Managing Director of iPRO discusses Low Cost Sourcing in countries such as China and Malaysia and explores whether or not it is still as effective in cost reduction

1. Martin Deas MBA, MCIPS, MIoD
Low Cost Sourcing – Where is it going ?

2.  Purchasing Graduate – Ferranti Defence 1978
 Purchasing roles in Industrial, Electronics, Computing, Service sector
 European Purchasing Director – Schlumbeger Europe, Netherlands
 Managing Director – Tokheim Europe, Netherlands
 2001 Founder & Managing Director – Purcon-iPRO Ltd
 2003 Managing Director – iPRO Solutions
 Completed MBA 1993. CIPS Member since 1981
Introduction . . . . .
Martin Deas

3. iPRO Solutions Ltd www.iprosolutions.co.uk

4. iPRO Solutions . . . . .
• 60 staff, 10 in Asia
• UK based, offices in China & Malaysia
• Partners in India, Vietnam and Poland
• Buy from Asia and sell into UK, Europe, China & India
• Products – Plastics / Metals / Electronics / Assembly
• Medium volume / Technically complex / High quality

5. Low Cost Sourcing . . . . . . .
Where is it going ?
www.iprosolutions.co.uk

6. Low Cost Sourcing . . . . . Where is it going ?
• Do low cost countries offer fewer savings opportunities
than 10 years ago ?
• Are things about to change ?
• What are the challenges for Buyers ?

7. 7
Low Cost Sourcing . . . . . Where is it going ?
 What has driven low cost sourcing
 Low Cost sourcing – Its not all about price
 China - a changing market
 The alternatives
 Where is it going ?

8. What has driven low cost sourcing ? . . . . .

9. 9
What has driven low cost sourcing . . . . .
China WTO 2001
Access to very low wage rates
New sources of supply
Massive savings opportunities
Opportunity to make big profits
An option to save the company
The internet / Email

10. 10
A 15-20 year shift in sourcing . . . . .
The Impact . . . . .
A massive shift in Manufacturing globally
Speed of change / Impact on the west
Local sourcing became global sourcing
Access to the biggest pool of labour on the planet
The emergence of China as a world economy
Emergence of “follower” economies
And the impact . . . . .

11. 11
A 15-20 year shift in sourcing . . . . .
The Upside . . . . .
Massive cost reductions
Rules for sourcing changed
Relatively easy savings
BUT there’s a catch . . . . .
And the impact . . . . .

12. 12
Low Cost Sourcing . . . . . Where is it going ?
 What has driven low cost sourcing
 Low Cost sourcing – Its not all about price
 China - a changing market
 The alternatives
 Where is it going ?

13. 13
A 15-20 year shift in sourcing . . . . .
The Challenges . . . . .
Complex supply chains / Longer lead-times / Freight
Cultural challenges
Delivery problems / Payment up front
Technical / Quality problems
Suppliers who are difficult to manage
Potentially higher risks which need managed
How to find and manage suppliers
Its not all about price . . . . .

14. 14
A 15-20 year shift in sourcing . . . . .
The Risk . . . . .
Too much price pressure impacts quality
There is a PRICE / QUALITY linkage
Some suppliers make minimal profit
Quality may be compromised to save money
Materials / Working conditions may be linked to profit
Some suppliers will do anything to maintain profits
Chinese suppliers often have a very short term view
Its not all about price . . . . .

15. 15
The pressure of cost reduction . . . . .
The problem with price driven sourcing . . . . .
Not all suppliers are the same . . . . .

16. 16
The pressure of cost reduction . . . . .
The problem with price driven sourcing . . . . .
Understand how the supplier achieves the price . . . . .

17. 17
The pressure of cost reduction . . . . .
The problem with price driven sourcing . . . . .
Understand how the supplier achieves the price . . . . .

18. 18
The pressure of cost reduction . . . . .
The problem with price driven sourcing . . . . .
Continual pursuit of
price is not compatible
with high quality and
good working conditions

19. 19
Not all suppliers are what they seem . . . . .
Sourcing . .The risks and challenges

20. 20
Quality . . . . . No problems if you select the right suppliers
Sourcing . .The risks and challenges

21. 21
Material Control . . . . .
Sourcing . .The risks and challenges

22. 22
Sourcing . .The risks and challenges
Control over labour . . . . .

