Sourcing for resilience: procurement’s new mantra

What drives sourcing decisions? The answer: most often, price. In search of better prices, buyers have throughout history looked further and further afield in order to find those better prices.

Which is why a huge number of supply chains now terminate in Asia, a region that has become the workshop of the world. For many North American and European businesses, China has now become something of a default sourcing option. And not just China. Vietnam, Thailand, Singapore, India, Taiwan, Pakistan, Bangladesh, Sri Lanka: these too have become popular sourcing alternatives.

But have we reached ‘peak Asia’? Have Asia’s disadvantages started to outweigh its obvious—and considerable—advantages? A growing number of voices think so.

The problem? Again and again in recent years, buyers have seen the downsides of sourcing over such distances. Quite simply, sourcing over such distances can leave supply chains more susceptible to disruption, giving rise to irregular and unpredictable supply.

And fairly obviously, the early weeks of the Covid-19 pandemic were a prime example of this. Factories in China’s Hubei province were locked down, as was a large part of China’s logistics infrastructure. Soon, large parts of the rest of the world followed. Economic activity slumped; manufacturing GDP plummeted. Ships were mothballed; aircraft grounded; factories silent. Even so, buyers could argue, global pandemics are thankfully rare. Do you disrupt the entire world’s sourcing model for a once in a century event.

Disruption isn’t new

Except supply chain disruption isn’t a once in a century event. Consider the first few months of 2021, for instance.

In just a few short months, we’ve seen a global shortage of semiconductor chips severe enough to cause production stoppages in several industries; a sixfold increase in the cost of container shipping between the Far East and Europe; and a six-day blockage of the Suez Canal and a subsequent multi-week disruption to shipping schedules caused by the stranding of the 220,000 tonne Ever Given, a huge container ship carrying almost 24,000 shipping containers.

Or, going further back, consider the eruption of Iceland’s Eyjafjallajökull volcano in 2010, and the subsequent closure of much of Europe’s air space. Or the earthquake and ensuing tsunami that hit north-eastern Japan in 2011. Or the extensive multi-month flooding of many of Thailand’s manufacturing areas that occurred the same year.

The lesson from all these is that distance brings danger, and disruption. Sourcing at distance can reduce costs, to be sure—but it can also increase them, too, as a consequence of natural disasters, logistics infrastructure failures, piracy and theft, political instability, conflict, and trade wars, tariffs, and customs hold-ups disrupt established trade flows.

A different mantra

As a result, a recognition is dawning that procurement practices need to change. For too long, goes the refrain, businesses have pursued Just in Time inventory management practices in conjunction with low-cost country sourcing—often combined with sole sourcing in order to drive economies of scale—and the result is that supply chains are now increasingly vulnerable to disruption.

It is time, goes the argument, for procurement functions to pursue a different strategy: sourcing for resilience, rather than lowest cost.

But forget over-simplistic ways of doing this. Re-shoring? In many Western countries, the manufacturing base required to do this simply isn’t there any longer: the factories have closed; the supply chains have vanished. Near-shoring? It offers some possibilities, to be sure. But few countries match the scale, supply base, industry knowledge, engineering and manufacturing skills, and logistics infrastructure of China.

Instead, businesses are going to have to find different ways of sourcing for resilience. Ways that retain the advantages of today’s sourcing models, while minimising—or ideally eliminating—their downsides.

Think differently

The good news: such ways exist. And, talking to experts, I explore them in my latest paper entitled Sourcing for Resilience. To succeed, businesses will require a different way of thinking about sourcing and supply chains. Which in turn will call for a different mindset, and different skills.

Yet the prize is worthwhile: more resilient supply chains, and less disruption. And the procurement function itself is also a major beneficiary.

Because sourcing over long distances, sourcing across multiple time zones, and sourcing over unreliable and inadequate logistics infrastructure brings complexity, challenge, and stress to a procurement function. In short, the more that a procurement function improves resilience, the more it helps to reduce the impact of this complexity, challenge, and stress on the procurement function itself.

In short, the business benefits—but so too do its buyers.