Manufacturers Forced to Better Manage Risks From Emerging Market Sourcing

9 Jun 08

Increased publicity over product recalls due to manufacturing defects has made product safety, product quality and environmental standards in emerging markets a hot issue according to Deloitte’s “Innovation in Emerging Markets” annual study.

Based on a global survey of more than 650 executives across various manufacturing sectors including: industrial equipment, process industries, automotive, consumer goods, medical equipment/pharmaceuticals, telecommunications, and aerospace and defense, the report provides perspectives on how companies are:

• Responding to risks in emerging market sourcing
• Taking steps to upgrading standards
• Selecting emerging market suppliers
• Monitoring emerging market suppliers
• Building a sustainable supply chain

For global manufacturers, sourcing successfully from emerging markets is not a question of avoiding the risks, but instead of managing them effectively through enhanced vendor selection, testing, monitoring, and contract provisions. While implementing more rigorous standards is likely to result in higher operating costs, manufacturers have the opportunity to turn this challenge into a competitive advantage—building brand equity and commanding higher prices by providing guarantees that their products meet the strictest standards.

We all know product sourcing from these emerging markets is ever increasing. Around three-quarters of the executives surveyed said they had increased their sourcing from the emerging market suppliers over the last 3 years. Many said their increases were quite significant.

The study also shows where these manufacturers are doing their sourcing and it holds no surprises. When asked where they look for suppliers for their manufactured components and parts, 66% nominated China, while 36% named Mexico and Central America. The remaining emerging markets were each cited by one-quarter or less.

“Manufacturers are feeling the heat - especially with all the negative publicity related to issues of sourcing from emerging markets,” said Tom Imbesi Deloitte Lead Manufacturing Partner.

“But the more successful companies are not avoiding the risks inherent in sourcing from emerging markets. Instead, they are intently focused on understanding and managing these risks in order to continue to reap the benefits that emerging market sourcing provides.”

The opposite can have devastating effects for a company's product image. Quality and safety issues, or product recalls can do irrepairable damage to a company's brand, their image and result in lost customers and market share. Especially in the current environment with the public, government and manufacturer's competitors all keeping a keen eye out for quality, safety or environmental issues with products sourced from low-cost manufacturing nations.

“Finding the right suppliers that are both willing and able to comply with rigorous standards and nurturing these relationships are important to success. When choosing emerging market suppliers, successful manufacturers are going beyond the basics of quality, cost, and reliability to place much more emphasis on the overall reputation of the supplier.” says Mr Imbesi.

The study indicates that successful manufacturers have been engaged—or will likely engage—more rigorously in other risk management activities, including:

• More frequent visits to suppliers’ facilities.
• Willingness to address managerial skills and working conditions during visits.
• An expectation that testing levels will increase significantly.
• Contract requirements that call for more visits to facilities and for the approval of subcontractors.

But managing the risks in this way adds costs to the final product and these costs must be taken into consideration when analysing the total cost in sourcing from an emerging market. Whereas when sourcing from established markets the risks are either much lower anyway, or the risk management is already 'included in the price'. Quality and reliability cost money and finding suppliers in emerging markets who can provide this at a lower cost than a local supplier in addition to lower priced components is the key to successful sourcing. But as the study shows, it is those companies who understand this and work at reducing their risks that are gaining a competitive advantage over those who source based on price alone.

To view the Deloitte Global Manufacturing Industry Group’s “Innovation in emerging markets. 2008 annual study,” please visit www.deloitte.com/manufacturing.

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