23. 23
Experience says . . . . .
Assume things can go wrong
Quality Lack of technical skills
Language Local culture
Managing Risk Materials
Logistics Labour
Technical Upfront Payments
Price isn’t everything – but it remains top of the list
Sourcing . .The risks and challenges

24. 24
Sourcing . . . . . The Corporate Risk
V

25. 25
$160bn sales, $45 Billion profit
47% gross margin
35 million phones sold last quarter
Employs 1.2 million people
300,000 in largest facility
Produces 40% of the world’s consumer electronics
Makes 5% gross margin and 1.8% net profit
Sourcing . . Apple v Foxconn

26. 26
The human cost of your iPHONE / iPod
2010 / 2011 2 incidents . . . . 2 people killed 150 injured
Workers complaints . . .
Harsh working conditions Disregard of Safety
Blinding lights Hazardous materials
Falsified records Excessive overtime
7 day working Crowded dorms
Standing all day Under age workers
“Apple never cared about anything other than increasing product
quality and decreasing production costs” – Foxconn employee
Sourcing . . Apple v Foxconn

27. 27
In Apple’s defence . . . . .
396 facilities audited by end 2011
70 violations found -
Excessive working hours
Less than MIN wage and punishment deductions
Toxic waste issues
“Right now, customers care more about a new iPhone than working conditions in
China” – Apple Executive
Protests against Apple
Apple will have to pay to fund improvements – higher prices will come
Sourcing . . Apple v Foxconn

28. 28
Price pressure impacts the value chain
Historically, international buyers have squeezed razor-thin profit
margins from supplier factories. Not only do buyer companies
seek the lowest-cost production, but stress factories through high
demands for short order turnaround times, forcing excessive
overtime hours, all at the expense of workers
China Labour Watch March 2011 ( survey of 46 factories )
Sourcing . . Apple v Foxconn

29. 29
Low Cost Sourcing . . . . . Where is it going ?
 What has driven low cost sourcing
 Low Cost sourcing – Its not all about price
 China - a changing market
 The alternatives
 Where is it going ?

30. 30
China - 15 years on and things are changing again . . . . .
Massive infrastructure investments
Reliance on exports – 40% of GDP
Migration to the cities
A maturing economy
An educated workforce
A growing prosperous middle class
China sourcing . . . . .

31. 31
China - 15 years on and things are changing again . . . . .
590 million internet users
78 million smart phones bought in Q1
2.5 million cars bought each month
Housing Boom and rising land prices
China sourcing . . . . .

32. 32
China - 15 years on and things are changing again . . . . .
The economy . . . . .
GDP / Growth falling
Reliance on recession hit economies
Exports slowing
A switch to drive domestic demand
Retail sales grew >13% in 2012
Inflation – Food / Fuel
China sourcing . . . . .

33. 33
China - 15 years on and things are changing again . . . . .
Labour . . . . .
780M working population
155M people surviving on $1 per day
An ageing population
A growing migrant population ( 262 million )
Gradual erosion of competitiveness
Plentiful supply of cheap labour for years to come
BUT . . . .Its mostly unskilled and in the wrong place
China sourcing . . . . .
Average annual China Manufacturing wages

34. 34
China - 15 years on and things are changing again . . . . .
Impacts on sourcing . . . .
Increasing labour rates
MINIMUM wages introduced
Over capacity in manufacturing
Currency appreciation
Export rebate changes / VAT changes
Some sectors – “going west”
Currency USD / CNY Sept 12 – Sept 13
China sourcing . . . . .

35. 35
China - 15 years on and things are changing again . . . . .
Buyer concerns . . . .
Competitive . . . but prices are increasing
Buyers seem undeterred by changes
Concern over Quality / Technical skills
Productivity is not improving quickly
Some Buyers are thinking about future competitiveness
Where will the Y-O-Y savings some from
WHERE WILL WE GO NEXT is the issue of the moment
China sourcing . . . . .

36. 36
Low Cost Sourcing . . . . . Where is it going ?
 What has driven low cost sourcing
 Low Cost sourcing – Its not all about price
 China - a changing market
 The alternatives
 Where is it going ?

37. 37
The Alternatives . . . . ( To China !! )
 China ( Go WEST )
 Other emerging Far-East economies
 India
 Eastern Europe
 Re-shoring ?

