AMR Research surveys manufacturing and retail executives on a quarterly basis for information on the top supply chain risks, where and why they source and manufacture, and how they mitigate risks. The following is a summary article of the data that we compile. If you are interested in the full data set, trend analysis, and/or speaking with the author, please contact info@amrresearch.com.
The findings of AMR Research’s quarterly supply chain risk survey reflect the challenges faced by all global companies caused by the recessionary economic environment, continued brand threats, and product quality failures. India emerges as an up and coming alternative for offshore sourcing and manufacturing, but remains plagued by its immature physical infrastructure.
India: The next China?
Comparing India’s manufacturing aspirations to China’s experience is not new. With its success in IT services outsourcing, India has been making forays into the manufacturing sector, with companies like Moser Baer, Bharat Forge, Bajaj, and Larsen & Toubro working hard to change India’s reputation as a low-quality manufacturing center. India is looking to use its skilled and highly educated resource pool to differentiate itself from China, by focusing on skill-intensive design and manufacturing outsourcing. For example, in addition to Tata Technologies designing Tata Motors cars and vans, Tata Consultancy Services boasts dozens of foreign design and engineering clients, including Chrysler, Boeing, and Airbus.
Yet manufacturing still contributes only about 16% of India’s GDP, which is half of China’s manufacturing contribution. But survey respondents indicated a significant uptick in their plans to increase their sourcing in India, compared to last quarter’s survey (see Figure 1). Companies cited the lure of India’s up-and-coming, middle-class consumer base and its increasing cost competitiveness with China for materials and labor as major reasons for expanding their sourcing and manufacturing (see Figure 2).
But despite the progress these companies have made, global firms face a slew of operational challenges in India. From unreliable electricity supplies, to dilapidated roads, to congested seaports and airports, India’s infrastructure preparedness pales in comparison to China’s well-run, foreign-investment-fed industrial centers like Guangzhou. In fact, respondents identified immature physical infrastructure as the primary risk associated with operating in India. Besides, in many sectors, companies still have to contend with anti-business government policies that restrict hiring and hold back domestic demand.
China’s IP protection failure opens the door to competition
China continues to be attractive to global companies because of its competitiveness in labor and material costs as well as its reach to a vast consumer market (see Figure 3). But that comes as a price, as China presents more than 10 of the top 15 risks in sourcing and manufacturing for global companies (see Table 1).
Most pertinent to increasingly distributed supply chains, China is still plagued by product quality failures and safety issues. The story of vendor protests at the Silk Market this month epitomizes China’s uphill cultural and government battle in protecting global companies’ intellectual property rights.
Four years ago, Burberry, Gucci, Chanel, Louis Vuitton, and Prada first sued the market’s operator, the Beijing Silk Street Company, and individual vendors for trademark violations. Finally, as part of a court-mediated agreement, the market’s managers agreed to crack down on offenders, closing operations for up to a week. In response, dozens of vendors protested at IntellecPro’s offices, the Chinese company that represents the luxury brand owners, for intellectual property violation. The popular perception is these vendors’ livelihoods should not be threatened to appease foreign companies.
Nearshoring for the United States and Europe still going strong
Continuing the trend, respondents indicated they will increase their nearshoring sourcing and manufacturing activities by a ratio of 5 to 1 (again see Figure 1). Mexico is the preferred nearshoring destination, with 84% of the respondents choosing it as a place for sourcing or manufacturing, followed by Canada at 55% and Brazil at 49%. Respondents also indicated an increase in sourcing and manufacturing in Eastern and Central Europe. These two findings are attributed to the increased cost competitiveness of nearshore locations, as well as company desires to build a more balanced geographic portfolio to avoid some of the risks associated with low-cost country sourcing.
Softening demand tops supply chain risks
Lower consumer spending is dominating the list of risks this quarter, with 37% of respondents identifying it as No. 1. Additionally, only 15% expect this risk to decrease by next year (see Figures 4a and 4b).
As retailers cut their inventories in the face of softening demand, this risk is cascading up consumer and industrial supply chains. Companies like Cisco and Procter & Gamble are grappling with tactical questions, like where to cut and position its inventory, and strategic initiatives, like where to source and how to rationalize its supplier base, to remain healthy during the downturn and be well-positioned for the next recovery cycle.
While contending with a shrinking, unpredictable consumer demand, companies continue to struggle with product quality failures, with 35% of respondents identifying it as the second top risk. Most recently, the U.S.-based peanut butter recall, courtesy of a salmonella outbreak, highlights the far-reaching results of such quality assurance failures not only on the culprit producer—Peanut Corporation of America, which filed for bankruptcy last month—but to the bottom line and brand image of more than 2,100 supply chains with affected products.
Volatile energy price risk comes in at No. 3 and commodity price volatility No. 6. Although global supply chains are currently enjoying low energy and commodity costs, last year’s record highs are still a fresh reminder to supply chain professionals that they cannot assume any price stability when making inventory, transportation, or manufacturing decisions.
IP infringement has maintained its fourth position on the list since the last survey. This confirms AMR Research’s prediction that intellectual property management will play a bigger role in supply chain management in the long term.
Working together in bad times
Respondents identified collaboration with trading partners as the most used and successful strategy to mitigate risk in this current economic environment (see Figure 5). Companies are working with their suppliers and customers to profitably meet shrinking demand. Additionally, many of our user clients are also emphasizing internal collaboration across their business units by establishing processes like sales and operations planning (S&OP) and integrated business planning.
The second most-successful risk mitigation strategy is balancing the sourcing portfolio to spread supply risk. Companies are expanding their sourcing and manufacturing in countries like Vietnam, Brazil, and India, to offset high-risk countries like the United States and China.
Can India do a better job regarding intellectual property protection? Can that tip the scale in its favor and position it as the next manufacturing powerhouse? I would love to hear your thoughts— ntohamy@amrresearch.com.
