March 2007 | Commentary | Viewpoint

Global Sourcing: The Path to High Performance

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Leading organizations on the path to high performance are those that accelerate global sourcing strategies, drive aggressive cost reductions, and look to contract manufacturing to leverage and expand the value of their brand.

Most significantly, these organizations plan to double their spend on low-cost country sourcing in the next three years.

High-performance businesses are masters of five procurement-related capabilities. They:

  1. Source direct materials globally and in low-cost countries to improve gross margins.
  2. Combine low-cost contract manufacturing and "buy-brand-sell" strategies to cut costs on low-margin products and fuel new growth by extending into complementary product lines.
  3. Elevate procurement to a strategic function so they can increase overall supply chain reliability and minimize total landed costs.
  4. Integrate purchasing earlier in the product development process to reduce product design costs.
  5. Deploy consistent processes and tools across business units and operating companies to aggregate and standardize spend data and improve compliance.

Many companies, however, do not view procurement as a strategic function and source of value. Typical small and medium-sized companies lag far behind large industrial products and automotive companies in their use of global sourcing.

Most companies adopt a fragmented approach to procurement, which leaves individual operating companies to pursue autonomous procurement policies and procedures with largely domestic suppliers.

Yet experience shows that companies do not have to be huge to have successful global sourcing programs—and improve business performance as a result.

From an Option to a Necessity

The average industrial products company can cut costs by $100 million to $200 million annually—based on a $5-billion company spending 50 cents of every sales dollar on direct materials—by implementing global sourcing.

Thanks to the rapid rise of low-cost emerging nations as both sources and consumers of direct materials, global sourcing is no longer an option, it is a competitive necessity.

Across a wide range of industrial and automotive product categories, for example, manufacturers in an Accenture study of global sourcing projects achieved net direct material cost savings between 10 percent and 20 percent. On average, the companies reduced costs by 15 percent.

By using low-cost contract manufacturing, businesses can change the underlying economics of low-margin products. If it is no longer cost-effective to manufacture its products, a company can outsource to a contract manufacturer in a low-cost region, brand the products as its own, and sell them through current distribution channels rather than exiting the products completely.

This strategy helps companies protect current revenue while improving margins—and prevents competitors from stealing market share and gaining a foothold with established customers.

"Buy-brand-sell" strategies can also help a small/medium-sized business tap into the power of its brand to fuel growth by adding complementary products to its portfolio without incurring the usual product design and development costs and resulting time-to-market delays.

By elevating procurement to a strategic function, high-performance businesses can flex their global-sourcing muscle in support of top-level business strategies.

As key technical services such as design and engineering—the "crown jewels" of many industrial products companies—become candidates for outsourcing, procurement's function becomes even more strategic.

One aircraft manufacturer, for example, outsourced the technical design and engineering work on its newest aircraft to 1,600 Russian engineers—a clear recognition of that country's unparalleled expertise in titanium technologies.

This is also a striking example of how integrating purchasing early in the product development process can optimize global sourcing opportunities.

The wing of its new aircraft is being designed and manufactured in Japan—leaving the aircraft manufacturer with little more than an assembly role in the aircraft's production.

Yet by taking maximum advantage of supplier collaboration, the company has improved the product's features and reduced overall cost.

Deploying consistent processes and tools across business units and operating companies lays the foundation for aggregating spend data. Together with streamlining requisition and approval operations, common processes and tools can reveal what you spend in major categories, as well as how fragmented or concentrated your supply base actually is.

High performance businesses boost gross margins by sourcing more direct materials globally and in low-cost countries. The opportunities for substantial savings are real.

Isn't it time you joined the industry leaders on the path to high performance?

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