Turning Points 2008: Global Sourcing Not Always a Sure Winner
Commentary by Bernice
Hurst, Managing Partner, Fine Food Network
Editor’s note: In what
we plan to make an annual end-of-year tradition, RetailWire has compiled
a list of the most significant retail industry “Turning Points” of
2008. (See our news release…) What follows is the fifth in a series
of 12 discussions based on the list.
For a while it looked
as if global sourcing, especially from Asia, was going to be the ultimate
win-win opportunity. Products were cheap, even with shipping costs. Consumers
were happy with low prices, shareholders with profits. Manufacturers were
happy with reduced costs, workers in developing countries with increased
job opportunities, wages and, for some, living standards. Exporters and
retailers from developed countries were happy finding new markets.
But, to coin a cliché,
if something looks too good to be true, it probably is. And while protectionism
cannot be seen as the way forward, the urge to withdraw inward is natural
in times of economic strife. Both the cost and security of products transported
from some distance have caused increasing concerns. Excitement and anticipation
are tempered with fear and distrust, especially when serious flaws are
discovered, as with melamine in baby and pet food or toxic residues on
children’s toys. Other products may just be shoddy and badly made. Oversight,
or the lack thereof, are problematic when dealing with globalization;
in particular, monitoring living and working conditions as well as adhering
to principles of social responsibility.
Outsourced customer care,
as we discussed recently, has antagonized customers although RetailWire contributors
have frequently highlighted the ways in which manufacturers and retailers
are (and are not) addressing consumer concerns. Low prices are often seen
as priority but job losses represent an increasingly unacceptable trade-off.
Mutual dependence is
spreading the global downturn just as it spread global affluence. With
fewer customers for their products, Asian manufacturers are disappearing.
In Guangdong, China, manufacturers of toys, handbags, tee-shirts and shoes
are closing down, abandoning workers whose “unscrupulous bosses take
advantage of China’s lax labor laws by disappearing without paying their
workers,”
according to The Daily Telegraph.
“Sharply lower consumer
spending in the United States and other high-income countries is stalling
global trade, causing a surprise downturn in exports from China that is
dramatically slowing its economy and rippling through other countries that
rely on international commerce,” according to The Washington Post.
The New York Times adds, “The
economic downturn has decimated the market for recycled materials like
cardboard, plastic, newspaper and metals.”
As there is little likelihood
of retreating from globalization, opportunities must be found to make it
work for the maximum number of people – primarily by making sure
people have work and can support themselves while creating profit and good
quality products for sale at low prices.
Discussion Questions: What will sourcing, particularly from Asian nations, look
like in the year ahead? What factors do you expect to particularly guide
sourcing strategies in 2009?
- Downturn Choking Global Commerce
– The Washington Post - The Bangalore Backlash: Call Centers
Return to U.S. – The Washington Post - China’s toy makers face bleak Christmas
as factories shut down – The Daily Telegraph - Asda wants
ethical code for UK suppliers only – The Guardian - Primark drops three Indian suppliers
for using child workers – The Independent - Back at Junk Value, Recyclables
Are Piling Up – The New York Times
For lots of reasons, local sourcing is going to get bigger and bigger. I was listening in on a Walmart conference call with analysts, and they are all over it. It sees this trend as growing quickly, far ahead of organics. Walmart is planning programs focusing on locally-grown foods and will be communicating this to shoppers in the spring and summer of next year. During the conference call, Walmart said it is the largest supplier of locally grown produce in the United States. We’ve already seen the power that Walmart brings to trends.
Like it or not, the US is entrenched in globalization and the attending impacts that has on an economy. However, it may be interesting for many to find that the top five export countries to the US are Canada, China, Mexico, Japan and Germany.
A large amount of outsourced manufacturing is never coming back to the US and therefore the idea of reducing reliance on imports in favor of domestic production of displaced product is unlikely.
There is an increased focus on local sourcing, especially of food products and some goods and services, but it isn’t likely to make much of a dent when it comes to the kinds of products being manufactured in China (Consumer Packaged Goods).
The apparel manufacturing industry within the US has been nearly eliminated and textile manufacturing isn’t far behind. Even industries which are typically highly mechanized such as hosiery have shifted their production to Mexico, Central America and China.
