New Year, New Regions: Why and How to Diversify Your Supply Base

Jan. 20, 2012
China isn't going away as a sourcing destination, but sourcing teams must be willing to look elsewhere.

If you're anything like the rest of Americans, you've probably already broken several of your New Year's resolutions. But if your resolution was a professional one to get your sourcing muscles back in shape, you'd be well served to give it another try.

It is not an easy feat. For decades now, many organizations have been beholden to low-cost, high-volume supply-powerhouse China. Even for those who claim to have a global sourcing strategy, the "global" is a misnomer veiling the reality: a sourcing function that still relies largely on China-and, in some cases, China alone.

And I don't blame sourcing professionals for focusing strictly on China. Costs are kept low due to great infrastructure and the world's largest labor pool. Years of experience supplying U.S. companies have created an unparalleled level of expertise in many industries, from apparel to electronics-and just about everything in between.

Chinese suppliers can meet stringent quality, volume and timeline needs, and have mastered the logistics that ensure the products consumers demand make it on to store shelves.

The Chinese government has been supportive with export-friendly policies. And with all this working in China's favor, no "number two" country has emerged as an alternative. As the old adage goes, if it isn't broken, don't fix it, right?

Wrong. The ability of sourcing executives to rely on China for an uninterrupted supply of low cost goods is disintegrating. Costs are increasing as the rise of the middle class drives labor costs up. Trade wars threaten to erupt as U.S. politicians ratchet up anti-China rhetoric, and China reacts with protectionist policies. Concerns over labor unrest, natural disasters, and product quality (or lackthereof) have resurfaced due to headlines keeping them top of mind.

China isn't going away as a sourcing destination. However, given all the changes in the global supply landscape, sourcing teams must be willing to look elsewhere for goods if they are going to keep their costs-and those that get passed along to their customers-down. It is somewhat of a chicken-and-egg problem: a go-to sourcing destination beyond China hasn't emerged, but part of the cause for that is that companies haven't had to make moves in a very long time and in many cases, simply don't have the know-how to do it.

This resulting sourcing muscle atrophy can seem overwhelming. It requires sourcing teams to develop a capability-finding and bringing on new suppliers in regions outside China-that hasn't been used in decades. Fortunately, at a time when sourcing organizations are being asked to span the globe, there are now more resources to do it in the form of information-such as data on suppliers' financial health, potential competitive conflicts, specific expertise, CSR performance, and more. Here is how to make it work in your organization:

Be Open to Change
Twenty years ago, the sourcing function relied primarily on relationships to identify and vet new suppliers-it was all about who you knew, who they knew, what they could do for you and when you could ask for favors. Relationships are, of course, still key today but that is only part of the sourcing process. Information on suppliers now complements relationships to provide an added level of assurance that your company will be working with the right supplier partners. This is a shift that may take some getting used to by those comfortable with the old way of doing things, but they will soon see that, when armed with both relationships and information, the decision making process is armed with that much more ammunition,so new supplier partners can be brought on faster and often with less internal resources.

Rely on Digital Natives
Even though the newbies on the sourcing team may not remember the good old days of sourcing or have a stable of friendlies to call on when looking for new suppliers, they will still play a critical role in helping sourcing organizations get back in shape. These digital natives, or people born during or after the general introduction of digital technology, have a greater understanding of its concepts-are comfortable turning to online information sources, using technology to manipulate it and somewhat naturally knowing how to find the best data to solve a problem or make an informed decision. This makes younger sourcing professionals coming up in the ranks best positioned not only to survive the diversification of the supply chain, but also thrive in helping their teams through it.

Prepare the Broader Organization
Of course sourcing executives know a major change is happening in the world in which they operate. But this doesn't mean they should take for granted that others-including senior executives within the company-do as well. Take early action to inform key players in the organization about the current events requiring a move beyond China-including how this may impact other elements of the business, like pricing of products or regulatory compliance. At a time when sourcing teams are continually asked to do more with less, it is also important to explain what a major undertaking it is to re-create the sourcing wheel in new regions so that budgets, technologies and staffing can be adjusted accordingly.

Be Resilient
Just like you can't shed those extra holiday pounds overnight, you cannot completely overhaul a sourcing function in a matter of months. Many companies have been talking about diversifying the supply base beyond China for years, and only a small portion have done so to the extent they would like. The fact is that it is really difficult, requires sourcing organizations to do things they have not done in a while (if ever) and can take a lot of time. Don't give up, and work on taking small steps in the right direction. Consider what I like to call a "China+1" strategy where you add one new sourcing geography in a quarter or year, then keep adding +1s until you truly can describe your efforts as a global sourcing strategy.

With the worst of the financial crisis that rocked us over the past few years (hopefully) behind us and a -China-only strategy becoming an increasingly risky proposition, 2012 is the perfect time to get your sourcing muscles back in shape.

Josh Green is CEO of Panjiva, a global trade intelligence provider.

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