If companies take a strategic view of sourcing and organize their resources to maximize sourcing’s contribution to their bottom lines, they can achieve double-digit savings. However, this is only possible when the sourcing department gets active support from senior leaders and the CEO.
The Untapped Sourcing Opportunities
Today, purchased goods and services represent from 30% to 80% of a company’s overall revenue. This shows that sourcing offers an untapped opportunity to the companies. The procurement department can play a major role in an organization’s success, and future prosperity as the demand for ongoing cost reduction continues in almost all industry sectors. The sourcing excellence competency level is something most companies have yet to achieve.
According to a recent study, the purchasing savings on the total money spent per year by an average performing company in any given industry is 2.3%. On the other hand, industry leaders are able to achieve more than 90% savings. This clearly indicates that the vast majority of companies are letting go of a significant amount of money.
Procurement specialists are particularly deft at realizing major savings. This includes knowing concepts such as leveraging spend volumes by geographic regions, business units, and category. Furthermore, they understand the ways of utilizing concepts such as total cost of ownership (TCO) during the sourcing process.
Unfortunately, most of them are unable to articulate the reasons procurement needs to be regarded as a core competency and what this means in practice for the business. Therefore, the responsibility of articulating the strategic value of sourcing to the business falls on the shoulders of procurement managers and heads.
An important thing that these managers and heads need to articulate is the bottom line impact of sourcing. Improving the bottom-line impact is critical for almost every organization. However, some entities are so focused on cost savings that they simply lose sight of this critical measure. Improving the bottom-line impact involves achieving global cost competitiveness, improving customer satisfaction, reducing Total Cost of Ownership, and improving the bottom line.
Globalization Is Increasing Sourcing Costs
All manufacturers across the world manage their businesses based on their fixed and variable cost. Fixed costs include rent, utilities, business taxes, and debt payments for equipment needed to run their operation.
Variable costs include wages (salaried and hourly), employee benefits, raw material, and expenses needed to generate sales and delivery of finished goods to the customer. The only factor that causes these costs to vary is the business’s location.
Developed economies such as the United States and Japan have grown over the last 50 years to provide the workforce with a higher standard of living which in turn drives a higher wage and costing structure. Other countries like China and India are developing, but due to the size of the workforce (5x that of the US and Japan), these countries maintain a lower standard of living keeping cost structures cheaper.
A prime example is that back in the 1960s, “made in Japan” translated to cheap goods in the US, but today, no one in the US would consider a Lexus cheap! Due to the expansion of manufacturing, Japanese workers received increased wages from 1960-2000. Quality of life was enhanced, and wages and fixed cost paralleled the increase. In time as China and India develop their economies, the wages and fixed cost will climb changing their competitive advantage in the global markets.
Today, global sourcing costs are increasing with each passing day, and at the forefront of the uptick are ever-rising labor costs. This includes the costs of hiring a Project Engineer (P.E). While there are many P.E. for hire, getting one onboard can be expensive, but not if you choose wisely. The same is the case with the other workforce.
The Trend of Outsourcing to Low-Cost Countries
For many people, China is the ‘go-to’ sourcing country. A major reason for this is the low cost of labor in China. However, in recent times, the cost of labor in China has risen, and many businesses have shifted their sourcing to Southeast Asian countries where extremely ‘cheap’ labor is available.
There are 31 provinces in China today. Since 2011, 16 of these provinces have seen an increase in wages. Furthermore, the Chinese economic experts expect the wage rate to increase every year by ten percent in these 16 provinces.
It is important for you to understand that local governments set minimum wages in China. Therefore, the wages in different parts of China vary. Also, the different regions calculate wages in a different manner from one another. For example, one region may include overtime, food, and housing in wages while another might only include the cash payment.
Today, the wages in the different regions of China are increasing differently. In 2014, the wage rate in southern Guangdong increased by 5-10 percent while the northern Hebei Province saw a 20 percent increase in the wage rate. This goes to show that when someone mentions ‘China’ as a low-cost country, they are actually referring to Chinese regions where wages and costs are low.
In the same way, when someone mentions Asia as a low-cost country sourcing option, they do not mean countries such as Japan or South Korea. Instead, they are referring to China, India, and the Southeast Asian countries.
The recorded monthly wage rates in low-cost Asian countries in 2015 are as follows:
- China $137-$639
- Vietnam $101-$142
- Indonesia $71-230
- Malaysia $254
- India $40-130
- The Philippines $110-$220
- Thailand $381,
- Sri Lanka $49-$72
- Bangladesh $68
- Laos $110
The rising cost of labor in some Chinese regions has forced many high volume manufacturers to look for alternative sourcing destinations. Some of these manufacturers have shifted base from coastal Chinese regions to the west of China while others have migrated to countries with similar facilities but lower wages such as Vietnam. Countries such as Myanmar, The Philippines, and Indonesia are also emerging as ‘viable’ sourcing options.
Another important thing for you to remember is the fact that the wages in some regions vary based on the product. Therefore, the labor costs of one product might be different from another in the same region or country. You need to remember that wages and costs in a particular region or country are not ‘universal’. Therefore, you should thoroughly investigate a country or region before choosing it for ‘low-cost’ sourcing.