Sourcing goods, components, materials and services from around the world is a 21st century reality. And China is global sourcing’s epicenter. No country can claim to be the lowest-cost source of everything; but China’s aggressiveness, size, labor pool, and liberalized regulations will keep it a prime sourcing venue for decades to come.

So how can companies best capture and sustain the cost advantages associated with China-focused sourcing? A recent survey by Accenture offers some insights. The report concludes that international procurement offices (IPOs) are the most comprehensive and far-reaching way to incorporate new sources of supply into a company’s established global supply chain. By contrast, companies are moving away from sourcing models that leverage trading agents, joint ventures, and wholly owned foreign enterprises. Trading agents (the most rudimentary and hands-off strategy) can filter out the kind of market information that businesses need to make critical sourcing decisions. JVs and WOFEs are more relationship oriented, but they often come up short for coordinating sourcing programs across plants and managing fulfillment, transportation and distribution activities.

IPOs avoid most of the above problems because they function as actual extensions of a company’s global procurement organization. In effect, they are shared services entities staffed with specialized sourcing teams that perform dedicated order- and logistics-management functions. The scope of these organizations can be vast—pretty much what you’d expect from a highly proficient shared services organization focused solely on global sourcing and procurement:

• Supply market research.
• Short-, medium- and long-term development of supply market strategies.
• Local supplier identification, screening, and negotiation.
• Purchase order management.
• Sampling, design, and engineering support.
• Logistics coordination and management.
• Quality assurance and control.
• Supplier relationship management.
• Supplier development and quality improvement.
• Competitive monitoring and analysis.

Many of the above capabilities are relatively new to IPOs. Some companies, for example, have only recently added functions such as bidding, logistics management and category management to the intelligence-gathering and interpreting roles they’ve traditionally associated with IPOs. The net effect is that modern-day IPOs are better positioned than ever to put local capabilities “on the ground” and thus improve proximity to supply markets; increase responsiveness to local opportunities; enhance procurement visibility; improve lead times, delivery reliability and product innovation; and reduce overall sourcing costs and sourcing cycle times.

Given these advantages, it shouldn’t be surprising that IPOs are becoming the preferred global sourcing strategy for a high number of high performers. Approximately 25 percent of respondents to the aforementioned survey are using their IPOs to carve a consistent advantage over less-innovative competitors. These organizations are saving 30 percent or more compared to purchases made prior to launching their IPOs.

Seven percent are actually saving in excess of 50 percent. In addition, more than half expect the percentage of sourcing spend handled by their China IPO to increase by more than 20 percent per year, and almost one third expect IPO-related savings of 30 percent or more within that same time period. Lastly, the research revealed that four out every five IPO users believe their current IPO performance is meeting or exceeding expectations.

This optimism is particularly noteworthy because of the IPO challenges that companies must surmount if they are to grow, and save, as expected. As shown in Figure 1, the most daunting of those challenges are acquiring and managing information, and ensuring its accuracy through consistent channels and clear communication. Standardization is also key because it influences design specifications, communication protocols, IT support mechanisms, assignment and application of metrics, and even issues associated with environmental compliance. A middle tier of challenges (lines four through six in Figure 1) also bear mention because they speak primarily to the IPO launch process. Survey results tell us that companies not only are concerned about IPO performance, they’re concerned about how to put the whole thing together in a timely and cost efficient way. They recognize that minimizing risk and maximizing speed-to-benefit are critical success factors. How to increase the success probability of an IPO—and hasten its implementation—will the focus of next month’s column.

One final challenge bears mention. In the world of global sourcing and market making, wage- and price-inflation is common. As a result, today’s low-cost sources of materials and components can become mid-cost sources almost overnight.

Such a metamorphosis is already starting to happen among certain industries in China. And it’s why high performers—in addition to diligent application of leading IPO practices—must be exceptionally agile and flexible. Innovation, flexibility and speed-to-benefit are clearly the cornerstones of high performance in China-focused sourcing, procurement and IPO management.