The Prognosticators Series: 2013 Predictions by Source One

Editor’s Note:  As is often the case when the hands of time tick relentlessly forward into another new year, we take this opportunity to look ahead to what the next 12 months might hold in store for us both personally as well as for the purchasing industry as a whole.

In this fifth installment of our 2013 Prognosticators Series, we gain the “company perspective” from Source One .  By the way, be sure to check out the Source One Website.

The growth of the procurement and sourcing industry, both in the workload and the amount of companies within the industry has been substantial in the last few years.  As such, the importance of developing and implementing efficient procurement strategies is becoming greater in the minds of executives worldwide. With that in mind, we here at Source One broke out the crystal ball and mulled over some issues that could become hot topics in the coming months.  Some topics we discussed included the impact a potential recession in China could have on outsourced manufacturing pricing, continuing outsourcing investment into Southeast Asia and Africa, nearshoring locations in Latin America, how companies plan to make business sense in the recent highly touted returns to domestic production, and the difficulties in making spend-smart decisions regarding benefits as several large pieces of the Federal health care initiative come online in early 2014.

Will China Continue as a Cost-Savings Haven?

For many companies, cost savings on the manufacturing side has largely meant “ship facilities to China” since the mid ‘90s. And, by and large, cost savings typically did ensue. That is no longer guaranteed, however. Increased media pressure and a maturing workforce have resulted in higher labor costs for Chinese plants; a move that has combined with a global recession slowdown in manufacturing demand to produce a flat 2012 in China and set the stage for a potential 2013 recession. (Unofficially, anyway, as the official party line in China is that the economy is fine.) As one pundit observed in 4^th Quarter 2012, however, China has exhausted the usual stimulus remedies to the tune of empty buildings and unused infrastructure and needs a sharp rise in manufacturing demand to grow again; an expectation that is crippled now that Southeast Asia and Africa can be potentially cheaper outsourcing options, and are gaining in popularity. Expect to see the nearshore countries, especially Mexico and Brazil to continue to gain momentum, even though domestic buyers will continue to struggle to identify vendors due to substantially underdeveloped marketing activities by companies in those regions.  If unused iron ore continues to reportedly heap out onto China’s streets, can the country deliver any good financial news?

The Impact of Domestic Production

On the subject of China, a man who made his name in the procurement of Chinese manufacturing – former CPO and current CEO of Apple, Tim Cook – recently announced the company’s commitment to return some of its production facilities to the U.S. even after his predecessor, Steve Jobs, bluntly said that would never happen. Other companies like Chrysler and GE are proudly touting their domestic production shifts. These are claims from gigantic companies looking to gain publicity and goodwill at the expense of their bottom line… or is it? Cook is talented with procurement (while preparing to move manufacturing overseas in the late ‘90s, he reportedly streamlined the Mac’s production, cutting assembly time in half) so there is little doubt his company’s return to the U.S. was done with minimal negative, or possibly positive, impact to the company’s total spend. Popular theory about American production costs would suggest doing so is an anomaly, or just downright impossible. It is, however, possible, and not rare for those equipped to do it. In our own office, for example, we recently completed a project for a large manufacturer looking to source production where we were able to find significant savings by shifting production to a young and nimble firm on the East Coast. As more and more companies look for the goodwill that “Made in the U.S.A.” brings, look for the successes – and failures – to hit the news.

Bracing for Healthcare Reforms

Very large chunks of the healthcare reform package known as Obamacare are set to come online in 1^st Quarter 2014, meaning plenty of corporations will spend the better part of 2013 conducting benefits analyses, planning, plotting, and, in some cases, gnashing teeth and stomping their feet. With the multitude of changes coming, there is ample room for bad decisions to be made on confusing advice, particularly from companies expecting good results by assigning a couple of HR folks and an accounting department rep to sourcing one of the most expensive and critical spend categories. Expect those companies that source their benefits intelligently and efficiently – or through a firm that is seasoned in the area and can make those decisions for them – to make the news for all the right reasons. Expect those who fight it tooth and nail, then rush to a rash decision, to be there for all the wrong ones.

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