BCG: Global Purchasing in the Post-crisis Era

The ups and downs of the global economy have had a tremendous impact on how companies view and conduct global sourcing. During the crisis, the exports of low-cost countries fell sharply, from 3.8 trillion US dollars in 2008 to 3 trillion US dollars in 2009, and have not yet returned to pre-recession levels. (See Figure 1) Of course, sluggish demand is the main reason for the decline in exports, but companies are also revisiting procurement strategies based on low-cost countries, mainly because they have encountered a series of challenges, such as quality and safety, product recalls, and labor costs. Rising, fluctuations in commodity prices and potential risks caused by excessive supply chains. Recent news reports seem to suggest changes in a pattern and the trend of returning to “nearshore” countries, such as Mexico for the United States and Eastern Europe for the EU.

However, according to a recent BCG survey, global procurement still exists, but the emphasis has shifted from simple labor cost savings to procurement total costs or purchases in “optimal cost” countries.

Labor and investment costs are rising

Although the low-cost labor force in the 1990s promoted mass production to move from the West to the East, global procurement is no longer limited to labor-intensive products such as clothing, toys, and footwear. Multinational corporations are increasingly sourcing more extensive products from low-cost countries, taking advantage of lower day-to-day management, investment, and capital costs in these countries, or out of consumers who can better choose suppliers or emerging markets, etc. Strategic considerations. With the reduction in the amount of labor required for imported products, the arbitrage effect of labor cost savings has also been reduced.

In addition, labor shortages inevitably lead to wage increases. The rise of Japan as a low-cost producer after World War II did not last for a long time. South Korea’s advantages in the 1970s and 1980s did not last long. The huge population of China, India and Southeast Asia has slowed down this inevitable phenomenon, but labor shortage has become an important issue in the latter half of the first decade of the 21st century. The shortage of labor force coupled with the continued growth in demand in the export industry has forced labor costs in many of these countries to rise. Recently, double-digit wage increases are extremely common in countries such as China and Vietnam.

As the demand for higher quality, better processes, and the high degree of automation required for large-scale production continues to grow, so does the skill level of workers in low-cost countries. Skilled workers also have higher costs, especially because they are often in short supply.

Investment costs have also changed dramatically over time. (See Figure 2.) In the past decade, manufacturing and construction industries have been on the rise in China and other low-cost countries, resulting in unlimited demand for resources and driving up raw material prices. For example, before the financial crisis broke out, crude oil prices hit a record high of US$147 per barrel. In addition to pushing up transportation and related costs of raw materials for petroleum products (such as plastics), the rise in oil prices has also affected the prices of other energy sources and has driven up the cost of other investments. The increase in cost offsets any form of labor cost savings and reduces the overall cost advantage of low-cost countries.

Cost pressure from other sources

In addition to rising labor costs and investment costs, companies sourcing from low-cost countries must also consider the costs involved in responding to environmental, health, and safety issues; the effects of excessive supply chains on inventory holding costs and shipping and response times. And potential quality issues that may lead to high claims, returns and stoppages. For example, in 2007, Chinese-made toys used leaded paint, causing more attention to safety issues. Companies purchasing toys from China may have to bear additional quality control costs or find ways to pass these costs on to customers.

In addition, the large fluctuations in currency make the potential savings from low-cost countries more and more difficult to predict. Since the outbreak of the financial crisis, the currency exchange rate market has experienced very large fluctuations. (See Figure 3) Firms that purchase from a single area find that they are particularly vulnerable to adverse currency fluctuations and may expend their expected cost savings.

Increasing protectionism has also increased the uncertainty of global procurement. After years of efforts to reduce trade barriers, both developed and developing countries have tried hard to recover from the economic recession. In particular, trade frictions between China and the United States have been escalating. In addition to continuing concerns about the devaluation of the renminbi, the U.S. government has also raised many import tariffs on Chinese products to protect domestic industries. In the first nine months of 2009 alone, the United States launched 14 investigations on Chinese exports, with a total value of US$5.8 billion, compared with only US$1 billion a year ago.

