Manufacturers say sourcing from LCCs is risky

Almost eight in 10 (78%) of global manufacturing executives believe that sourcing products in emerging markets presents a real risk to their business, according to a new study published today (14 May).

The study is from Deloitte Touche Tohmatsu’s global manufacturing industry group.

A year of high profile product recalls has seen product safety, product quality and environmental standards in emerging markets rise up the boardroom agenda, it says.

The study shows that the importance of risk assessment at a senior level within manufacturers is increasing.

Nearly half of them from developed market manufacturers report that the issue of product quality is viewed as ‘much more important’ by their organisation than 12 months ago.

Product safety (37%) and environmental standards (35%) are also increasingly of concern.

However, one area that may be being overlooked, says Deloitte, concerns sub-contracting by emerging market suppliers with many of them sub-contracting much of their work, raising the complexity of compliance.

Only 35% of developed market manufacturers say they perform extensive monitoring of subcontractors, leaving many other businesses vulnerable to risk.

UK manufacturing industry leader at Deloitte Jane Lodge says companies in developed markets have little visibility into the subcontractors used by their suppliers.

“As this is where many of the problems have emerged, developed market companies will need to take a more active role in reviewing subcontractors and including them in their monitoring programmes.”

“Going forward, it is likely that these companies will seek out emerging market suppliers that can provide more transparency regarding their subcontractors in addition to overall higher standards.”

Other key findings from the report, which captures the views of some 650 global executives, include:

  • Around 25% of executives reported that their company had been involved in a product recall in the past five years
  • Roughly 75% of executives from developed market manufacturers reported an increased use of suppliers in emerging markets in the last three years
  • Around two-thirds of developed market executives expected increased production in company-owned facilities in the future
  • More than 75% thought it was likely their company would favour sourcing from markets with stricter standards
  • Just over one-third of the developed market executives surveyed felt that their companies had been very successful in sourcing from emerging markets.

These companies appeared to be more attuned to the risks involved.

Their boards of directors and senior management are more involved in product safety and quality issues, and their companies’ work closely with their suppliers to inspect supplier facilities more often.

“We found that executives from both developed and developing markets anticipate a greater demand for higher standards and transparency,” says Jane Lodge.

“In addition to upgrading standards and testing, many viewed the need to provide customers with more sourcing information to allay fears about safety, quality, and environmental standards will undoubtedly mean higher operating costs.”

Forty-one percent of the developed market executives surveyed believe cost increases were very likely, as companies respond to the demand for more stringent standards.

Emerging market executives were even more likely to anticipate higher operating costs, with 59 per cent believing these were very likely.

“Manufacturers have the opportunity to turn this situation to their advantage,” explains Lodge.

“In fact, some executives surveyed view the entire risk scenario in emerging markets as an opportunity to stand out from the competition by providing guarantees of meeting strict standards – which may allow them to command higher prices.”

The benefits can go far beyond price to include increased market share and the building of brand equity for the developed market manufacturer.

Emerging market suppliers also stand to benefit.

Adhering to higher standards may make it easier to attract and keep global customers, especially when those standards are contrasted with problems afflicting competitors in the local market as well as in competing emerging markets.

“Competing on cost alone can be short-sighted when the potential for brand-crippling damage is so real,” warns Lodge.

“Companies that raise standards are likely to find that their competitors will follow suit.”

“To maintain their advantage, they will need to execute quickly and be prepared to continue to upgrade to more rigorous standards.”

“Finding the right suppliers that are both willing and able to comply with rigorous standards and nurturing these relationships are important to success,” emphasises Lodge.

“Successful manufacturers are going beyond the basics when choosing emerging market suppliers – quality, cost, and reliability – to place much more emphasis on the overall reputation of the supplier.”

Download the full report

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