14/10/10

By Claire West

A wave of industrial disputes leading to higher wages and rising costs in China will force Western buyers to look for cheap goods and services in other countries, say procurement specialists ADR International.

These could include Vietnam, says Robin Jackson, CEO of ADR International.
Alternatively, procurement professionals could work with suppliers in China to reduce costs.

Jackson says the “Golden Age” of inexpensive sourcing from China is over. This summer the People’s Republic suffered a wave of strikes leading to higher wages. A company supplying parts to automotive leader Honda settled a dispute with a 47 per cent wage increase.

In the latest issue of the ADR International eBulletin titled Sourcing in a Fast-Changing World, Jackson says: “Over the past year the warning signs have been getting ever clearer. As China continues to grow rapidly there is no longer a surplus of labour and it is no longer cheap.

“Recent studies have shown that the migration of labour from the farms of inland China to the coastal factories has slowed to a trickle and that Chinese workers are now demanding a higher share of the economic growth through high wage increase demands.”

He concludes: “The Golden Age is over. China is no longer our saviour: it is growing into our number one problem. Now is not the time for procurement to rest on its laurels. We need to signal the risks to the business and develop a case for change… act now and use some of those excess profits you currently enjoy to help pay for the re-sourcing.”

Dave McClimon, COO at ADR North America, says the cost of moving goods has risen because logistics firms reduced capacity during the worldwide recession.

McClimon says: “The best mitigating factor for supply managers is that since the economy is reviving slowly, there may still be time to lock in longer-term contracts to keep costs contained over the long term. For many companies, transportation may have to be treated as a strategic category rather than a commodity.

“The highest pressure for price hikes may still be a year or two away, so it might be smart to consider contracts that run three years or more. In those cases, negotiate stable rates over the life of the contract in return for capacity guarantees to the carrier.”

Tera McKeen, a director and senior consultant at the sourcing division of ADR International, says electronic tools to speed up the procurement process have brought huge benefits, but there are issues to consider before spending money on an expensive software package.

These include the need to invest in training and to check whether it might be better to outsource the whole process to a third-party provider.

McKeen says: “The best results can be achieved when e-sourcing is embedded into your strategic sourcing process from square one, during implementation of the software. That way, you have full control over the process and can go forward to develop your strategic sourcing using tried and tested electronic tools with expert support.”