Daily Archives: July 4, 2008

Another Notch on the Belt for Procurement

It was great to see Procurement take center stage in a recent Forbes article on Forbes article by Knowledge@Wharton that interviewed Marshall L. Fisher, director of Wharton’s Fishman-Davidson Center for Service and Operations Management. It was even greater to see the article start off by noting that Procurement, historically an uncelebrated topic among business strategists, is now taking center stage and that these days, purchasing departments are playing pivotal roles within global firms in ways old-fashioned purchasing managers could never have imagined.

In the lengthy and informative article, Fisher noted that two of the biggest phenomenons in recent history are the outsourcing and offshoring of manufacturing operations, which is in sharp contrast to the 1980’s when the focus was on trying to strengthen and preserve US manufacturing. These days there are many companies that don’t make anything in the US, if they even make anything in-house. They’ve taken outsourcing and offshoring to “low-cost labor regions” to the extreme.

And “low-cost labor regions” evolved to meet the needs of companies that took outsourcing and off-shoring to the extreme. Fisher gives the example of Luen Thai, a company in southern China that is one of the largest private-label apparel manufacturers in the world. In order to meet the growing needs of their global client base, they set up a massive facility that is known as “supply chain city” just to produce apparel. It was designed as a “one stop shop” that does everything from initial design through final production, including prototyping and redesign on the spot.

Another example Fisher gives is Foxconn, “Hon Hai” in China. They’re a 32 Billion company that produces a large percentage of branded consumer electronics globally, with clients that include Dell, Motorola, and Apple. They have 12 facilities, and one facility alone is so large that it’s literally the size of a small city with 245,000 employees, as well as its own police force, hospital staff, and school.

But once the low-cost labor regions proved themselves, like China, business started pouring in, and then the same problems that were encountered a decade earlier when everyone was outsourcing to Japan came back. Labor became scarce and costs started to rise. And then we had the recent slate of quality issues. In other words, in outsourcing to low-labor-cost countries, you get a short-term benefit, but there is a risk you may be spawning a competitor.

In summary, procurement is taking center stage, but the global supply chain is more challenging than ever.