China Sourcing: The Future Ain't What it Used to Be (Post 1)

This morning, I'd like to welcome Aptium Global's Lisa Reisman back to Spend Matters as we launch our China Sourcing "The Future Ain't What it Used to Be" mini-series. A couple of years back, Lisa traded in her Fortune 500 consulting and trading past to focus entirely on working with small and middle market manufacturers on direct materials sourcing. In full disclosure, I have an economic interest in her firm, considering that she's my wife.

Has the China Balloon Popped?

There is a large hissing sound going on right now and it's coming out of China. The double whammy of increased export trade tariffs and the reduction/elimination of Chinese VAT rebates have thrown many a buyer and supplier in a full blown tizzy. A tizzy you may ask? Well, we've seen some confusion that low cost country sourcing or global sourcing only means China sourcing.

I once visited a company that designed bags for boutique retailers. They were considering identifying an alternative source of supply (their only suppliers were based in China). I sure hope they found some alternatives (their suppliers are probably increasing prices by at least 8%). From umbrellas and plastic flanges to watch parts and transmission belts, over 2000 commodities have been affected by the changes. Though the press covers the fact that China is seeking to rid itself of its "polluting low value-industries", the effects of these changes will ripple throughout all industries. You'll see the changes at your favorite retailers including Target and Wal-Mart.

And denial is the first phase. But haven't we seen this happen before? Didn't Korea and Japan follow similar paths, exporting low value-add products and eventually turning out some of the world's highest quality cars and electronics? China is merely following a similar well-paved path.

And businesses of all sizes would do well to follow a successful LCCS path as well. To wit:

1. If you aren't saving at least 35% on your parts/products, make sure you have two additional qualified suppliers ... one domestic (if possible) and one in another country/region.

2. If you do have only one source of supply and your product/category was unscathed by these changes, consider yourself lucky but take the time now to identify alternative global suppliers.

3. Re-align your sourcing organization ... don't organize by country, rather, organize by skill. Centralize a core group of "global sourcing experts" and hire opportunistically by region the folks required to execute the sourcing program (e.g. Hire a QA resource in China) but make the sourcing decision to source from China part of the core team’s responsibility.

In short, global sourcing is always risky business, and it's unlikely that this will be the last of the changes. Alas, my colleague Tom Goldblatt, recently commented, "We are very concerned about the currency valuation. We think with a future democratic administration and other pressures that the currency in China will rise in the next couple of years from 10-25% percent."

Regardless of whether or not you agree with future prognostications like this, one thing's for sure. And that's the fact that the China price is rising. Today, across many categories. And if you're not prepared, you better start developing your options.

Lisa Reisman is Middle Markets Editor of Spend Matters. She can be reached via email @ lreisman [at] aptiumglobal [dot] com.

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