Cutting Costs & Getting It Right

With much of the Western world still dealing with soft economic conditions, it's not surprising that controlling costs will remain a top priority for many companies this year.

Not surprisingly either, it's likely that many of those cost-control directives will fall to the supply chain and procurement teams. Commonly, the finance department believes improved sourcing and purchased practices will drive profits, or at least help balance the balance sheet.

Supply chain and purchasing executives, you already know this drill, but here are a few insights that may help you better prepare for this year's round of cost-cutting evaluations.

GEP, a procurement services and software provider, points out key trends impacting sourcing and procurement organizations, and forecasts the direction important purchasing categories will take in its Strategic Sourcing and Procurement Outlook 2013 (registration required).

Here's a brief summary of a few trends that caught my eye, which I think will have significant impact on the way parts are sourced, bought, and delivered this year:

  • Rising transportation costs: Prices in the worldwide transportation industry will increase 3 to 5 percent. Additionally, ocean carriers will feel the pressure to deliver cost savings on recurring expenses and hang onto contracted rates. GEP says in order to mitigate this, carriers “will tighten capacities by idling equipment and consolidating volumes amongst themselves. Due to margin pressures, the freight forwarder and brokerage industry will also look for consolidation.”
  • The cloud factor: Cloud computing continues to pinch pricing at traditional ERP software vendors, and GEP expects to see an acceleration in the migration of more software to the cloud. According to the company, “The traditional ERP vendors (SAP and Oracle) are not moving to the cloud fast enough and will continue to lose market shares in their core markets. Ask for steep discounts using the cloud as leverage in 2013.”
  • China becomes less of a low-cost country: Although China and low-cost have been synonymous for a decade or more, the profile of the country is definitely shifting, and executives will want to take heed. A few things are driving up manufacturing costs there — rising wage rates, energy prices, and currency exchange rates, plus a stricter regulatory environment.

    As GEP points out, “China, in its current 'FiveYear Plan on Employment Improvement' aims at adding 13 percent annually to its minimum wage rate, from 2011 to 2015. The Chinese Yuan is now approximately 25 per cent more expensive than in 2005 and is expected to continue to strengthen in the coming years. Oil prices have gradually risen ever since touching the rock bottom of $32 in late 2008 and freight costs, as a percentage of total landed cost, have increased significantly. Taken together, these factors make China less attractive from a pure cost perspective across several categories.”

GEP adds that while many categories of Chinese suppliers have been able to offset some of these costs by increasing automation and remaining competitive, many procurement managers are re-examining their options in China and considering other destinations including Mexico, Brazil, India, Southeast Asia, and East Europe.

I would love to hear what trends you're following, and where your supply chain team and the finance department are finding common ground.

11 comments on “Cutting Costs & Getting It Right

  1. Houngbo_Hospice
    January 29, 2013

    “Taken together, these factors make China less attractive from a pure cost perspective across several categories.”

    Can we say this is a rather good news for the Western countries economy? I have the impression that will speed up the “bring jobs back home” process.

  2. Daniel
    January 29, 2013

    Jennifer, there is no doubt that business should be in a profitable way. Inorder to explore it further, companies had moved to China and other non-home places to gain the local advantages. But now china is no more attractive in terms of manpower or raw material. The next options are local governments has to provide tax incentives to companies for generating more business and intern employment opportunities.

  3. prabhakar_deosthali
    January 30, 2013

    While looking at the rising labor costs in China, we must also consider the escalation of local labor costs which may again offset the likely advantage one may consider of using the local manufacturing.

    The increase in transportation costs is a world wide phenomenon and that can also affect the local manufacturing

    January 30, 2013

    I genuinely wish we'd all stop chasing the lowest cost route every time at the expense of everything else.  What happens when we have all been round the globe once and there are no more places to look.  

  5. Jennifer Baljko
    January 31, 2013

    Hi Hospice: To your question about is this good news for Western countries – I don't know. Depends on which part of the electronics supply chain a company is in and how dependent the company is on a low-cost model.  It could be good news, though, for countries like Thailand, Vietnam, etc that are trying to move away from low-cost textile production and expand their existing technology bases. 

  6. Jennifer Baljko
    January 31, 2013

    Jacob – Interesting that you mention the raw minerals issues. The duties China charges for raw minerals moving in and out of the country can be pretty expensive, something else supply chain professional have to consider. Tax incentives are a starting point but there also have to be conversations around long-term sustainability – it's too complicated to move factories every 10 years.

  7. Jennifer Baljko
    January 31, 2013

    Right, Prabhakar.  It's really about calculating the total landed costs, not just one set of costs in isolation of the others.

  8. Jennifer Baljko
    January 31, 2013

    FlyingScott –  “What happens when we have all been round the globe once and there are no more places to look.  “

    Too bad the moon is too logistically complicated. It would be cool to say my phone or tablet is literally “out of this world.”  😉

  9. Houngbo_Hospice
    January 31, 2013


    I understand your point. China asian rivals may be  the replacement to China, but I was basing my argumentation based on  Google's recent decision to manufacture in the USA. And chances are that some other companies will follow.

  10. Houngbo_Hospice
    January 31, 2013

    “The increase in transportation costs is a world wide phenomenon and that can also affect the local manufacturing”

    This is one of the reasons China is no longer the right choice for manufacturers. I wonder if there is something the country can do to reverse the situation.

  11. Daniel
    February 5, 2013

    Jennifer, these are different factors which can cause fluxuations in production cost. Nothing is stable, companies have to account all such fluxuation costs, and then only they will be able to work it out for a reasonable profit.

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