Sourcing in Low Cost Countries, Where is it going?

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Managing Director of iPRO discusses Low Cost Sourcing in countries such as China and Malaysia and explores whether or not it is still as effective in cost reduction

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Sourcing in Low Cost Countries, Where is it going?

  1. 1. Martin Deas MBA, MCIPS, MIoD Low Cost Sourcing – Where is it going ?
  2. 2.  Purchasing Graduate – Ferranti Defence 1978  Purchasing roles in Industrial, Electronics, Computing, Service sector  European Purchasing Director – Schlumbeger Europe, Netherlands  Managing Director – Tokheim Europe, Netherlands  2001 Founder & Managing Director – Purcon-iPRO Ltd  2003 Managing Director – iPRO Solutions  Completed MBA 1993. CIPS Member since 1981 Introduction . . . . . Martin Deas
  3. 3. iPRO Solutions Ltd www.iprosolutions.co.uk
  4. 4. iPRO Solutions . . . . . • 60 staff, 10 in Asia • UK based, offices in China & Malaysia • Partners in India, Vietnam and Poland • Buy from Asia and sell into UK, Europe, China & India • Products – Plastics / Metals / Electronics / Assembly • Medium volume / Technically complex / High quality
  5. 5. Low Cost Sourcing . . . . . . . Where is it going ? www.iprosolutions.co.uk
  6. 6. Low Cost Sourcing . . . . . Where is it going ? • Do low cost countries offer fewer savings opportunities than 10 years ago ? • Are things about to change ? • What are the challenges for Buyers ?
  7. 7. 7 Low Cost Sourcing . . . . . Where is it going ?  What has driven low cost sourcing  Low Cost sourcing – Its not all about price  China - a changing market  The alternatives  Where is it going ?
  8. 8. What has driven low cost sourcing ? . . . . .
  9. 9. 9 What has driven low cost sourcing . . . . . China WTO 2001 Access to very low wage rates New sources of supply Massive savings opportunities Opportunity to make big profits An option to save the company The internet / Email
  10. 10. 10 A 15-20 year shift in sourcing . . . . . The Impact . . . . . A massive shift in Manufacturing globally Speed of change / Impact on the west Local sourcing became global sourcing Access to the biggest pool of labour on the planet The emergence of China as a world economy Emergence of “follower” economies And the impact . . . . .
  11. 11. 11 A 15-20 year shift in sourcing . . . . . The Upside . . . . . Massive cost reductions Rules for sourcing changed Relatively easy savings BUT there’s a catch . . . . . And the impact . . . . .
  12. 12. 12 Low Cost Sourcing . . . . . Where is it going ?  What has driven low cost sourcing  Low Cost sourcing – Its not all about price  China - a changing market  The alternatives  Where is it going ?
  13. 13. 13 A 15-20 year shift in sourcing . . . . . The Challenges . . . . . Complex supply chains / Longer lead-times / Freight Cultural challenges Delivery problems / Payment up front Technical / Quality problems Suppliers who are difficult to manage Potentially higher risks which need managed How to find and manage suppliers Its not all about price . . . . .
  14. 14. 14 A 15-20 year shift in sourcing . . . . . The Risk . . . . . Too much price pressure impacts quality There is a PRICE / QUALITY linkage Some suppliers make minimal profit Quality may be compromised to save money Materials / Working conditions may be linked to profit Some suppliers will do anything to maintain profits Chinese suppliers often have a very short term view Its not all about price . . . . .
  15. 15. 15 The pressure of cost reduction . . . . . The problem with price driven sourcing . . . . . Not all suppliers are the same . . . . .
  16. 16. 16 The pressure of cost reduction . . . . . The problem with price driven sourcing . . . . . Understand how the supplier achieves the price . . . . .
  17. 17. 17 The pressure of cost reduction . . . . . The problem with price driven sourcing . . . . . Understand how the supplier achieves the price . . . . .
  18. 18. 18 The pressure of cost reduction . . . . . The problem with price driven sourcing . . . . . Continual pursuit of price is not compatible with high quality and good working conditions
  19. 19. 19 Not all suppliers are what they seem . . . . . Sourcing . .The risks and challenges
  20. 20. 20 Quality . . . . . No problems if you select the right suppliers Sourcing . .The risks and challenges
  21. 21. 21 Material Control . . . . . Sourcing . .The risks and challenges
  22. 22. 22 Sourcing . .The risks and challenges Control over labour . . . . .
