Global trade wars have pushed companies to explore new markets for their supplier base. Can Asia still be a cost-saving destination?
December 3, 2018
By: Mudit Agarwal, Senior Manager, Industrials, The Smart Cube
2018 has been a frantic year for global supply chains. The US Administration’s decision to levy tariffs on a heap of imported goods, particularly from China, has left procurement organizations dazed and confused. The retaliation from other countries in the form of tariffs on US-imported goods hasn’t helped either.
2019 is expected to follow suit. The start of the year will see an increase from 10% to 25% in tariffs on $200 billion worth of imports from China. Companies across industries with huge supplier bases in China, have been hit hard; some have started exploring new markets in Eastern Europe and Mexico. But with the right intelligence, Asia could still be a prudent cost-saving destination.
To maximize opportunities for sourcing from Asian markets, organizations need to first have answers to these three questions:
1. Do you have the right insight into your chosen supplier market?
The first thing procurement teams need to know is whether they have an in-depth understanding of the Asian supplier market, insights into category trends, the supply-market structure and the balance of demand-supply. In a recent study done for a large industrials manufacturer, our experts informed its fittings category manager about an expected imbalance between demand and supply in the region due to high demand from the Power and Oil & Gas sectors. This intelligence enabled the category manager to take proactive steps to enter long-term contracts with preferred fittings suppliers in the APAC region, creating potential savings of up to 62% – a significant impact to the company’s bottom line.
Other key aspects that procurement leaders should keep in mind when looking at the Asian market are:
- Supply chain review. Trade tariffs have affected certain products, and it is important to conduct a thorough review of the supply chain in order to mitigate the situation. Solutions include looking for opportunities to source from additional product suppliers or e-sourcing the entire product line.
- Calculate all costs. Add the newly-imposed tariffs and trade duties into the cost model. Factor in all costs – even transportation costs and brokerage fees affect margins.
- Multiple sourcing origins. Identify multiple geographies which have competitive suppliers. Vietnam, Indonesia and India have emerged as conducive low-cost sourcing regions in our recent studies for multiple categories.
There are instances when a thorough market review could find Asia is not the answer for every category. The Smart Cube recently conducted category research for an industrial client. The solutions team found that the production cost of freeze sprays was lower in the US compared to APAC. This is one of many examples that reinforce the importance of due diligence to make informed sourcing decisions for any category.
2. Have you selected the right supplier?
Organizations have to adhere to preset quality criteria. Finding the right suppliers that can meet these quality standards in alternative markets is a common challenge faced by procurement teams.
The first step is to do a risk and financial assessment for the potential new supplier. This is to be followed by a thorough evaluation of product quality, capacity, schedules, and other business-specific criteria which can vary across companies and categories. For example, an industrial manufacturer sourcing thermocouple probes would want to check ISO and CE certifications, while an airline engine manufacturer would check for AS9100 certification in suppliers. This becomes more difficult when suppliers are in non-English speaking and culturally different Asian countries – so this must be taken into account when planning and staffing a supplier sourcing exercise.
As margin pressures on industrial companies increase, we foresee Tier 2 and Tier 3 suppliers playing a growing role in cost savings. The challenges around quality assessment may be greater, but if navigated correctly, the ensuing business benefits could outweigh the challenges.
In a comprehensive study done recently for a large scientific and medical equipment manufacturer, we identified new suppliers in countries including India, Japan, Malaysia, South Korea and also China, for each of its seven high-spend categories (and sub-categories within). There were many suppliers which were rejected upfront that did not meet the qualification criteria. Sourcing from the recommended suppliers would yield more than 60% cost savings for four of the categories, and more than 40% cost savings for the others. Our experts are in the process of gathering market intelligence covering five more categories for the next phase of the project.
3. What is your negotiation strategy?
Category leaders need to establish a strong negotiation strategy. Intelligence such as standard market pricing, competitor pricing, volume of supply in the market, the supply-demand balance, the supply market structure, production and raw material costs, can all work as negotiation levers. Quotes from competitors, for instance, can stop the supplier from overcharging; or access to production costs can help estimate the final product cost.
In a recent study for a manufacturing company for one of its key categories, glassware, our experts found that the suppliers operated at a substantial margin of 20%-25% in APAC, when research also showed there was an abundance of suppliers in the region. With the products being standard, labor costs being low, and demand-supply balance maintained in the market, these insights could be crucial in creating the foundation for the client’s negotiation strategy. Based on our forecast, the business could save between the range of 65% and 95% for different products under the glassware category.
What does this mean for the industrials sector?
Evidence from our work with companies in the industrials sector suggests the Asian region can still be a lucrative source of cost savings. With accurate market intelligence, procurement organizations can identify and select the right suppliers, and develop strong negotiation strategies. Besides cost savings, organizations can gain a competitive edge over other companies in their sector, who would also be charting an alternate sourcing strategy. At a time when procurement leaders are tasked to do ‘more with less’, one answer could be tapping into alternative markets – and the foundation is timely and relevant market intelligence.
About the Author
Mudit Agarwal, Senior Manager, Industrials, The Smart Cube
Mudit specializes in providing customized solutions to clients in the procurement and supply chain space. In his nine years with The Smart Cube, he has supported clients with formulating sourcing strategies, cost reduction initiatives and streamlining supplier relationships. When he is not leading a team of analysts and project managers, he spends his time reading fiction and playing with his son.