What Companies Are Focused on Regarding Overseas Outsourcing

Here is some more from the MITA presentation by Deloitte. From Deloitte's recent survey, the top six things companies are focusing on as they examine current overseas outsourcing or consider new opportunities are:

1. Local market inflationary measures (labor rate, utilities, etc.)
2. Changing customs and duties environment
3. Intellectual property leakage
4. Currency rate fluctuations
5. Oil price volatility (as an indicator of transportation costs)
6. Potential legislative impacts (including potential carbon regulations and other potential trade barriers)

When evaluating an overseas outsourcing strategy these are excellent things to consider. I would add contingency planning - what will you do if your supply line is disrupted? Also add inventory and cash flow impact of the longer supply line.

Make sure to touch all these bases as you consider your current and future position relative to overseas outsourcing.

What Does America Make

There is a really good article by AP this month that has been in several papers and on many web sites. It goes into some detail on how the US still produces $2.50 worth of products for every $1 China produces.

The article describes what we will people as well, that the US has moved up the "food chain" and now makes much more complex items. What people see in retail stores are what is made in China. US companies make computer parts, airplanes, software, and other complex items.

Manufacturing all over the world is taking a hit right now. History shows the US will likely emerge stronger than other countries as we are the innovators. I firmly believe this to be the case.

You can find the article at the following site:

http://news.moneycentral.msn.com/ticker/article.aspx?Feed=AP&Date=20090216&ID=9613102&Symbol=US:AAPL

US Wins WTO Dispute with China Over IP Protection

In January the USA won what appears to be an important WTO ruling on intellectual property rights protection in China. This is important to all companies sourcing or selling in China. In both cases it is important that China's IP protection improves.

Since the WTO allows for appeals and the process of complying will be a long one, the impact of this ruling will not be immediate. It is another sign that IP protection in China is moving the right direction. This is good for US companies, but also good for the continued growth of the Chinese economy.

Here is a link to the Office of the US Trade Representative where you can find the news release on this development:

http://www.ustr.gov/

26 Million Chinese Migrant Workers Unemployed

The Chinese government now estimates the number of unemployed migrant workers is now greater than the population of Texas. This is a huge issue for the country and the world as it could lead to unrest. Many of the unemployed stayed in their home provinces after Chinese New Year and some are returning now. Others are staying in the cities hoping to find work. USA Today did a great story on this today. Here is the link:

http://www.usatoday.com/news/world/2009-02-16-chinamigrants_N.htm

Cost Savings Expectations

More from the MITA Deloitte presentation mentioned in my last post. The Deloitte study on LCCS (Low-Cost Country Sourcing) found the following levels of expected savings:

6-10% savings - 7% of respondents
11-15% savings - 14% of respondents
16-20% savings - 0% of respondents
21-25% savings - 43% of respondents
25-30% savings - 21% of respondents
>30% savings - 14% of respondents

The actual level of reported savings for these companies was:

6-10% savings - 21% of respondents
11-15% savings - 14% of respondents
16-20% savings - 29% of respondents
21-25% savings - 21% of respondents
25-30% savings - 7% of respondents
>30% savings - 7% of respondents

So, what can we learn from this? First, the median actual savings fell somewhere in the 16-20% savings category. The median expected savings was 21-25%. Expected was higher than actual. No news there as returns on most investments are lower than expected. Is the savings enough to justify the efforts? At 20% I would say, yes. Below that it's more questionable.

It is safe to assume the top performing companies using LCCS were above the median. I guest the moral is to make sure you are top performing with regards to sourcing as you need to be in most key parts of your business to succeed.

This survey was taken in the last several weeks, so the savings likely represents experience from 2008. I'll post more interesting information from it in future posts.

Attributes of Sourcing "Top Performers"

I attended an excellent meeting of the Madison International Trade Association (MITA) yesterday. The first speaker was from Deloitte and he described research his firm is finishing on Low-Cost Country Sourcing (LCCS) Strategies. Here was the findings on what attributes made companies top performers in sourcing.

- Dedicated LCCS team
- Established own International Purchasing Office (IPO)
- High percentage of local resources engaged
- Supplier selection process includes strong local market insight
- Have supplier development function to drive continous improvement

Deloitte works with large companies that have the resources to maintain dedicated LCCS teams and IPO's. Most small and mid-size enterprises (SME's) do not. OPSA is the solution for SME's as we provide the top four items above for our customers. We need to start a formal supplier development program and intend to do that soon.

Some Good News on China's Economy

Some good news from Hong Kong as we come out of the New Year holiday time. We need more good news.

HK stock index jumps 3.6 pct on China prospects

The Associated Press


HONG KONG: Hong Kong's stock index jumped more than 3 percent Friday amid optimism about China's economic prospects.

The blue-chip Hang Seng Index advanced 476.14 points, or 3.6 percent, to 13,655.04, in line with gains in mainland markets.

Better-than-expected manufacturing and bank lending reports this week have boosted confidence in the success of Beijing's efforts to safeguard the economy through stimulus spending and monetary easing.

"People are hoping more will be done by the major governments and central banks," said Dariusz Kowalczyk, chief investment strategist for SJS Markets. "Investors are looking for any optimistic event to hang onto right now."

Chinese stocks were especially strong.

Chinese top lender Industrial & Commercial Bank of China Ltd, or ICBC, surged 4.6 percent to 3.65 Hong Kong dollars. Air China soared 8.3 percent to HK$42.36.

Lenovo Group rebounded almost 11 percent to HK$1.62 a day after the Chinese computer maker announced a quarterly loss and management shake-up.

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China Announces Huge Increase in Rural Unemployment

The Chinese government announced this week that over 25 million rural residents, most of them migrant workers who travel to industrial cities for work, are unemployed. This is a huge increase in unemployment for a group that has enjoyed increases in their standard of living as China's export economy has boomed.

The government announced it is considering even more intense stimulus efforts to address the situation.

I'm not sure what impact this has on our business yet, but I sure am keeping my eye on developments. Here's a story from AFP on this situation.

http://www.google.com/hostednews/afp/article/ALeqM5jVtf5IJZ-RKUQWenCnyw3dRG97DA