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Global Sourcingfor High Performance Leading practices and the emerging role of international procurement organizations in ChinaFor five consecutive years, Accenture has studied the practices and challengesof supply chain executives who manage sourcing and procurement, seeking innovative ways to help improve the performance of procurement organizations. Accenture's most recent study was undertaken in August 2004 with 238 senior procurement executives. The goal of the 2004 Accenture Global Procurement Survey was to assess executive-level perceptions of global sourcing opportunities.Participants in the studyrepresented a range ofindustries in both Europeand the United States.In parallel with this,Accenture and the ChinaSupply Chain Council (CSCC)conducted the first in-depthresearch and detailedassessment of internationalprocurement organizations(IPOs) in China and their rolein building global sourcingcapabilities in their jointstudy, Accenture and CSCCChina IPO Survey, 2005.This paper presents anoverview of the findingsfrom these studies, includingan analysis of the trends inglobal sourcing, characteristicsof leading procurementorganizations and insights onthe growth of Chinese IPOsas a fundamental part of aglobal sourcing strategy.Introduction23Global sourcing is a fundamental strategic objective for organizationsGlobal sourcing has, in short order, become a fundamental consideration for corporate strategy and the C-level executive agenda. Many organizations are taking advantage of the opportunity to source from low-cost countries and show an increased interest in doing so over the next two years. (Figure 1) Why the increased attention to sourcing in low-cost countries? For many organizations, internal and external pressures have forced them to seek innovative ways to reduce their overall cost structure, while delivering a broader range of products and services to customers with increasingly shorter lifecycles. Simply put, global sourcing presents a compelling value proposition and provides another strategic lever for organizations to help meet these sometimes conflicting objectives.Accenture research shows that largenumbers of organizations are planningto make global sourcing a part of theircore strategy. Organizations plan todouble their spend in low cost countriesover the next three years and theyexpect savings to increase by anincremental 37 percent in that timeover what they are currently achieving.Many executives do clarify, however,that global sourcing requirescollaboration through the supply chainand that it cannot be a procurement-only led initiative.But, this approach is not entirely new.Some organizations that could betermed "pioneering" have beenexecuting a global sourcing strategyfor more than 10 years. (Figure 2) Butthese organizations are in the minority.There is now a significant "fast follower"trend occurring, where 50 percent oforganizations with no global sourcingexperience are planning to executethis type of strategy within the nextthree years. Over this same timeperiod, surveyed organizations plan toincrease spend in low-cost countries by85 percent to $130 billion. (Figure 3)45Source for Figures 1, 2 and 3: Accenture Global Procurement Survey 2004Figure 1: Migration to Eastern Europe,Asia and Central/South AmericaTotal procurement spend by region (in %)7Although the strongest motivation for global sourcing is to reduce cost, other factors are now growing in importance.Capacity management is an important motivator as organizations continue to seek opportunities to reduce supply side risk by building additional supplier relationships. Guaranteeing alternate sources of supply, to ensure business continuity, is another key motivator.These drivers of global sourcing initiatives clearly indicate the value of low cost alternates in preserving operational integrity.Figure 4: Satisfaction with results achieved through globalsourcing program(share of respondents in %, neutral positions not shown)Source: Accenture Global Procurement Survey 2004Quality, while at this stage is not as significant a motivator, is also becoming a key consideration. Global organizations are recognizing that low-cost supplier markets such as China are capable of producing at quality levels comparable to home markets.Many organizations realize that there are significant challenges when sourcing from distant supplier markets and raise legitimate concerns about how to deal with them.Among the concerns are longer lead times, delivery reliability and lack of product innovation—all of which are key areas of focus for buyers. (Figure 4)With lead times, for example, volatility and uncertainty with the actual lead time for a shipment and absolute overall lead time duration were cited as potential issues.In executing a global sourcing strategy, organizations understand more and more that a single country approach may not be the most appropriate one. China is clearly the primary low-cost country source for organizations based in both Europe and the United States. (Figure 5)Countries targetedby sourcing strategiesWeighting based on first, second and third choice selection where second and third choiceshad