Dave HenshallGlobal Sourcing

Chinese Red LanternsUnder international pressure to revalue its currency, China has been accused of exporting unemployment to the world.

However, China showed spectacular timing by announcing a week before the G20 meeting in Toronto that it will abandon the two-year-old peg that has kept the RMB tied to the dollar and allow the exchange rate to float within a very narrow band .

With clear pressure for a trend upwards, a stronger RMB will make Chinese goods more expensive to western buyers, bringing pressure for Chinese suppliers to reduce prices. Also, it will make western imports cheaper, providing Chinese companies an opportunity to upgrade and re-position their manufacturing capabilities via capital investments.

With the rise in domestic wages, more Chinese consumers will be able to afford desirable western consumer products such as the iPhone. However, before hoards of consumers rush off to Apples newly opened Shanghai store and businesses invest heavily for the future, there remains an important caveat: if wage increases are passed onto the consumer this could negate the benefit of the decision to float the RMB, placing pressure on Chinese businesses to find efficiency and productivity increases to contain inflationary pressure.

So where will these efficiency’s come from? One source is from increased capital investment, but this will take time to feed into market prices. The other source is from the supply chain and more effective sourcing strategies:

Companies such as General Motors, Honda, Motorola, and Intel, have all shifted some manufacturing or research to inland locations in recent years, both to tap lower costs and to open up new markets. Others have gone off shore, to lower-cost countries such as Vietnam or Indonesia. Businesses will need to weigh the risk and benefits of moving offshore to such countries, which have more political uncertainty and poor infrastructure. Developing new and existing domestic suppliers therefore, will become increasingly important in the drive to become more efficient and reduce cost.

There is a clear opportunity for procurement to add value at a strategic level, by contributing to procurement’s “golden triangle” of growth, margin improvement and sustainability.Procurement’s contribution to these goals is supported via cost management, collaboration and innovation:

Advanced cost management skills can drive cost both ‘down’ and ‘out’ of the supply chain while delivering ‘value’ by routinely evaluating business process sourcing to optimize cost.

Collaborative skills are critical to reducing risk and capturing supplier innovation.

By creating value that competitors cannot easily replicate, a gap is opened between the organisation and its direct competitors to create sustainable competitive advantage for itself, rather than for the benefit of the industry as a whole.

Procuring innovation requires new skills when dealing in intellectual property: engage supply markets without revealing critical details about their intentions and have the tools to evaluate how much they are willing to pay to explore and develop new ideas.

The central bank decision has created a high degree of certainty for Chinese buyers; the currency will trend upwards and wages will be allowed to rise.

Procurement will increasingly be under the spotlight and must grasp the opportunity. The critical challenge will be to develop the necessary talent to rise to the occasion.

The alternative will be to accept lower margins.

Nuff said …