In 2009, the U.S. government imposed tariffs on all cars and light truck tires imported from China. Twenty-seven EU member states have also joined the campaign against boycotts of low-cost countries and impose tariffs on steel imports from China. Similarly, footwear companies that ship products made in China and Vietnam to Europe are also faced with high EU tariffs. Companies that rely heavily on a single supply base can easily be hit hard by such government decisions.

Protectionism is not the only legislative uncertainty faced by multinational corporations procured from low-cost countries. Many countries use export tariffs and VAT rebates to strengthen the competitiveness of local industries in the global export market. In China, the government has been using export tariffs and VAT refund structures that support more efforts to encourage exports. However, due to the fact that the export growth in the first five months of 2010 was 33% higher than in 2009 and the impact of the financial crisis in 2008 largely subsided, the Chinese government cancelled the refund of 406 kinds of export products in July 2010 to reduce the Export incentives for energy-intensive products such as rubber and glass. For companies sourcing from China, in addition to direct financial impact, such changes also emphasize the continuing risk of global sourcing: Any country's cost savings may be subject to immediate risk due to changes in trade laws. Excessive reliance on a single source of supply adds to this risk.

Increased emphasis on total cost

These ever-increasing costs and changing conditions have brought new challenges to global procurement. To succeed in a new environment, we must transform the traditional procurement model into a more comprehensive and strategic approach, considering the total cost of procurement in different countries. Thus we found that many companies shift their focus from low-cost national procurement to “optimal cost” national procurement—an approach that assesses a range of factors, not just labor costs.

In order to understand in detail the current best practices of global sourcing and how best to develop national procurement, BCG surveyed 30 multinational companies from various industries and countries. According to our research, the optimal cost of national procurement will continue to prevail. In fact, we have found that the overall scope of participation is more extensive, and companies are adopting a more strategic approach to establishing a supply portfolio and trying to achieve a competitive advantage, rather than just reducing costs. Below we will discuss each trend carefully.

More extensive participation

The participants in the best-cost national procurement include not only the leading multinational companies and Fortune 500 companies, but also the SMEs in North America and Europe. Part of the reason is that it has become easier to buy from overseas suppliers. Increased market transparency helps small businesses establish direct purchase agreements with the best-cost countries. The main reason for the increase in participating companies is that suppliers in low-cost countries have become increasingly sophisticated and have become reliable substitutes for Western suppliers on the world stage.

In addition, the product categories that are purchased expand from traditional labor-intensive products such as clothing and toys to technical and capital-intensive products. This is basically the case for all major low-cost supply bases in the world. For example, companies that purchase more capital equipment from these regions need to reduce overall capital expenditures. From pumping machines to chemical equipment, from storage tanks to blast furnaces, companies are finding suppliers with extensive product development and production experience, and their experience often comes from the process of providing services to a rapidly growing local economy. Many mining, oil exploration, and chemical industry multinationals are actively sourcing large capital equipment from low-cost countries for use in factories located in the East and West.

However, the participants in the best-cost national procurement are not just limited to manufacturing companies. Even some PE (private equity) companies are establishing purchasing agencies in the most cost-effective countries, using their scale of integration to provide cost-saving opportunities for portfolio companies.

More kinds of combination methods

All companies interviewed stated that they will continue to maintain or increase their purchasing activities in the countries with the best costs, especially in Asia, because purchasing in these countries can still save a lot of costs. Many participating companies have expressed that although the financial crisis has had a negative impact on certain regions, it has also brought opportunities for the purchase of the best-cost national products. For example, currency depreciation has made South Korea and other relatively high-cost regions a new base for optimal cost supply. Other traditional low-cost countries such as Mexico and Vietnam have become even more attractive due to exchange rate changes. Many participating companies have discovered that the global economic recession has made senior management pay more attention to cost reduction issues. This concern puts pressure on the procurement team and encourages them to develop other countries and supply sources as cost-saving alternatives.

However, the risks and uncertainties surrounding labor shortages, currency fluctuations, and protectionism have increased the concerns of the respondents. Many companies are actively adopting more diversified global purchasing methods and maintaining different supply source combinations in different countries and regions to reduce risks.

Realize a truly global advantage

The companies interviewed also stated that the benefits of the best-cost national procurement are not just cost savings, but also the strategic advantages gained through local and global competition. Many companies are moving other parts of the value chain beyond procurement, such as R&D and production, to the best-cost countries to further develop their design capabilities and production networks. These advances can create sustainable competitive advantages. This global scope of use reflects the development direction of the best-cost national procurement initiatives.

In addition to building competitiveness on a global scale, companies are also using their procurement agencies in emerging regions to increase the penetration of the local market. By entering the local market, establishing ties with government officials, and displaying innovations throughout the value chain, optimal cost national procurement can generate significant revenue and profit advantages, even in the business development of emerging markets.

Adapting to current challenges: Seven cornerstones

The financial crisis has clearly changed the development of the global economy. Even more complicated is that a two-speed world is emerging, characterized by a slowdown in the growth rates of developed economies such as the United States, Europe, and Japan, while the economies of Southeast Asia and the BRIC countries (Brazil, Russia, India, and China)1 are even faster. Grow. To meet the different needs of these high-growth and low-growth regions, it will certainly put tremendous pressure on the existing procurement model.

In addition, the global business environment will have great uncertainty in the short to medium term. As previously mentioned, some unpredictable factors such as currency fluctuations, investment costs and logistics costs, and trade barriers mean that companies with global supply chains must be highly adaptable and flexible enough to compete successfully. When companies reassess their operating models in the uncertain future, risk management issues have emerged.

Our surveyed companies are taking a series of measures and actions to solve these problems. For many companies, it will be difficult to change the structure of their global supply chain in the short term, given the challenges of finding qualified new suppliers or adjusting the output of existing suppliers in the face of capacity constraints. Therefore, most short-term measures such as government lobbying and currency hedging will be able to minimize the impact of uncertainty. These activities can effectively win time for companies that want to reorganize their supply bases to better manage new challenges.

There are also companies looking for ways to make their supply chains more flexible in the face of change and disruptions. Companies are “stress testing” their supply chains to assess the potential impacts of certain scenarios, such as the emergence of supplier quality problems in a country and the need to find alternative supply bases; port congestion or other logistics problems Delays in shipments and delivery times have changed; or due to currency appreciation, rising wages, logistics costs or tariff issues, the cost of landed products for global purchases has risen dramatically. Regular review of such issues will help companies avoid shocks.

For the medium-term situation, our interviewed companies realized that over-reliance on a region or a single low-cost supply base may be dangerous and unsustainable. They are actively working to diversify supply bases to reduce risks. In addition to the traditional supply bases established in India and China, many companies are also developing new suppliers in Southeast Asia, the Indochina Peninsula and North Africa. The dominant position of the Chinese factories in the world in the past decade has made it difficult for companies to purchase products on other products in other regions. For certain products such as lighters, China's dominance is very strong, and it is almost impossible to find other more suitable sources of supply, let alone bear huge new production capacity. Before the diversification of production really started, companies needed to invest in the development of other suppliers. However, a more comprehensive view of global supply sources is gradually becoming the mainstream view.

Some companies have even gone further and questioned their existing global value chains. Although they have worked well in the past, they may not be feasible in the future. They raise questions that touch the core of current operating models, such as whether we should change our global footprint. Should we redesign our global value chain and rethink where we buy production factors and assembly products? Should production or assembly be outsourced to increase flexibility and reduce legacy issues?

Regardless of how the company ultimately reimagines its long-term operating model, the purchasing organization is working to optimize its procurement practices. Because the country's purchases at optimal cost are developing very rapidly, past best practices that have been summarized are quickly becoming routine practices today. Companies must continually improve their capabilities in order to maintain a more equitable competitive environment. Otherwise, there will be backward risks. Our survey shows that the leaders of the best-cost national procurement have built the seven cornerstones for achieving excellence in procurement:

1. Comprehensive strategic perspective and management philosophy

2. Well-designed organizational structure with formal reporting processes appropriate to the nature and stage of business development to promote optimal cost national procurement

3. A good governance structure with a cross-functional coordination and cooperation mechanism to allow efficient interaction between global buyers or procurement engineers and optimal cost suppliers

4. Clear and clear procurement process, best practices in supplier and quota management, best practices in national procurement

5. Easy-to-use data systems for all relevant functional departments, around suitable metrics and support systems, with key performance indicators that can flexibly adapt to market changes

6. Plan well-rounded talent development and maintain a strong optimal cost national procurement team to provide a global career path

7. Strong change management capabilities that can motivate the enthusiasm and professionalism of all levels of the organization

Leader's Lessons Learned: The Four Stages of Development at the Best Cost National Procurement

As companies continue to accumulate experience and increase their expertise, they face a variety of challenges and must establish new best practices for success. The BCG study shows that companies need to go through four stages of development in the process of raising the purchasing power of the best cost country. (See Figure 4)

Stage One: Test Water

The company usually has limited experience and knowledge when it comes to exploring the best-cost national procurement, and the infrastructure has not fully adapted to global procurement. In the first phase, the organizational structure and processes are tested and refined. Companies usually deploy overseas small-scale project teams to conduct multiple rounds of pilot tests on selected product categories, thereby formulating all agreements from supplier inspection to order management. The small project team will make the process more transparent and easier to manage, and better able to deliver tangible results. These positive early results can create the motivation for change, and promote other organizations to change. In addition, the cost savings can be used to promote more optimal cost national procurement activities.

The key to success at this stage is the attention and investment of senior management, who can eliminate any obstacles from the process and establish a solid foundation for each stage of the future. Because the optimal cost of national procurement represents a new type of business model and requires radically different ways of thinking, change must often be driven by the Chief Procurement Officer or other senior leaders. Without the strong support of senior management, global procurement initiatives may lose momentum. For example, an industrial goods company in Asia has successfully increased its purchasing power at the best cost in the country and realized substantial savings, thus providing financial support for the further expansion of the project. However, due to the departure of the project leader (a key member of the board of directors) and management’s attention turning to other issues, the project has failed. The optimal cost of national procurement projects has not been able to regain momentum within the organization.

Phase II: Grasping Savings

As business growth matures, they will initiate other procurement waves until the best-cost national procurement eventually becomes the global procurement of post-harvest crisis times. 8 Boston Consulting Group's October 2010 purchase of regular business functions. In order to promote full integration, companies need to do a lot of work to ensure the establishment of cross-functional and cross-regional coordination mechanisms. Some companies set up rotation plans for highly potential employees to ensure the establishment of an informal network of future regional and functional leaders. In the second phase, the procurement organization usually formulates a clear strategy to determine how to integrate the best-cost national procurement into its global operations strategy. They usually establish and track purchases or savings targets to ensure the optimal cost of national procurement progress and development.

In order to establish and support this work, the organizational structure and processes that have been tested and refined during the first phase need to be institutionalized. At this point, the team that is distributed as "satellite" is no longer just a supporting role. Together with the headquarters staff, they become an integral part of the purchasing function. A company with a "high-level buyer" model can allow these buyers to be stationed in the satellite team rather than at the company's headquarters to expand the procurement category and promote the operation strategy because they are closer to key suppliers. Human resources organizations can actively develop employees in these satellite branches to ensure the establishment of a talent team that can support future growth.

Phase 3: Play a global advantage

In order to compete with low-cost challengers in developing countries, companies must find other advantages besides cost. In the third phase, leading companies will focus their attention on cost reduction and instead seek ways to use innovation, product development, and manufacturing skills in the best cost countries. The procurement team worked with local suppliers to develop components from scratch instead of purchasing Western-designed parts from local suppliers. For this reason, many companies have begun to transfer other parts of the value chain overseas. For example, many multinational companies are establishing R&D centers in India and China. A global industrial product company is using the design and manufacturing capabilities of China and India to develop products for emerging markets and developed markets. In addition to reducing development costs, these new products are also designed to use existing low-cost materials and standard components in the region to reduce production costs.

