In the global market of 2005, successful companies will excel at supply-chain management, innovation and outsourcing, states Barry Jaruzelski, vice president and managing partner for management consulting firm Booz Allen & Hamilton Inc. (New York), in a recent report.
Summing up the state of the economy, he notes that private non-residential investment has grown slowly since early 2003, driven initially by information technology investments, but also by spending on new construction, industrial and transportation equipment, and other machinery. In the near future at least, the "China price"—quoted prices from Chinese suppliers—will remain the world's definition of cost competitiveness, even as many companies struggle to deal with high raw material prices. He expects the prices of scrap metal and oil to stabilize, but remain at historically high levels. Operational efficiency and leaner operating models will be key to maintaining margins.
With 40% to 70% of costs embedded in the supply chain, more and more businesses will be turning to foreign sources to achieve cost reductions, Jaruzelski observes. A recent Booz Allen study found that by the end of 2008, U.S. automotive and industrial manufacturers expect to more than double the percentage of goods sourced from countries with low labor costs, mostly from China.
"There isn't a manufacturer on earth that isn't on a crusade to control costs in the supply chain," he writes. "Our most recent study indicates that the 'piece-part' prices companies are paying still aren't as low as they could be, nor are companies satisfied with the level of other costs throughout their supply chains." The advantage will go to companies that can collaborate with suppliers to attack waste in the supply chain, coordinate market strategies, and jointly manage resources. Those who stick to confrontational and transactional pricing will find it harder to squeeze out costs.
A study surveying 150 CFOs by the consulting firm revealed that one third of firms engaged in outsourcing are less than satisfied with the results. Cost reductions and other benefits have only been partially realized, frequently because many outsourcing arrangements were hastily arranged in response to cost-reduction mandates. Jaruzelski says outsourcing is entering its next wave as companies become more adept at working with local and offshore vendors to achieve the anticipated benefits.
