Most significantly, these organizations plan to double-spend on low-cost country sourcing in the next three years.
Many companies do not yet view procurement as a strategic function and source of value. The typical smaller and medium-sized company lags far behind the largest industrial products and automotive companies in its use of global and low-cost country sourcing. Most take a fragmented approach to procurement, which leaves individual operating companies to pursue autonomous procurement policies and procedures with largely domestic suppliers.
Yet we know from experience that you do not have to be huge to have a successful global sourcing program—and to improve business performance as a result. For a typical industrial products company, the impact of global sourcing on profitability can be substantial—$100 million to $200 million in annual savings (for a $5 billion company spending 50 cents out of every sales dollar on direct materials).
Global sourcing of direct materials is no longer an option. It’s a competitive necessity, thanks to the rapid rise of low-cost emerging nations as both sources and consumers of direct materials. Across a range of industrial products and automotive global sourcing projects, clients can expect net direct material cost savings of from 10 percent to 20 percent, with an average net savings of about 15 percent.
By using low-cost contract manufacturing, you can change the underlying economics of low-margin products. If it is no longer cost-effective to manufacture your own products, consider outsourcing these products to a contract manufacturer in a low-cost region, then brand them as your own, and sell them on to your customer through your current distribution channels, rather than exiting the products completely. This strategy helps you protect current revenue while improving margins—and prevents competitors from stealing market share and gaining a foothold with your established customers.
“Buy-brand-sell” strategies can also help you tap into the power of your brand to fuel growth by adding complementary products to your 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.
Deploying consistent processes and tools across business units and operating companies lays the foundation for aggregating spend data. Together with streamlining the requisition and approval process, common processes and tools can build the fact base to instantly understand what you are spending on major categories, as well as just how fragmented or concentrated your supply base actually is.
High-performance businesses in your industry are already boosting gross margins by sourcing more direct materials globally and in low cost countries. The opportunities for substantial savings in terms of both margin improvement and revenues from these capabilities are real. Isn’t it time you joined the industry leaders on the path to high performance?
Paul Loftus, email@example.com, is North American Practice lead for Accenture, a consulting firm in New York City