Some companies jump the gun on overseas sourcing

Staff -- Purchasing, 3/3/2005

A recent study of procurement practices at 275 international companies found that companies are moving to source in low-cost regions before they have adequate knowledge and expertise in the markets.

The Assessment of Excellence in Procurement from consulting firm A.T. Kearney found that as companies chase offshore sourcing savings, they are not effectively evaluating the risks, nor cultivating the necessary skills associated with overseas sourcing efforts. Yet, by 2009, 72% of companies surveyed plan to source from China compared to less than 30% in 1999. And 59% of companies plan to source from Eastern Europe by 2009, an increase from around 33% five years ago. Half of companies surveyed plan to source from India in 2009, nearly tripling the number sourcing from there in 1999.

But A.T. Kearney reports that "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." As evidence to that fact, only 53% of companies polled 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 only 39% have formal plans in place to increase their supplier base from global sources.

Additional findings from the study:

• 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 the companies in the study now 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.