China, Mexico and Beyond — The Latest Trends and Savings Percentages in Global Sourcing (Part 2)

In the first part of this series of columns looking at the latest in global sourcing trends for 2010, I examined the latest from Mexico and China by sharing a recent Industry Week write-up that captured the highlights of a recent Grant Thornton study. In Part 2, I'll continue this analysis, sharing some other findings from the study. But let's start by digging a layer deeper on the Mexico/China cost equation. Now the qualitative comments I'm about to quote from the article and study are nothing new, and represent first-grade level knowledge of a global sourcing education. But the numbers are fascinating, showing that the cost differential between China and Mexico (on a per hour basis) is shrinking, at least based on my own experience in LCCS projects not so long ago. Consider how "the wage difference between a typical U.S. worker and a Mexican worker is considerable (approx. $13/hr) ... However, the labor rate difference between China and Mexico is not nearly as great (approx. $2/hr)." Moreover, "when determining a non-domestic source for a particular component the other cost and risk factors have a growing importance as a criterion."

For those LCCS experts in the audience -- if Dick Locke isn't somewhere in the Pacific or Atlantic on his yacht right now I'm sure we'll get a wisecrack response in the next 48 hours -- this might seem like a statement of fact rather than a research finding. But I do think that more and more companies are finally realizing that piece part cost is but a single total cost component in the global sourcing equation. Among the other regional findings in the study, nothing else jumps out as overly newsworthy -- or new at all, for that matter. To wit, "Central/Eastern European countries such as Hungary, Poland, Russia and the Czech Republic continue to be the locations of choice for Western European manufacturing from both a plant and SKU perspective with supply percentages even greater than Mexico's support of North America" and "the Asia Pacific regional low cost sourcing is being dominated by China, India, Vietnam, Thailand and the Philippines." However, it is somewhat interesting to note that "inland China is being employed as a low cost source for coastal manufacturing sites." In other words, the Chinese heartland is its own LCCS.

A lot of the global sourcing trends absent from the study -- at least as Industry Week reports it -- that I've seen first hand recently focus less on regional strategies and more on corporate procurement and supply chain goals. Along these lines, as companies look to ramp-up volumes on a lasting basis or even as a temporary restocking strategy following the worst of the downturn, LCCS is becoming less important. Rather, manufacturers are focusing their efforts on developing local suppliers to meet the types of volume requirements that even a 5% increase in orders could bring (which could equate with a 20, 30, 40 percent or more increase in a supplier's volumes based on inventory). In short, I've observed that manufacturers are far more concerned at the moment with local suppliers being able to deliver on larger order volumes (e.g., by rehiring workers and gaining access to working capital) than on babysitting Chinese or other global suppliers from a quality standpoint.

Stay tuned for the final post in this series, where I'll share some more personal observations on trends in global sourcing for 2010 and beyond.

  - Jason Busch

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