half and one third ratings respectively.Source: Accenture Global Procurement Survey 20048Characteristics of leading sourcing organizationsAccenture looked to differentiate those organizations that are performing at superior levels, to learn what steps they are taking to maximize results from global sourcing.One key finding is that the leading organizations are accelerating their global sourcing strategies and driving more aggressive spend reduction targets. (Figures 6 and 7) They spent more in low-cost countries over the past three years and had higher expectations for the level of savings delivered than others.Leading organizations also show amarked difference in price performanceand supplier delivery accuracy in theirsourcing strategies. They achieve morethan 10 percent price reductions and10 percent supplier delivery accuracypremiums over others.Designing and executing a well-architected global sourcing strategyis another differentiator among theorganization studied. The strategies ofthe leaders often have several elementsincluding setting up a local procurementoffice; assessing capability gaps insuppliers; utilizing bid strategies andfact-based negotiation in sourcingarrangements; establishing a winningapproach to supplier identification;and undertaking category and riskassessment prior to execution.Figure 6:Procurement spend in low-costcountries(in percentage of total procurement spend)Figure 7: Incremental savings through low-costcountry sourcing(in percentage of total LCC spend)Source for Figures 6 and 7: Accenture Global Procurement Survey 20049By industry, electronics and high tech (26 percent), and industrial equipment (20 percent) now form the largest segments investing in China. (Figure 10)This is driven from a transformational shift occurring within the China export market.10The growth of China International Procurement OrganizationsChina is a fundamental part of almost every organization's global sourcing strategy. Establishing a physicalpresence in China is the critical success factor for a truly effective global sourcing initiative.The leading organizations areestablishing international procurement organizations (IPOs) as an effective means of maximizing the value from China sourcing.“Others” include Saudi Arabia, Singapore, Taiwan, Australia,Pakistan, Japan and MalaysiaFigure 9: China IPO Experience and IntentionsSource for Figures 8 and 9: Accenture and CSCC China IPO Survey, 2005A significant proportion of organizations already have IPOs in the country. With 36 percent of IPOs established by United States organizations, the United States is clearly the dominant country establishing IPOs, followed by Germany at 17 percent. (Figure 8) And for many, it is not a new venture.Almost 40 percent have four or more years experience with IPOs. Among organizations without their own IPO,55 percent intend to establish one in the next three years. (Figure 9)11Traditionally, high-growth exportproducts have been heavy in laborcontent. Now, we are seeing a clearshift to categories of goods with moretechnical and engineering components,reflecting China's emergence as ahigher-quality category provider.(Figure 11)This shift can be viewed as a migrationfrom traditional tier one segments,such as transportation and travelservices, food and consumer productsand retail, to high-growth, highlyattractive markets to create morevalue. These "tier two" markets includeelectronics and high tech, industrialequipment, automotive, chemicals,pharmaceutical and medical, andmedia and entertainment.Source for Figures 10 and 11: Accenture and CSCC China IPO Survey, 2005Figure 11: Growth rate and strategic importance for China’s exporting business by industry(2004)IPO capabilities13To achieve greatest value, ChinaIPOs must develop a comprehensiveportfolio of capabilities to ensurethe best "total landed cost" solutionsare developed.Many organizations—more than 70percent—are focusing on thedevelopment of their fundamentalcapabilities, such as supplier marketresearch, supplier identification andqualification, supplier development andproduct quality inspections. (Figure 12)This is a positive development. But many are not focusing on transactional capabilities, such as executing bidding, logistics management and procurement transactions. Another area of even less focus is progressive and sustaining capabilities, which include category management, inventory management,procurement and sourcing training,and the development of supplier market strategies.Source: Accenture and CSCC China IPO Survey, 2005Consequently, only 8 percent of organizations are currently maximizing their savings potential by effectively designing and implementing a suite of capabilities to provide total landed cost solutions from their IPO.Success factors for International Procurement OrganizationsThere are some clear factors that organizations must get right for their IPOs to be successful.Effective governance structure A China IPO is part of the home office procurement department operating in China to facilitate China sourcing activities. Based on this and unique market conditions in China, the China IPO should customize its home office procurement practices to work within the China