  23. 23. 23 Experience says . . . . . Assume things can go wrong Quality Lack of technical skills Language Local culture Managing Risk Materials Logistics Labour Technical Upfront Payments Price isn’t everything – but it remains top of the list Sourcing . .The risks and challenges
  24. 24. 24 Sourcing . . . . . The Corporate Risk V
  25. 25. 25 $160bn sales, $45 Billion profit 47% gross margin 35 million phones sold last quarter Employs 1.2 million people 300,000 in largest facility Produces 40% of the world’s consumer electronics Makes 5% gross margin and 1.8% net profit Sourcing . . Apple v Foxconn
  26. 26. 26 The human cost of your iPHONE / iPod 2010 / 2011 2 incidents . . . . 2 people killed 150 injured Workers complaints . . . Harsh working conditions Disregard of Safety Blinding lights Hazardous materials Falsified records Excessive overtime 7 day working Crowded dorms Standing all day Under age workers “Apple never cared about anything other than increasing product quality and decreasing production costs” – Foxconn employee Sourcing . . Apple v Foxconn
  27. 27. 27 In Apple’s defence . . . . . 396 facilities audited by end 2011 70 violations found - Excessive working hours Less than MIN wage and punishment deductions Toxic waste issues “Right now, customers care more about a new iPhone than working conditions in China” – Apple Executive Protests against Apple Apple will have to pay to fund improvements – higher prices will come Sourcing . . Apple v Foxconn
  28. 28. 28 Price pressure impacts the value chain Historically, international buyers have squeezed razor-thin profit margins from supplier factories. Not only do buyer companies seek the lowest-cost production, but stress factories through high demands for short order turnaround times, forcing excessive overtime hours, all at the expense of workers China Labour Watch March 2011 ( survey of 46 factories ) Sourcing . . Apple v Foxconn
  29. 29. 29 Low Cost Sourcing . . . . . Where is it going ?  What has driven low cost sourcing  Low Cost sourcing – Its not all about price  China - a changing market  The alternatives  Where is it going ?
  30. 30. 30 China - 15 years on and things are changing again . . . . . Massive infrastructure investments Reliance on exports – 40% of GDP Migration to the cities A maturing economy An educated workforce A growing prosperous middle class China sourcing . . . . .
  31. 31. 31 China - 15 years on and things are changing again . . . . . 590 million internet users 78 million smart phones bought in Q1 2.5 million cars bought each month Housing Boom and rising land prices China sourcing . . . . .
  32. 32. 32 China - 15 years on and things are changing again . . . . . The economy . . . . . GDP / Growth falling Reliance on recession hit economies Exports slowing A switch to drive domestic demand Retail sales grew >13% in 2012 Inflation – Food / Fuel China sourcing . . . . .
  33. 33. 33 China - 15 years on and things are changing again . . . . . Labour . . . . . 780M working population 155M people surviving on $1 per day An ageing population A growing migrant population ( 262 million ) Gradual erosion of competitiveness Plentiful supply of cheap labour for years to come BUT . . . .Its mostly unskilled and in the wrong place China sourcing . . . . . Average annual China Manufacturing wages
  34. 34. 34 China - 15 years on and things are changing again . . . . . Impacts on sourcing . . . . Increasing labour rates MINIMUM wages introduced Over capacity in manufacturing Currency appreciation Export rebate changes / VAT changes Some sectors – “going west” Currency USD / CNY Sept 12 – Sept 13 China sourcing . . . . .
  35. 35. 35 China - 15 years on and things are changing again . . . . . Buyer concerns . . . . Competitive . . . but prices are increasing Buyers seem undeterred by changes Concern over Quality / Technical skills Productivity is not improving quickly Some Buyers are thinking about future competitiveness Where will the Y-O-Y savings some from WHERE WILL WE GO NEXT is the issue of the moment China sourcing . . . . .
  36. 36. 36 Low Cost Sourcing . . . . . Where is it going ?  What has driven low cost sourcing  Low Cost sourcing – Its not all about price  China - a changing market  The alternatives  Where is it going ?
  37. 37. 37 The Alternatives . . . . ( To China !! )  China ( Go WEST )  Other emerging Far-East economies  India  Eastern Europe  Re-shoring ?