Phase 4: Management Costs National Purchasing Dynamics

At this stage, companies have made great progress in the development and utilization of global advantages, and thus obtained a competitive advantage. Retail, electronics, apparel, footwear and other consumer goods companies invest most of their purchase funds outside their home countries. Their current major challenge is to manage the inherent risks of extending supply chains in a rapidly changing global environment. Excessive reliance on a single country or region may increase these risks to an unacceptable level. Many companies choose to limit risks by establishing a balanced, diversified procurement network, such as shifting purchases from traditional supply bases such as China to other low-cost regions.

At this stage, other companies have established a global network of international procurement affiliates to monitor the development of supply bases in various regions and optimize their cost position by utilizing capable local suppliers. Some companies have also shifted some of their purchases out of China in order to reduce their exposure to the renminbi and avoid possible tariffs on some Chinese products. Some companies are also actively establishing other supply bases to promote the necessary relocation activities in the future. Some companies even go further and begin to question the design of their existing supply chain and consider whether it is necessary to carry out some degree of transformation. For example, can we purchase prefabricated parts from the best-cost countries and assemble at near-shore locations to achieve the best balance of cost, flexibility, and risk?

Each stage presents different challenges to the seven cornerstones and different industries. For example, companies that purchase toys, clothing, or other products from established suppliers in the best-cost countries face more diverse problems than mining companies that must deal with emerging Asian suppliers. As the business grows more and more mature, their ability to use the best-cost national suppliers has gradually increased, creating more opportunities to reduce overall costs and increase their competitiveness in the market. However, it is important to understand that the optimal cost of a company is partly determined by the degree of development of the supply base.

Stay alert

It is critical that companies regularly make adjustments to better manage emerging challenges. Many companies find that if they can't develop and expand their purchasing power at the optimal cost, then even if the project is successful at the beginning, it will stagnate.

In the past decade, the Boston Consulting Group has been tracking the development process of the best cost national procurement, and found that the professional level and maturity of participating companies are getting higher and higher. However, since today's best practices will become tomorrow's regular practices, we recommend the following three major initiatives:

1. Conduct “health checkups” on a regular basis to assess whether the current state of the company’s optimal cost progress in national procurement practices is adapting to emerging risks and challenges

2. Monitor emerging trends and best practices adopted by other companies for national procurement best practices

3. Balancing the risks and rewards of changing global market conditions, and adjusting or designing the company's optimal costs accordingly

Leading companies focus on the different components of the seven cornerstones and adopt practices that promote more effective procurement, thereby allowing themselves to stand out and move to the next stage of development as soon as possible. As these companies move along the development stage of purchasing at the optimal cost, they not only gain cost advantages but also have stronger competitiveness in the global market.

Looking to the future

In the past decade, the best-cost national procurement has helped many companies reduce their purchasing costs by millions of dollars and gain a competitive advantage in the global market. However, the development of the global economy is undergoing fundamental changes. The cost of production materials in low-cost countries has risen, which has changed the relative attractiveness of different regions. At the same time, the global demand pattern also changes with the adjustment of the purchasing power of emerging economies. And, the recent global recession has accelerated these changes.

For many multinational corporations, the era of simply purchasing from China to reduce costs may already be over. In the future, companies will rely on more diverse low-cost supplier bases across multiple regions. The "China 1" strategy, popular only a few years ago, is likely to be transformed into a "BRIC4" strategy. In addition, the one-way model that is sourced from the east and sold to the West is likely to allow the networked model of supply centers located in different regions to rapidly infiltrate the rapidly growing emerging markets. Given these emerging global commercial realities, some companies may need to redesign the entire production and procurement network.

Globalization has opened the door for multinational corporations to use global procurement to gain market access and cut costs. Best-cost national procurement is one of the most direct ways that companies can use the advantages of different regions of the world to improve their cost status. However, these potential rewards are not without risk. The growing ties between global economies and the lingering uncertainties caused by the recent recession have brought enormous challenges to global sourcing. In order to avoid stagnation, companies must continue to develop and improve the optimal cost of national procurement capabilities.