environment.There are challenges to be sure. A key one is how to ensure the implementation of corporate strategy, policy, ethics, process and standards while the China IPO is operating far away from the home office—managed largely by a group of local new recruits from different professional backgrounds. To tackle this challenge, it is essential to put in place an effective governancestructure. It should have the flexibilityto allow the China IPO to engage thelocal supplier market based on homeoffice approved practices.The nature of different industries willalter the exact approach; however,the implementation of an effectivegovernance structure is stronglyrelated to the successful applicationof the following criteria within aChina IPO environment:•A corporate lead from the homeoffice to set the practice anddirection in China locally•Open communication betweenthe China IPO and head office•Transparent operations with regularprocess assurance assessments•Establishment of achievable targetswithin a reasonable time frame tominimize unapproved expeditingand execution approaches•Continuous training to reinforcecorporate expectationsIntegration with thehome officeBeing far away from the home officeand in a much different time zone,the China IPO team may be unableto access critical information andcommunicate with product leadeffectively. Without information andcommunication, the China IPO willbe treated as a stand alone businessunit—deployed to China with anunclear corporate mandate.Integrating the China IPO successfullyinto the corporate family is a keyinternal challenge. To resolve thisintegration issue, there are a fewcritical steps required.1415•Senior management "top-down"support ensuring business unit leadswill comply with the China IPOstrategic approach•Assign aggressive and achievablesavings targets to business unitsand offer use of the China IPO as apossible solution to meet the target•Appoint a designated coordinatorbridging all the communication andknowledge gaps between the ChinaIPO, home office and product lead•Continuous communication ofthe China IPO value to make homeoffice and product leads aware andacknowledge the valueThese approaches will help the ChinaIPO integrate with home office operations smoothly.Senior executive leadership Our research has suggested that installing senior executive management talent in an IPO is a fundamental requirement for success. Fully 66percent of China IPOs are managed by senior executives. These executives have typically been charged with both the initial establishment of the IPO and its ongoing management. There are several reasons for this. Senior executives recognize the strategic value that the China IPO can deliver and can provide the appropriate level of experience required to build a new organization in a complex environment.They can ensure effective integration and communication between the IPO and home office management and can develop an effective and efficientChina IPO strategy, reinforcing itsvalue to home office management. Figure 13: Tenure with IPOFigure 14: Turnover Source for Figures 13 and 14: Accenture and CSCC China IPO Survey, 2005Rigorous talent management Securing and retaining key talent is another critical element that must be addressed for the China IPO to generate immediate returns and ensure ongoing success. Given that future success will be directly dependent on the quality of staff this will soon become the primary issue China IPOs must manage.Since many have not existed for more than one or two years, turnover is not yet a major issue. (Figure 13) There is still not a high level of industry experience among IPO employees either,with more than 75 percent having five or less years in this field. (Figure 14)As the industry matures it can be expected that turnover will increase and there will be more people with higher levels of industry experience—which will drive a competition for talent.A talent management plan will need to be in place to address this trend. Addressing the talent management issue will require a comprehensive approach to human resource management, specifically recruitment, retention and training. (Figure 15) The recruitment plan should include a clear understanding of the kind of talent the company needs and the channels that will be used to source that talent. It also requires a strong image plan, promoting the organization as an employer of choice in China. Decision making should be done by experienced, local and global managers to ensure the right people are hired.To retain the best people, it is importantthat China IPO management properlyposition staff in the organization andexpand their responsibilities to quickentheir development. With the need toramp the organization up to fullcapacity as quickly as possible, thisis imperative. When the best talent issourced, it is essential to do everythingto keep that talent by allotting theproper level of investment. There shouldalso be a clear and fair performancemeasurement process with rewardsfor good performance.Training is also crucial to a talentmanagement plan. Business strategymust be aligned with the trainingcurriculum to ensure employees aredeveloping skills in line with theirroles in the organization. The