Supply chains will shift East

Posted on 24 Sep 2010 by The Manufacturer

Strong evidence that companies are looking East to find low cost suppliers, says KPMG’s UK head of diversified industrials Gautam Dalal

UK manufacturers will shift their supply chain eastwards at pace in pursuit of lower cost sourcing according to our new Global Manufacturing Outlook report, which surveyed senior executives in large industrial companies in the US, Western Europe and Asia Pacific.

Difficult financial times have magnified the importance of value for money leaving UK businesses extremely price sensitive, with 86 percent of domestic manufacturers naming cost as their number one supply chain priority (compared to the global average of 66 percent), which may explain the strategic geographic sourcing changes on the cards.

The majority (55%) currently have their primary sourcing relationship here in the UK, but more than four in ten companies (41%) expect to have a more globally dispersed supply chain within the next two years, as they seek lower cost locations.

It appears that the biggest beneficiary of new sourcing arrangements by UK firms will be India, with half of the businesses we surveyed planning to increase their sourcing from India in the next two years, while 41 per cent expect to turn to China. Domestic suppliers are likely to lose out, as 36 percent of UK businesses intend to reduce their sourcing from local suppliers during the same period, with 63 per cent citing cost as the explanation.

Low cost sourcing remains the direction of travel most influencing geographic shifts within supply chains but there are a significant proportion of businesses balancing this as part of a layered location equation, factoring in considerations including labour market, logistics, currency volatility, customer profiles and demand as well as political, tax, and regulatory environments.

Indeed top performers are considering ways to align supply chains and their geography to other business model concerns with leading strategies involving detailed scenario modeling to determine the appropriate response to a host of volatile elements. The most successful companies will be those who build adaptability and flexibility into their supply chains. For example, nearly half of the manufacturers questioned (47%) are moving to a model where suppliers are as close as possible to operations in order to reduce risk.

The financial crisis dealt a blow to industry, and businesses are responding; addressing cost concerns and positioning themselves for recovery with more dynamic, resilient and responsive supply chains. It’s incumbent upon businesses to embrace new ways to use the supply chain to future-proof their business models.