The Transformation of Sourcing: There’s More to it than COVID

Picture of Keith Holder

Keith Holder

Principal Partner

As with many other industries, Covid-19 has proven a catalyst to accelerating change in the world of sourcing. Yet change, upheaval and transformation of sourcing operations had started long before the spread of the global pandemic, as I have witnessed first-hand.

The heyday of global sourcing in the late 1990s and 2000s has been replaced by a slowdown of global trade prompted by US / China political disputes, trade conflicts and their accompanying tariffs, Brexit and other regional events.

Changes (i.e., reductions) in sourcing / exporting ex-China were in evidence long before the global pandemic hit, driven by annual labour cost increases in China and accelerated by US imposed tariffs. Vietnam and Cambodia became the most popular ‘China +1’ destinations, with significant shifts to Thailand, Sri Lanka and Malaysia, too.

Short-term tactical and localised sourcing (of both finished goods and raw materials) to reduce distance and time from source to market has been a factor too. This has been driven partly by skyrocketing freight costs, some politically motivated reshoring and borders shutting due to Covid-19. The long-promised potential for sourcing in eastern European countries is finally bearing fruit as a result, with Romania and Latvia leading a number of countries in the region benefiting from this switch.

China mooted shifting its manufacturing further up the value chain as far back as the last economic crisis in 2008, so this is nothing new. But it has now morphed into the utilization of increased factory production for home markets in Asia. This is a result of rising middle class incomes and urbanization driving growth in the region. Production in China for China and Asia consumer markets has increased as a percentage of total manufacturing capacity, taking up the slack left by departing Western customers and allowing China to be less reliant on exports to boost its growth.

Along with the much heralded and significant increase in online retailer’s turnover since Covid-19, traditional bricks and mortar retailers, faced with dramatic loss of footfall and the costs of long-term property leases, have upped their online game and are increasing sales faster than pure online retailers.

Online commercial operations are also growing but are seeing the need to look for new vendors as their traditional base cannot fulfil bigger online orders, going against the long-practiced trend of vendor consolidation. Those that are agile, can adapt quickly and have courageous leaders, will have a better chance of surviving and thriving. The long list of casualties shows that more than ever there are no hiding places; Debenhams and Arcadia on the UK high street being the most recent.

A byproduct of the review of the physical sourcing infrastructure, directly linked to Covid-19, has been the acceleration of digital technologies being incorporated into the sourcing process.

Whether this is a basic conversion from paperwork and Excel spreadsheets to an ‘off the shelf’ systemization, or enabling empowerment at source in real time, a lot is happening and rapidly. Stock management, sales optimisation, demand forecasting, digital sampling, digital showrooms, and the use of blockchain to increase the security of transactions are all examples of where digitisation is being introduced or improved.

One of the most significant changes is the demarcation of work away from the out of date ‘home-country-knows-best’ mindset, where every major decision is made centrally at head office due to a lack of trust or perceived lack of skillset at source, to a decentralized model based on trust. Tools being implemented to increase efficiency and transparency of the sourcing process have long been available, but the mindset to trust your colleagues away from the ‘centre’ is being forced by Covid-19, mostly due to the massive reduction in travel to check or confirm regularly at source.

In summary, global trade is down but by no means out. China and the rest of Asia are open for business; the former being less reliant on exports and increasingly servicing the regions burgeoning consumer demand as traditional ways of working no longer work in our new normal.

The recently signed and soon to be ratified Regional Comprehensive Economic Partnership (RCEP) agreement demonstrates that while the UK and the USA appear to be heading down more nationalist paths, the rest of the world still has an appetite for global business. A subtle shift in trade to be much more Asia-centric is trending, not just for manufacturing and sourcing, but for consumer spending too.

A final point that is close to my heart and topical is sustainable sourcing. This is being driven by increasingly informed consumers, who demand to know where we are sourcing from, how we are treating our suppliers, their workforces and how we are contributing positively to their local communities and environments. But has the move towards sustainable sourcing accelerated as a reaction to the disruption of Covid-19?

I’d like to think it has. Sourcing was moving in a more sustainable direction long before Covid-19 hit, but with all the changes the pandemic has brought, the media coverage of the natural world recovering while we were locked down, and the drive of humanity to get back on its feet, I think we have a real opportunity and the mindset to do the right thing and make sourcing truly sustainable.