Manufacturers Feel the Heat over Emerging Market Sourcing

Higher standards needed for emerging market suppliers

Heightened publicity over product recalls has made product safety, as well as product quality and environmental standards, in emerging markets a hot-button issue, according to a new "Innovation in Emerging Markets" annual study by the Deloitte Touche Tohmatsu ("Deloitte") Global Manufacturing Industry Group. Roughly two-thirds or more of both developed market and emerging market executives said that over the last 12 months these issues had become more important when global companies choose emerging market suppliers.

Roughly three-quarters of the developed market executives surveyed said they had increased their use of emerging market suppliers over the last three years, with almost half saying they had increased it significantly. In terms of where they look for suppliers of components and parts, 66% cited China, while 36% named Mexico and Central America. Central/Eastern Europe, India, and Southeast Asia were each cited by one-quarter or less.

Just over one-third of the developed market executives surveyed felt that their companies had been very successful in sourcing from emerging markets. These companies appeared to be more attuned to the risks involved. Their boards of directors and senior management are more involved in product safety and quality issues, and their companies work closely with their suppliers to inspect supplier facilities more often.

"Deloitte's research found that executives from both developed and developing markets anticipate a greater demand for higher standards and transparency," said Craig Giffi, Deloitte's vice chairman and U.S. Consumer & Industrial Products industry leader. "In addition to upgrading standards and testing, many viewed the need to provide customers with more sourcing information to allay fears about safety, quality and environmental standards."

Forty-one percent of developed market executives surveyed believed cost increases were very likely, as companies respond to the demand for more stringent standards. Emerging market executives were even more likely to anticipate higher operating costs, with 59% believing these were very likely.

"Finding the right suppliers that are both willing and able to comply with rigorous standards and nurturing these relationships are important to success," emphasizes Giffi. "When choosing emerging market suppliers, successful manufacturers are going beyond the basics of quality, cost, and reliability to place much more emphasis on the overall reputation of the supplier."

The study indicates that successful manufacturers have been engaged -- or will likely engage --more rigorously in other risk management activities, including:

  • More frequent visits to suppliers' facilities.
  • Willingness to address managerial skills and working conditions during visits.
  • An expectation that testing levels will increase significantly.
  • Contract requirements that call for more visits to facilities and for the approval of subcontractors.

To view the Deloitte Global Manufacturing Industry Group's "Innovation in emerging markets. 2008 annual study," please visit www.deloitte.com/manufacturing.

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