The challenge for procurement in Asia therefore is to keep pace with technological innovations, managing multiple vendors, expanding the operations while attempting to be more cost efficient. This naturally weighs greatly on the dynamism of the buying system and the ability to enhance the procurement processes in the context of the supply chain. Understandably, enhancing procurement strategies would generate greater savings for their companies, while driving future growth and competitiveness. The current thinking is that the effective use of people, processes and technology allows this inbound supply chain optimization to occur. For instance, innovation is not possible without the effective execution of the process, and effective execution is not possible without proper governance, clear accountabilities and a sound operating discipline. Innovation through leveraging supplier capabilities and execution against savings goals are just two examples. We now present some trends on procurement in Asia.

Understanding and valuing strategic partnerships

First, there is an increasing focus on understanding and valuing strategic partnerships or alliances between buyers and sellers (for example in electronics manufacturing service contract manufacturers), and between different tiers of suppliers (in the automotive sectors where the Tier 1 suppliers will work closely with the Tier 2 and Tier 3 suppliers), and so on. The challenge for these suppliers and buyers is on how to align the goal of producers and consumers to the products and services rendered. Next, in this partnership approach to supplier management, one area that has repeatedly surfaced for discussion in many a conference and academic paper is the assignment of responsibility of inventory management of both raw materials and components. Today, in Asia, we have suppliers responsible for SOI and VMI, with the question of responsibility of goods still a nagging issue, especially for end of life products.

Related to this aspect of strategic partnership is that of the advantages of partnerships in supplier assurance, supplier implementation, and supply base reduction. Sourcing from unknown or untested geographies ultimately poses the proverbial question, namely, how can one assure that only approved materials are supplied. The classic case in hand is the recent debacle of the toys that were sourced by global brand owners such as Mattel but the components used in the final system were actually sub-quality and detrimental to the human body. Driven by a need to aggressively reduce the total cost of purchase, Mattel today sources 2/3 of its toys from China, but recently had to recall 18 million units of its toys at a cost of more than USD 30 million. The world’s top six toy manufacturers are already sourcing in China and have manufacturing points in Southern China, though the majority of the demand lies in the developed nations of Europe and the Americas. Presently, Chinese manufacturers have close to 80% of the world toy market and they employ more than 4 million workers. No competing producer in Indonesia, Vietnam, