Executive Briefings

Top Considerations for Engaging in Profitable Proximity Sourcing

Analyst Insight: We have been writing for a few years now about the changing perceptions of global sourcing, and as distribution and lead-time costs become more prominent, the need to think more holistically about how and where to source materials and finished goods. It is no longer sufficient to think just about labor costs, but total costs with an appreciation for the impact of long lead times.

-Simon Ellis, Supply Chain Strategies practice director, IDC Manufacturing Insights

IDC Manufacturing Insights conducted a survey in October 2010, asking 204 U.S.-based manufacturers about their plans and priorities for global sourcing in 2011, and beyond. The survey was balanced across company size and role in the supply chain, and all respondents were either familiar with their company's supply chain strategy and operations, or were part of the IT group supporting  the supply chain.

Overall and as expected, the trend for supplier location is increasingly global, although the data suggests this has now flattened out - expectations for regional sourcing are down somewhat over the time frame of the questions (2008-2012). However, "single-country" sourcing is down significantly.  This suggests that for most companies, even if the costs do not favor global suppliers, no such constraints exist for taking a regional view of supply.  We see a similar trend for "owned and operated" locations to be global, although in this case the data shows that there is still some significant movement to be made globally over the next two years.

When manufacturers look at global sourcing, it is comforting to see that they are increasingly looking at a more complete view of costs - although, perhaps not yet a fully realized "total landed cost".

The top three priorities for companies when making a sourcing decision are:

• Manufacturing cost (owned and/or outsourced production)

• Logistics and/or fulfillment cost (transportation and warehousing)

• Supply lead time (time to receive an order from supplier once order is placed)

What is particularly interesting, however, is the next set of decision criteria - and the degree to which product quality and risk management have climbed in importance when selecting a supplier or supply region.

The following points are worth noting:

1) The importance of supplier financial health has climbed in importance based on the past few years where manufacturers faced a significant number of key supply insolvencies.

2) Risk management, or continuity planning, has also climbed significantly in terms of priority for manufacturers when evaluating supply decisions.

3) Visibility is increasingly important, particularly as an early warning signal for problems in the supply side of the supply chain.

All three of these points come back to risk management and continuity planning and the challenge companies have in attempting to quantify, for example, better supply side visibility.

The Outlook

There is little question that manufacturers are reassessing their global supply networks in light of changing demographics and cost-of-goods components.  IDC Manufacturing Insights expects rising labor costs in emerging economies, a growing appreciation for the benefits of shortening lead times, and the importance of product quality to drive some quite different sourcing choices in 2011 and beyond.

Analyst Insight: We have been writing for a few years now about the changing perceptions of global sourcing, and as distribution and lead-time costs become more prominent, the need to think more holistically about how and where to source materials and finished goods. It is no longer sufficient to think just about labor costs, but total costs with an appreciation for the impact of long lead times.

-Simon Ellis, Supply Chain Strategies practice director, IDC Manufacturing Insights

IDC Manufacturing Insights conducted a survey in October 2010, asking 204 U.S.-based manufacturers about their plans and priorities for global sourcing in 2011, and beyond. The survey was balanced across company size and role in the supply chain, and all respondents were either familiar with their company's supply chain strategy and operations, or were part of the IT group supporting  the supply chain.

Overall and as expected, the trend for supplier location is increasingly global, although the data suggests this has now flattened out - expectations for regional sourcing are down somewhat over the time frame of the questions (2008-2012). However, "single-country" sourcing is down significantly.  This suggests that for most companies, even if the costs do not favor global suppliers, no such constraints exist for taking a regional view of supply.  We see a similar trend for "owned and operated" locations to be global, although in this case the data shows that there is still some significant movement to be made globally over the next two years.

When manufacturers look at global sourcing, it is comforting to see that they are increasingly looking at a more complete view of costs - although, perhaps not yet a fully realized "total landed cost".

The top three priorities for companies when making a sourcing decision are:

• Manufacturing cost (owned and/or outsourced production)

• Logistics and/or fulfillment cost (transportation and warehousing)

• Supply lead time (time to receive an order from supplier once order is placed)

What is particularly interesting, however, is the next set of decision criteria - and the degree to which product quality and risk management have climbed in importance when selecting a supplier or supply region.

The following points are worth noting:

1) The importance of supplier financial health has climbed in importance based on the past few years where manufacturers faced a significant number of key supply insolvencies.

2) Risk management, or continuity planning, has also climbed significantly in terms of priority for manufacturers when evaluating supply decisions.

3) Visibility is increasingly important, particularly as an early warning signal for problems in the supply side of the supply chain.

All three of these points come back to risk management and continuity planning and the challenge companies have in attempting to quantify, for example, better supply side visibility.

The Outlook

There is little question that manufacturers are reassessing their global supply networks in light of changing demographics and cost-of-goods components.  IDC Manufacturing Insights expects rising labor costs in emerging economies, a growing appreciation for the benefits of shortening lead times, and the importance of product quality to drive some quite different sourcing choices in 2011 and beyond.