Procurement Intelligence Unit

If a year’s a long time in politics then 12 months must seem like a lifetime in procurement. Last September the financial world was shaken to its very core when Lehman Brothers became the biggest, and most high profile casualty, of the global economic crisis.

Small wonder then, that supplier risk was priority number one for CPOs across the world with distressed supply chains posing the greatest threat to procurement, and the wider business world, in a generation.

Back in March of this year,a study by A.T.Kearney concluded that up to half of the top auto suppliers in the U.S. were staring bankruptcy in the face. The report warned that the collapse in demand, and the subsequent cuts in production were placing an intolerable strain on an already vulnerable supply base.

However, while some companies began setting up teams to monitor the robustness (or otherwise) of their supply chains, many firms sourcing directly from China were left floundering as they tried to gain the necessary insight into their tier two and tier three suppliers in the country.

And although the general health of global suppliers, particularly those in the U.S. and China, has improved, with vast numbers now coming off the critical list, there’s little doubt that fundamental problems persist.

Earlier this week, the Procurement Intelligence Unit, caught up with Dr. Martin Lockstrom, director of the European Business School Supply Management Institute in China, who expressed the view that supply chain visibility should still be a primary consideration for sourcing operations in China.

And it’s a message that he thinks is finally beginning to filter through.

“Companies have become more aware of the associated risks, like currency risks and CSR-related risks,” Lockstrom said. “And so rather than blindly off-shoring to countries like India and China, it seems that companies have realised that you can outsource procurement activities, you can offshoring business activities, but you can’t offshore the risk.”

In his various discussions with leading figures within the Chinese business community, Lockstrom confirmed that, while there is a growing acceptance that the country can no longer rely solely on its export market for continued expansion, there has been little evidence of Western companies drawing back their sourcing operations within the country, despite the economic turmoil.

“I think the importance of China as a supply market has not decreased – rather the opposite in the sense that when consumer confidence falls they get increased cost pressures and, in this way, they try and reduce the cost base further by sourcing from emerging markets,” he said.

“I haven’t spoken to any company that is planning to scale down their operation.”

The message, though, appears clear – cost may be the primary driving force behind recent sourcing decisions, but companies know that any moves they make in the emerging markets are at their own risk.