increasing demands of the evolving Chinese middle class. This plays into the trend toward regional production and sourcing.

One of the biggest challenges in this changed sourcing preference is the lack of sources. When sourcing from China became the norm, plants closed, equipment was scrapped, and skilled production workers retired or moved into other fields. It will take some time to rebuild the production base.