Monday, March 22, 2010

No More Free Lunch: Purchasing Directors in China Face Rising Prices

The cost of doing business in China is rising. China has been the world’s factory and the anchor of the global disconnect between rising material prices and lower consumer prices. Now, factories in throughout China are being forced to raise the prices of exports as the costs of energy and raw materials soar in a fiercely competitive market. While China is still considered cheap by Western standards, suppliers are no longer eager to race to the bottom. They are investing in the capital and knowhow to improve their production and compete on a global scale. Purchasing directors able to adapt their sourcing strategies in this rapidly changing market will find that new advantages and rich opportunities await them.

Corporations that began outsourcing production to China in the early 1990’s have benefited from dramatically lower costs and thus high corporate profits. The challenge for medium and large multinationals in China these days will be to maintain consistent prices from reliable suppliers while continuing to cut costs and improve efficiency. While some companies contemplate moving inland, where labor costs are lower, or to other parts of Asia, such as Vietnam, India, or Bangladesh, many purchasing directors realize the advantages China has to offer. Rather than moving factories or massive supply chains, resulting in logistical nightmares and productivity losses, firms willing to invest in a competent procurement team and strategic sourcing processes will continue to dominate in this unique market.

So where does that leave companies just now starting to source from China? According to a recent survey by AT Kearny, over 70% of companies surveyed plan to procure from China by 2010, a 40% increase from just a decade ago. Yet many purchasing directors are not prepared to manage these sourcing efforts efficiently and cost effectively. They lack the experience on the ground to fully understand the intricacies and obstacles associated with emerging market procurement, especially in a market as cutthroat as China’s. Companies often underestimate the value of working with an expert who knows the territory, the costs and the players, inside and out. Beyond cultural and language obstacles, logistical issues like proximity and expertise come into play. Locating a reliable supplier is just a start. It takes a true professional with their finger on the pulse to ensure reasonable pricing and fair contracts in these dynamic market conditions.

While increasing costs have their downfalls, companies that procure strategically will maintain their low prices and benefit from better suppliers, standards, and quality. Don’t be left in the dust.

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