THE BUSINESS REVIEW FOR PROCUREMENT LEADERS
In recent years, global market forces including outsourcing, continuous cost
pressures and a general breaking down of trade barriers between countries
and regions have combined to produce a strong surge of interest in low-cost
country sourcing (LCCS). Enterprises of all sizes and in all parts of the
world are rushing to gain the major cost savings and other benefits of sourcing
from suppliers in countries that have low labour, material and manufacturing
costs.
A recent research report from Aberdeen Group, Low-Cost Country Sourcing Success Strategies, reveals that supply managers plan to double their business with offshore suppliers over the next three years. Among low-cost countries, which include India, Brazil and those in eastern Europe, China is the most popular source of supplied goods. But China's business boom over the past few years has created a large trade imbalance with many countries, including the United States and countries in western Europe.
China's currency - the yuan, otherwise known as the renminbi - had been firmly pegged to the US dollar for the past 10 years, which had produced an artificially low value for the currency and resulted in the trade imbalances. In July, the Chinese government agreed to give up the fixed exchange rate policy, bowing to pressure from the US and European governments, which had threatened to deploy import quotas and other trade retaliatory measures if the policy on the yuan's valuation was not changed. It will now be valued against a basket of currencies, including the dollar, the euro, the yen and the Korean won.
Will the revaluation affect LCCS?
Any change in currency value obviously can affect import and export levels.
But China's revaluation caused the yuan to appreciate only 2.1 per
cent against the dollar. This is far too small a change to make any significant
impact on LCCS. Buyers of Chinese supplies typically pay at least 30 per
cent less than they would in developed countries, according to Aberdeen's
recent research.
Longer term, there could be an effect on sourcing from China if the yuan appreciates more against the euro and the US dollar, but China may not be a low-cost country for a long period of time, anyway. Booming demand and strained manufacturing capacity are already exerting upwards pricing pressure on some Chinese commodities.
Will there be additional steps taken to revalue the yuan?
Chinese leaders are not saying much about this. I believe we won't see
another move this year. We may see one next year, but I expect it to be relatively
minor. I think the long-term plan is to slowly move the yuan towards its true
value, but it will take time.
The general consensus among global economists is that the move is a positive yet controlled step towards a long-term strategy of moving the yuan closer to its true global market value. There are some exceptions, but for the most part economists and even US politicians generally accepted the revaluation as positive, saying it's a good first step.
Currency issue aside, how should companies reduce the risks of sourcing from
a relatively underdeveloped country like China?
Our research shows that the most popular method of LCCS risk-mitigation is
a logical one: establish secondary sources, usually in a country other than
the one in which the primary supplier is located. Companies also hold additional
inventory to reduce risk, though this, of course, takes away some of the cost
savings. It's very important that companies understand LCCS risks in
detail. The extended global supply chain that is automatically created when
executing LCCS is complex and difficult to manage. And everything takes longer,
including moving goods through the supply chain.
Is LCCS a passing fad, or a supply strategy that will endure?
What used to be called global sourcing and is now called LCCS is a supply strategy
that will evolve and change, but it's here to stay. The cost savings
and other benefits that can be achieved via the use of LCCS are simply too
compelling for procurement groups to ignore. Global market forces are creating
continuous cost pressures on companies in nearly all industrial sectors.
Companies that ignore the benefits of LCCS will be at a competitive disadvantage.
It's hard to overstate how popular LCCS has become. Aberdeen research
shows that more than three-quarters of companies are using LCCS to some degree,
and the majority of companies that are already using it plan to expand their
programmes.