trainingprogram should be well defined anddeveloped with a clear process forenrollment. Tying career advancementto achievement of clearly definedcapabilities should also be considered,as well as the addition of soft skilltraining in core required courses(e.g., time management, team work,business ethics).Source: Accenture and CSCC China IPO Survey, 2005Figure 15: China IPO challenges—Recruitment, retention and training16Do IPOs deliver as promised?A key question for senior executivesglobal sourcing strategy is: "Doesthe investment of time and effort toestablish a functioning IPO in Chinaprovide the expected returns?" Theshort answer is yes.Among those whose organizations haveestablished China IPOs, 72 percent feelthat the ventures have met or exceededtheir expectations. (Figure 16) They feeltheir IPOs delivered expected benefitswithin a set time frame; helped themretain and maximize benefits; enabledthem to continuously identify newopportunities and grow to expectedsize; developed strategic advantages;diversified their market risk; enabledthem to resolve all China sourcingchallenges on the ground; andstimulated internal process changeacross the organization.Source: Accenture and CSCC China IPO Survey, 200517The path to high performanceGlobal sourcing is rapidly becoming the key initiative organizations undertake to reduce total costs and is now seen as a critical part of an organization's overall strategy. In fact , leading organizations on the path to high performance are accelerating their global sourcing strategies and driving more aggressive spend reduction targets. China is the preferred low-cost country source, with near-shore locations in Eastern Europe and South America currently forming a significant second tier for organizations based in Europe and the United States respectively. China's growth and attractiveness as the primary low-cost country market has traditionally been a result of low costs in labor-intensive categories. We are now seeing growth in highly technical segments, which is greatly increasing investment in the country.Leading organizations are establishingIPOs as an effective means ofmaximizing the value from Chinasourcing and overcoming the tacticalchallenges. While still relativelyimmature in the China market, IPOsare meeting or exceeding initialperformance expectations. Simplyestablishing an IPO, however, is notsufficient to deliver the greatestvalue to an organization. To achievemaximum returns and achieve highperformance, organizations mustsee IPOs as a component of awell-designed and executed globalsourcing strategy.Accenture's global sourcingcapabilitiesAccenture has an end-to-end approachto assisting organizations with globalsourcing. It delivers expertise inprogram management; low-costcountry assessment and globalsourcing strategy; strategic supplieridentification, qualification, integrationand development; fulfillment;organizational design; staffing,recruiting and training; and systemimplementation.High performance procurementorganizations design and executea well-architected global sourcingstrategy that enables high performance.To find out more about Accenture'sglobal sourcing model and our SupplyChain Management service line, visit/supplychain.18Copyright © 2005 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.About AccentureAccenture is a global management consulting, technology services and outsourcing company. Committed to delivering innovation, Accenture collaborates with its clients to help them become high-performance businesses and governments. With deep industry and business process expertise, broad global resources, and a proven track record, Accenture can mobilize the right people, skills and technologies to help clients improve their performance. With more than 115,000 people in 48 countries, the company generated net revenues of US$13.67 billion for the fiscal year ended August 31, 2004. Its home page is .About the AuthorsJamie Bolton is a Partner with Accenture and is responsible for the North Asia Supply Chain Practice. Mr. Bolton has served clients across a variety of industries including electronics and high tech, consumer and industrial products, pulp and paper and utilities. Focusing on business transformation and creating sustainable supply chain performance improvements through behavior change, Mr. Bolton’s areas of expertise include supply chain strategy and integration, supply chain planning and optimization through network modeling, procurement transformation, sourcing and eProcurement and supply chain process reengineering and inventory management. Based in Shanghai, Mr. Bolton can be reached at jamie.m.bolton@.Eric Chu is a Director with Accenture and is responsible for the China Global Sourcing Team for the North Asia Supply Chain practice. Mr. Chu has deep strategic sourcing and supply chain experience in multiple industries across Asia Pacific. Most recently he has been working with multinational organizations focused on the development of China International Procurement Organizations. His area of expertise is in infrastructure projects, land & marine engineering, transportation, and high-tech industries. Based in Shanghai,Mr. Chu can be reached ateric.m.chu@.。