38. 38
China . . . . .Go West
Go west . . . .
Low skill base
Higher transport
costs

39. 39
Wages are low but are increasing
MIN Wage rates being implemented in all countries
Access to low labour costs is not the problem - materials not available
The product is important – some locations are not viable
UK rates remain very high but are increasing at a slower rate
Emerging economies . . . . .
Country MIN WAGE Approx Monthly Wage Rates
Malaysia Yes $296 per month
Vietnam Yes $80 - $110 per month
Thailand Yes $210 per month
Indonesia Yes $90 - $226 per month
Philippines Yes $136 per month
Cambodia NO $40 - $70 per month
Burma NO $40 - $60 per month

40. 40
China v India . . . . .
China Min wages do
not reflect the real
cost of welfare
payments of approx
20%
UK Min wage
equivalent is approx
$1400 . . .

41. 41
India . . . . .
650 million working population
Average age 25
Massive growth coming as population moves to the cities
Growth now at a 10 year low
Sees itself as an alternative to China
More sourcing opportunities will emerge
BUT . . .
India . . . . .

42. 42
India . . . . .
BUT
Politics is mired in sleeze
Customs are a nightmare
Serious under achievement compared to eg: Korea
Poor productivity
Quality and understanding of western requirements - a major problem
Serious risks for sourcing – experience and insight required
AND . . .
India . . . . .

43. 43
The currency and economy is a growing disaster . . . . .
20% slide in currency since May 2013, BUT India imports 80% of its oil so
input prices are rising. India does not have a bank on the world stage
– it is economically weak
India . . . . .

44. 44
Eastern Europe . . . . .
Eastern Europe
Poland MIN wage $500 pm Average $860pm
Slovenia MIN wage $1035pm Average $1310pm
Slovakia MIN wage $540pm Average $841pm
Romania MIN wage $205pm Average $490pm
Turkey MIN wage $570pm Average $861pm
Hungary MIN wage $450pm Average $660pm
Estonia MIN wage $420pm Average $930pm
Serbia MIN wage $250pm Average $479pm
Source: Worldbank, ILO Database & World of labour. 2011/12
Cheaper than UK but not more competitive on labour costs than Asia
Interesting against Asia for lower volumes

45. 45
Re-Shoring . . . . .
“Re-shoring” – is it happening ?
YES and NO
Some evidence that medium to smaller businesses are re-shoring
Little evidence that multinationals in global markets are changing direction
Some re-shoring is not price driven – recession / lead times / IP
Re-shoring may be to E.Europe, not UK

46. 46
Are there alternatives to China ?
No obvious alternative to China
The cost delta is narrowing
BUT
Labour rates remain very low
India does not appear to offer an immediate solution
Other Asian economies are sometimes competitive but too small
Re-shoring will have a small impact
GSP changes in 2014 may have some impact
The Alternatives . . . . .

47. 47
Today there is only one serious alternative to China
. . . . . . . CHINA
The Alternatives . . . . .

48. 48
Low Cost Sourcing . . . . . Where is it going ?
 What has driven low cost sourcing
 Low Cost sourcing – Its not all about price
 China - a changing market
 The alternatives
 Where is it going ?

49. 49
Low Cost Sourcing . . . . . Where is it going ?
 Do low cost countries offer fewer savings
opportunities than 10 years ago ?
 Are things about to change ?
 What are the challenges for Buyers ?

50. 50
What are the challenges for Buyers ?
Finding new sources of cost reduction – where to go ?
When prices increase – think beyond the price
Develop suppliers on non-price elements
Change the supply process – consignment / PULL systems
Understand the drivers of cost – materials / freight /
Manage exchange rate impacts
Low Cost Sourcing – Where is it going ?

51. 51
Do low cost countries offer fewer savings opportunities
than 10 years ago ?
NO . . . . . but there is still a massive potential
New opportunities emerging to source in new countries
It is getting harder work - you have to look further
Low Cost Sourcing – Where is it going ?

52. 52
Are things about to change ?
No . . . . . Little evidence of a period of significant change coming
China will continue to dominate
Emerging economies will have a major impact
Look to Malaysia, Thailand, Vietnam
Selected EE countries – Romania / Czech / Turkey
Low Cost Sourcing – Where is it going ?

53. 53
Further reading . . . . .

54. Thank you
Questions . . . . .
Martin Deas
Managing Director
iPRO Solutions Ltd
T: 01844-292630
M: 0775 369 2658
mdeas@iprosolutions.co.uk
www.iprosolutions.co.uk