Costs drive manufacturing supply chains east
UK manufacturers will migrate supply chains eastwards
As over a third of UK firms plan to source less in domestic markets over the next two years, India looks set to benefit, says a KPMG survey.
According to KPMG’s new Global Manufacturing Outlook report, UK manufacturers will shift their supply chain eastwards at pace as the pursuit of lower cost sourcing is expected to result in more globally dispersed supply chains. The survey covered, senior executives in large industrial companies in the US, Western Europe and Asia Pacific.
Economic uncertainty has left UK businesses extremely price sensitive, with 86% of domestic manufacturers naming cost as their number one supply chain priority (compared to the global average of 66%), which may explain the strategic geographic sourcing changes on the cards.
The majority (55 %) of UK manufacturers currently have their primary sourcing relationship with a domestic supplier, but more than four in ten companies (41%) expect to have a more globally dispersed supply chain within the next two years, as they seek lower cost locations.
The biggest beneficiary of new sourcing arrangements by UK firms is expected to be India, as half of the businesses questioned for KPMG plan to increase their sourcing from the subcontinent in the next two years, while 41% expect to turn to China. Domestic suppliers are likely to lose out, as 36% of UK businesses intend to reduce their sourcing from local suppliers during the same period, with 63% citing cost as the explanation.
Globally, China is the most common sourcing location, where 35% of businesses already have primary supplier relationships, while 39% intend to increase their sourcing from the country. India is not far behind, having supplier relationships with 26% of global businesses currently, and the same proportion planning to call on India for more of their supply chain requirements in the next two years, again cost being the predominant deciding factor.
Cost concerns are not only influencing supply chain geography but can pose a risk to long term relationships, with 38% of businesses globally admitting to having damaged relationships with suppliers due to an acute focus on cost. With just 23% of UK businesses conceding the same point, they appear to have managed the balance between cost and relationships better than average.
Gautam Dalal, KPMG’s UK Head of Diversified Industrials, said: “Difficult financial times of course magnify the importance of value for money. But by focusing too narrowly on immediate financial concerns businesses risk losing sight of the bigger picture so I’m relatively relieved that more than three quarters of UK companies feel their supplier relations have emerged from difficult times unscathed.”
KPMG’s report also indicates that the geography of sourcing is a complex balancing act between global and local as the search for low cost is just part of a layered location equation, which should factor in considerations including labour market, logistics, currency volatility, customer profiles and demand as well as political, tax, and regulatory environments.
Some top performers are thinking beyond sourcing locations for low cost alone and considering ways to align supply chains and their geography to other business model concerns. For example, nearly half of the manufacturers questioned (47%) are moving to a model where suppliers are as close as possible to operations in order to reduce risk. Further, half of all businesses which have sourced from developing economies believe that changing quality and cost considerations have made a shift back to sourcing from developed economies more viable.
Gautam Dalal said: “Low cost sourcing remains the direction of travel most influencing geographic shifts within supply chains but there are a significant proportion of businesses bucking the trend based on other factors.
“It used to be that sourcing decisions rested on routine considerations like who could make the best bolt for the best price. This approach worked when there was little variability in the cost inputs. Now, leading supply chain strategies must involve detailed scenario modelling to determine the appropriate response to a host of volatile elements. The most successful companies will be those who build adaptability and flexibility into their supply chains.”
Relationships
The KPMG report found that a notable trend in supply chain management is an appetite for forging stronger and deeper relationships, across a smaller number of suppliers, engaging in collaboration to achieve the best combination of speed, quality and cost.
The UK is leading the pack as nearly three quarters (73%) of domestic manufacturers plan to change their supply chain strategy through an increase in the use of long term contracts in the next two years, compared to a global average of 41%. Closer collaboration with suppliers is also intended across a range of areas from product innovation and research and development to cost reduction. Given this focus on supplier partnerships it’s no surprise that 59% of UK businesses, and 39% globally, intend to reduce their pool of suppliers.
Gautam Dalal said: “Key suppliers are increasingly becoming partners rather than purveyors of goods and services. Viewing the supplier relationship as a strategic partnership helps to ensure certainty of supply, improve demand planning and fine-tune the mechanism for getting product to the customer. What’s more, long term relationships can help with both price and the overall cost of supplies.”
Concluding, Gautam Dalal said: “The financial crisis dealt a blow to industry, and businesses are responding; addressing cost concerns and positioning themselves for recovery with more dynamic, resilient and responsive supply chains. It’s incumbent upon businesses to embrace new ways to use the supply chain to future-proof their business models.”
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