China, for example, is suffering and closing factories due to low consumer demand and concerns over safety. The idea that somehow this will result in increased US production isn’t likely. I think that we’ll continue to see dampened demand across most categories and then as the global economy moves back into a growth mode, exports will again grow at their previous frenetic pace.
In all of the supply chain models that I’ve seen, transportation costs are typically assumed to grow modestly over time, but other than a sort of COLA factor, these models are really assuming very little volatility in cost. This last year has proven that building a supply chain model based on that assumption is actually very risky. I think many industry leaders recognized a certain amount of risk inherent in stretching a supply chain so far geographically, but the incredible rise in oil prices over the summer exposed a whole new risk. The only company that I’ve heard of that handled it effectively was Southwest Airlines, who hedged on fuel prices and reaped the rewards.
The pain of high oil prices definitely left a scar. We’ll see how long it takes to fade–for US consumers, how long before they are tempted back into the big SUVs that they dearly love? For manufacturers, how long before the scramble for near-sourcing fades to just a hedge, with minimal production capacity maintained just in case oil prices spike again?
There is no going back. We will continue to source from the most efficient producers. It may slow due to the economy this year. However, don’t misread that as a change in trends.
Local sourcing of produce might be growing because of perishability and the relatively small cost differential for local versus imported produce. However, it is unlikely that countries with developed economies will be able to domestically manufacture apparel and CPG products cheaper than less developed countries. Thus merchandise imports by more-developed countries from less-developed countries will continue to grow. While the economic decline is affecting Chinese manufacturers, it is affecting manufacturers in more developed countries even more.
Over the long-run, a significant increase in energy costs might raise the cost of imported goods to the point that domestic manufacturing is economically competitive. Labor costs in China will probably increase and manufacturing will shift to other countries like African nations, but it is not going to shift back to the US.
I think that there’s likely to be a desire to diversify sourcing, so that all the eggs aren’t in one basket. This will be seen in renewed attempts to source products domestically, as well as diversify sourcing into different countries and regions of the world, as well as across a range of different companies within individual overseas markets.
But the downturn will only reinforce the fundamental laws of economics. Product costing will continue to be of prime importance, and ultimately the vast majority of products will likely continue to be sourced through existing, known channels with the lowest cost structures. Globalization is the economic result of specialization, and few companies are likely to be willing to commit significant portions of their production to higher cost, or new, potentially riskier sources.
When properly managed and controlled, global sourcing is always a winner. The advantages of lower production costs combined with better logistical and overall costs ensures that the channel can be managed to fill and maintain the efficiencies it offers, as well as the opportunities to provide manufacturing and distribution locations in multiple parts of the world.
As I walk the markets of Hong Kong, I see fabulous products made in China as well as from around the world. At the same time, I miss some of the items I became so used to seeing in the States, simply because no one buys them here. And while I don’t want to place blame elsewhere for poor quality or unsafe products, US companies that set quality or performance standards for the products they brought in the country, have a lot of responsibility in this matter. . . as do customers who wanted the cheapest price.
Yes there are unscrupulous companies in Asia, but there are also lots in the States (read the paper, every day). I think the old saying still rings true . . . you get what you pay for. If a thing is overpriced – if the experience of buying it was good, the price was worth it.
One final point though. If you buy products from a company or country that you know exploits its workers and don’t do something about it, you are as bad as the owners. Check your resources.
Global sourcing will accelerate as long as protectionism is held back. The Chinese Yuan (Renminbi) declined 7% against the US dollar in the past 12 months, so Chinese goods are less expensive than ever. And Chinese quality continues to get better. Except for food, it seems like the majority of retail volume has been Chinese for years, whether it’s Walmart, Target, Macy’s, or any other mainstream store. The exceptions aren’t American sources, they’re other lower-wage countries like Thailand, Vietnam, and Mexico.
Even when an item has an “American brand” the components, if not the whole assembly, are often non-American. How many HP personal computers are made in USA? How many Ford parts and cars are made in Mexico? And since many Hondas, Toyotas, Nissans and Subarus are made and/or assembled in the USA, does that mean those cars are American?