Can Procurement Disaster-Proof the Supply Chain?

Procurement teams from almost every type of business struggled to reconcile with disruptions caused by COVID-19. Beginning in China, regions around the world were hit by the pandemic in succession, leading to a cascade of disruptions in manufacturing and the provision of business services.

Now, procurement leaders are reviewing all that occurred over the past two years to determine if they can better integrate risk aversion and resilience into their procurement practices. If there is one aspect of this journey that stands out above others, it's that both direct and indirect sourcing from a single country or region introduces an inordinate amount of risk into the supply chain.

Rethinking Sourcing from China

For example, many U.S. organizations source a significant amount of their supplies from China. In the past, sourcing from China made sense to reduce costs. And although the Chinese manufacturing base was located overseas, favorable shipping conditions have long made China a cost-effective partner for sourcing.

But when the pandemic hit China, many companies weren't prepared to see their key manufacturing sites go dark. They didn't have alternative sources of goods and products lined up, so there was a scramble for suppliers across the globe. This led organizations to seek alternatives in Southeast Asia, South America, and elsewhere, but only after their business had been impacted.

Now, organizations are weighing the risks and benefits of relying on China s their sole provider of goods and services, and it has become clear among many procurement leaders that supply chains must be diversified to disaster-proof them against future disruptions.

Diversifying Manufacturing Services Worldwide

Procurement innovators suggest that organizations move away from placing such a preponderance of their manufacturing services in China, or any single region. Instead, they should use a diverse set of manufacturing services worldwide, as this could help them mitigate risks from regional disruptions.

This may not sound like an attractive prospect for some companies due to the issue of cost. China has long provided goods and services at low prices that manufacturers in other regions haven't been able to match.

But there are low-cost sourcing opportunities in other regions if procurement teams are willing to search for them. More importantly, they can partner with these low-cost suppliers without sacrificing quality.

For example, there are opportunities to source from suppliers in regions like Eastern Europe, Central America, South America, and Southeast Asia. Mexico is of particular interest. According to a survey of executives by Foley & Lardner LLP, a large portion of U.S.-based executives moved their portions of their manufacturing operations to Mexico in 2020.

Considering Total Cost of Ownership and Customer Satisfaction

Another aspect of the supply chain that procurement leaders are starting to consider is the total cost of ownership (TCO). By taking a more holistic look at their suppliers, as well as the cost and time it takes to deliver goods and services to market, organizations can make better choices about where and from whom they draw supply from.

For example, established manufacturing centers like China and the U.S. can provide low-cost and quality goods, but there are factors to consider other than direct costs. Longer lead times are becoming a significant challenge in the U.S. due to an ongoing shortage of truck drives. Because China is overseas, U.S businesses are subject to risks involved in container shipping, and there is now a global shortage of shipping containers.

A TCO perspective takes these costs into account as well as the direct costs of procuring products. Other factors, such as freight costs, tariffs, fees, and taxes are also important to consider. For example, while a country like China might provide cheaper goods, countries like Mexico may have fewer tariffs, charges, and taxes.

Organizations must consider how much value they are losing in their operations when it takes longer to source supplies from their traditional suppliers. If it once took a month to gain supply from a Chinese manufacturer, but it now takes three months, that equates to lost business that comes with a significant cost. In some cases, paying more for goods closer to home may provide a better TCO.

Finally, companies must also consider their customers and not just end-users of their products. External customers will be more satisfied if they receive quick delivery of their products. Internal customers, such as employees, are directly impacted by disruptions in the company's indirect procurement function, and their needs must also be taken into account.