Consider This -- Riskiest Place May Be Your Comfort Zone

Dec. 9, 2009
Contract manufacturers that keep a sharp eye on global sourcing trends can better align their priorities with the marketplace and move effectively on new business opportunities.

Sometimes the riskiest approach is to do nothing. This is especially true during economic upheaval, and for manufacturers their comfort zone might be the riskiest place to be right now. The analogy I like to share is that of Olympic indoor speed-skating: Nobody passes on the straightaways. Positions are gained and lost on the turns.

The critical practice of sourcing is in a particularly sharp turn. Companies that understand today's dynamic sourcing universe -- and are rebidding and rethinking their business in light of it -- almost surely will pass the ones that don't.

The turn is markedly visible via online marketplaces, where buyers and suppliers are increasingly interacting on a global scale. Over time, daily online sourcing transactions reveal important trends. For example, due to the economy more buyers are working on maintenance-related issues versus new construction. Particularly for U.S. operations, many companies have left their remanufacturing and repair in America but have shipped a lot of new construction overseas. Another emerging trend is the increase of jobs with heavy freight costs returning to the United States. Manufacturers also are finding that importing materials can dramatically impact pricing, especially when compared to countries with indigenous natural resources.

Sizing Up the Global Manufacturing Options

For U.S. buyers, how do countries in the Western Hemisphere stack up to the rest of the world? First, the United States traditionally carries low logistics costs and low risks -- think border crossing and political stability. Typically, U.S. suppliers can meet the requirements of high-tolerance work. Communication is easy, and U.S. buyers don't run the risk of drastic changes in exchange rates. The con: higher costs than low-cost countries (LCCs). To the north, Canada can match U.S. manufacturing quality. However, due to current exchange rates, it can be a harder location to justify when sourcing.

Mexico has become more "land competitive" with LCCs based on fluctuating fuel prices. Mexico is comparable in quality to China and other LCCs, but the logistical costs are much lower. With NAFTA, there are no tariff issues. Cons of doing business in Mexico include quality consistency, language barriers, exchange rates, border crossing risks and drug-related violence. Brazil also is a player to consider, as their manufacturing quality is more in line with that found in the United States. However, Brazil's currency swings can be an issue.

For years, U.S. manufacturers have competed with low-cost Asian countries. But the tide is changing. China has started to lose some of its appeal for several reasons, including value-added tax, the uncertainty of long-term business climates, fluctuating exchange rate, length of supply chain and quality issues. Many American buyers are realizing that the risk China carries can offset the financial rewards.

So where are the new LCCs, and what are the strengths and risks of doing business with them? Vietnam is emerging due to its competitive pricing and more-skilled laborers in comparison to China. Over the past 20 years, Vietnam has been reinventing itself and acquiring the latest technologies. The political risks associated with sourcing to Vietnam are low compared to other LCCs, making it even more attractive. The cons include language and logistical concerns.

For European buyers, Eastern Europe is becoming more attractive. These countries typically have lower costs, and logistical expenditures are generally cost effective because you can move virtually anything across Europe via rail rather inexpensively. In addition, the quality of the labor force tends to be high. The con for U.S. buyers is that Eastern Europe's tariffs and logistics can be expensive. There is simply not as much scale from Eastern Europe to the United States as there is from China.

In credit-strapped Latin America, suppliers are finding it hard to get funding for raw materials. When sourcing parts and goods worldwide today, buyers often lack visibility to a supplier's financial situation or their ability to obtain the materials needed to get the job done. Overall, friction in the market has increased uncertainty about global supply chain health.

However, opportunities abound for manufacturers whose superior quality and exchange rate are attractive right now. Suppliers that keep a sharp eye on global sourcing trends can better align their priorities with the evolving global marketplace. And with practice, they can strategically pursue new business anywhere in the world.

Steve Cook is the chief operations officer of online manufacturing marketplace

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