Sourcing goods globally is not a new concept. Many companies have been sourcing from lower-cost countries for years. Recently, however, there has been a notable increase in the number of companies that are pursuing a global supply base, the variety of countries being considered as sourcing candidates, and the quantity and type of items being sourced and acquired.

This trend is certain to continue. In fact, 91 percent of respondents to a 2003 Accenture survey reported that they planned to increase their sourcing from lower-cost countries and regions. Moreover, as major markets in countries like China and India open up to foreign companies, sourcing decisions increasingly are being considered as a component of new market strategies.

Among all the lower-cost countries on the world's radar screen, none has received more attention than China. Nor is there another country whose continued growth is more certain or more dramatic. This column—the first of a two-part series—focuses on the characteristics that are making China one of the world's premier sources of supply as well as one of the most challenging. This discussion, however, is relevant to companies seeking to tap any of the world's emerging sources of supply, including Eastern Europe, Mexico, Brazil, India, and other Pacific Rim countries.

As shown in the chart at left, price and competitive pressures continue to be the motivators that most companies cite as reasons for acquiring more products from lower-cost countries. According to the 2003 Accenture survey results, globalization of suppliers (in other words, suppliers relocating to a lower-cost region or country) also is an important driver.

The flip side of that equation is the increasing attractiveness of countries from which new sources of supply might emanate. The four criteria noted below are largely universal, although the examples refer to China specifically.

Worker education: Almost 49 percent of China's population has attained a middle school or higher education.

Large, lower-cost labor pool: China has 941 million citizens between the ages of 15 and 59, representing 64 percent of its total population. Labor costs for manufacturing are a fraction of those in the United States.

Size of domestic and export market: According to the China National Statistics Bureau, domestic consumption reached $495 billion in 2003—an 8.8 percent increase from 2001. Exports reached $326 billion, or 22.3 percent higher than in 2001.

Market liberalization: In conjunction with regulatory changes, such as its entry into the World Trade Organization (WTO), China has committed to cut tariffs from an average of 24.6 percent to 9.4 percent by 2005.

Price and competitive pressures are the top two motivators for companies seeking to obtain goods from lower-cost countries. Source: Accenture Lower-Cost Country Sourcing Survey, 2003.

Supplier relationships and identification: Most companies have spent a great deal of time, energy, and money building a network of productive supplier contacts and relationships. In effect, they have created a system that works. Disrupting that system in favor of new sourcing opportunities is a formidable task.

The process of supplier identification, for example, often is taken for granted in North America, since comprehensive information about potential suppliers and a standardized business language generally exist. However, in lower-cost countries such as China, supplier information is far more fragmented and is thus more difficult to obtain and compare.

Technology and information systems: IT systems and infrastructures are significantly less advanced and integrated in China, as is true across most lower-cost countries and regions.

Supplier shortlisting: During the solicitation, screening, and shortlisting process, stateside procurement teams have come to expect a generally high level of sophistication from their prospective suppliers. There are numerous reasons why this will change when they work with Asian, Central and Eastern European, or Mexican suppliers.

In all of these supply locations, for example, information is harder to acquire, consolidate, and present due to systems limitations and language barriers. Quality standards and legal oversight may be lax, which means that due-diligence responsibilities rest more heavily with the buyer.

Relationship-based negotiation: Companies will need to incorporate an understanding of local business culture and relationships when negotiating for quality, service, and price. This is particularly true in China, but it is also common to many less-developed countries. Without the right guanxi (relationships), for example, priority-customer treatment in China is unlikely. The reality is that China's emphasis on relationships often trumps commercial realities. This is changing, but not quickly.

In the next issue, we'll look at what kinds of products are best suited to global sourcing and what sourcing alternatives can help companies achieve higher performance.