  38. 38. 38 China . . . . .Go West Go west . . . . Low skill base Higher transport costs
  39. 39. 39 Wages are low but are increasing MIN Wage rates being implemented in all countries Access to low labour costs is not the problem - materials not available The product is important – some locations are not viable UK rates remain very high but are increasing at a slower rate Emerging economies . . . . . Country MIN WAGE Approx Monthly Wage Rates Malaysia Yes $296 per month Vietnam Yes $80 - $110 per month Thailand Yes $210 per month Indonesia Yes $90 - $226 per month Philippines Yes $136 per month Cambodia NO $40 - $70 per month Burma NO $40 - $60 per month
  40. 40. 40 China v India . . . . . China Min wages do not reflect the real cost of welfare payments of approx 20% UK Min wage equivalent is approx $1400 . . .
  41. 41. 41 India . . . . . 650 million working population Average age 25 Massive growth coming as population moves to the cities Growth now at a 10 year low Sees itself as an alternative to China More sourcing opportunities will emerge BUT . . . India . . . . .
  42. 42. 42 India . . . . . BUT Politics is mired in sleeze Customs are a nightmare Serious under achievement compared to eg: Korea Poor productivity Quality and understanding of western requirements - a major problem Serious risks for sourcing – experience and insight required AND . . . India . . . . .
  43. 43. 43 The currency and economy is a growing disaster . . . . . 20% slide in currency since May 2013, BUT India imports 80% of its oil so input prices are rising. India does not have a bank on the world stage – it is economically weak India . . . . .
  44. 44. 44 Eastern Europe . . . . . Eastern Europe Poland MIN wage $500 pm Average $860pm Slovenia MIN wage $1035pm Average $1310pm Slovakia MIN wage $540pm Average $841pm Romania MIN wage $205pm Average $490pm Turkey MIN wage $570pm Average $861pm Hungary MIN wage $450pm Average $660pm Estonia MIN wage $420pm Average $930pm Serbia MIN wage $250pm Average $479pm Source: Worldbank, ILO Database & World of labour. 2011/12 Cheaper than UK but not more competitive on labour costs than Asia Interesting against Asia for lower volumes
  45. 45. 45 Re-Shoring . . . . . “Re-shoring” – is it happening ? YES and NO Some evidence that medium to smaller businesses are re-shoring Little evidence that multinationals in global markets are changing direction Some re-shoring is not price driven – recession / lead times / IP Re-shoring may be to E.Europe, not UK
  46. 46. 46 Are there alternatives to China ? No obvious alternative to China The cost delta is narrowing BUT Labour rates remain very low India does not appear to offer an immediate solution Other Asian economies are sometimes competitive but too small Re-shoring will have a small impact GSP changes in 2014 may have some impact The Alternatives . . . . .
  47. 47. 47 Today there is only one serious alternative to China . . . . . . . CHINA The Alternatives . . . . .
  48. 48. 48 Low Cost Sourcing . . . . . Where is it going ?  What has driven low cost sourcing  Low Cost sourcing – Its not all about price  China - a changing market  The alternatives  Where is it going ?
  49. 49. 49 Low Cost Sourcing . . . . . Where is it going ?  Do low cost countries offer fewer savings opportunities than 10 years ago ?  Are things about to change ?  What are the challenges for Buyers ?
  50. 50. 50 What are the challenges for Buyers ? Finding new sources of cost reduction – where to go ? When prices increase – think beyond the price Develop suppliers on non-price elements Change the supply process – consignment / PULL systems Understand the drivers of cost – materials / freight / Manage exchange rate impacts Low Cost Sourcing – Where is it going ?
  51. 51. 51 Do low cost countries offer fewer savings opportunities than 10 years ago ? NO . . . . . but there is still a massive potential New opportunities emerging to source in new countries It is getting harder work - you have to look further Low Cost Sourcing – Where is it going ?
  52. 52. 52 Are things about to change ? No . . . . . Little evidence of a period of significant change coming China will continue to dominate Emerging economies will have a major impact Look to Malaysia, Thailand, Vietnam Selected EE countries – Romania / Czech / Turkey Low Cost Sourcing – Where is it going ?
  53. 53. 53 Further reading . . . . .
  54. 54. Thank you Questions . . . . . Martin Deas Managing Director iPRO Solutions Ltd T: 01844-292630 M: 0775 369 2658 mdeas@iprosolutions.co.uk www.iprosolutions.co.uk

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