Global Sourcing: Does Innovation Matter?

In a recent post in Sourcing Innovation, Michael Lamoureux questioned if low cost country sourcing from China was really innovative. The gist of his argument was to challenge whether the hurdles and landmines of manufacturing in -- and exporting from -- China will ultimately catch up with the low labor rates that make the region so attractive in the first place. Personally, I think Michael is onto something. Now, I won't agree entirely with his word choice. I think it’s almost irrelevant whether a Spend Management activity is "innovative". The cold facts should speak for themselves: does the savings or efficiencies gained from an activity or process outweigh the risks that it introduces? Whether an activity is innovative, contrarian, or lagging should not matter.

When it comes to China sourcing, I still believe companies contemplating the opportunity still have much to gain, especially if their efforts are framed from a perspective of sourcing and selling globally. Supply base localization efforts in China aimed at building local manufacturing capability to penetrate the regional Chinese and Asian markets remain a smart priority for global companies in my book. But simply playing the regional labor arbitrage export game will ultimately go the way of the physicals trading companies that used to dominate the global trading of many direct materials categories before they were disintermediated when medium and larger companies began to source directly. In fact, low cost country sourcing has been around ever since the concept of "trade" began. The difference was for thousands of years, global trade was dominated by intermediaries, not companies themselves.

I could not agree more with the statement Supply Management recently pointed out: "Low-cost sourcing is not about a place or country, it's the process of being able to move quickly". At least for the next few decades, we’ll see labor arbitrage opportunities in Asia, South and Central America, Eastern Europe, and maybe even Africa (but Africa, a great ultimate opportunity, will take the establishment of stable democracies throughout before it becomes possible to exploit the great labor opportunity of the region). However, when it comes to companies just getting into the current low-cost game, I'd argue that China specifically is probably on the back-half of the curve, or at least the current curve. Thanks to commodity price pressures, wage inflation, currency question marks, crappy IP laws, and increasing domestic demand, there are at least half a dozen other significant low-wage countries which present potentially greater -- or as great -- long-term opportunities for companies willing to make the investment. At the same time, when it comes to global sourcing, it's pretty easy to make the argument that China sourcing is no longer innovative. But more important, innovative or not, it is not always the right answer.

Jason Busch

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