When investigating global sourcing strategies, I was surprised by the admission of a handful of supply management executives that their initiatives to source more from emerging markets was not driven by a strategic plan or analysis. Instead, these execs confessed, “This whole thing got started because our CEO heard about it from another CEO on the golf course.” (Sort of like when CEOs started pushing reverse auctions after eBay hit it big — without fully understanding the technology, approach, or risks.)

A new Economist survey of more than 1,000 corporate executives signals that CEO-driven low-cost country sourcing (LCCS) initiatives have hit the mainstream. According to the study, CEO Briefing: Corporate Priorities for 2007 and Beyond, CEOs cited global sourcing as the second-biggest force impacting the global marketplace. However, the study also suggests that CEOs now have a better understanding of the opportunities and risks of sourcing from emerging markets. 

(It is important to note, that global sourcing was only slightly behind the number one impact on global business — “rising demand in emerging markets”. This finding reinforces that global supply management is now firmly entrenched on the coroporate agenda.)

Not surprisingly, Asia was the top region CEOs were pushing their supply team to source more from, with 60% of execs feeling these region “offers the greatest sourcing opportunities.” Within the Asian region, execs are bullish on increasing sourcing from China and India. On a global basis, Central and Eastern Europe were a distant second-choice for low-cost supply opportunities, with just 15% of execs pushing sourcing from the area.

Importantly, CEOs no longer view sourcing from LCCS as a slam dunk for cost savings. In fact, the study showed evidence that execs now understand at least some of the risks involved with sourcing from emerging markets:

• Skills shortage: The biggest concern raised by CEO’s was the global talent crunch — this is especially true in emerging markets where execs cited lack of available talent as the primary barrier to growth. “If there’s one limiting factor to growth, it is people and talent,” said one General Electric exec cited in the study. The Economist reports that wage inflation in the Indian IT sector is about 20% and turnover is double that. The study also reports that “most multi-national operations in China must contend with 20% - 30% annual staff turnover rate and recruit 1,00 plus employees annually.” Supply chain talent is among the most scarce in the region, with logistics firms saying they struggle with competitors poaching their talent. In response, many CEOs say their companies are improving their training and advancement programs to keep top performers.
• Logistical challenges: CEOs are beginning to understand that low manufacturing costs and labor arbitrage are only part of the supply cost equation. Specifically, top execs — many of whom have visited emerging markets in recent months — now recognize the immature and strained transport networks within developing countries. Says one company cited in the study: “The 2,150-km journey between Kolkata and Mumbai can take a cargo truck some seven days to navigate, at an average speed of 11 km per hour, with some 32 hours spent waiting at tollbooths and checkpoints.”
• Economic instability: CEOs are aware that inflationary and currency risks of emerging markets can quickly cut into cost benefits from sourcing there. For example, the Economist reports that inflation in India has almost doubled in the past 12 months. “Housing prices are skyrocketing and strong wage gains are fueling buoyant domestic demand.”
• Sustainable supply: According to the study, “Environmental issues and climate change are creeping up the [CEO's] agenda.” Interest in more sustainable energy sources and environmentally and renewable materials and products are being driven by a mix of public interest, global regulations, and “rocketing” oil prices. Some CEOs report that these pressures are causing them to rethink their supply and logistics strategies, including changing the mix of freight and adopting fuel-efficient, low-emissions vehicles. (It should be noted that the majority of study respondents hailed from outside the U.S. Other regions of the world, particularly Europe, are far more advanced in their support and execution of environmentally and socially responsible supply and business practices.”

Overall the findings from the Economist study should be good news for supply managers, suggesting that you may finally get the attention and support you need for your global supply initiatives. It also suggests that your top brass may have more realistic expectations about what to expect from your low-cost country initiatives. Use their support to develop the talent, policies, processes, and systems you’ll need to achieve both their near-term and your long-range goals.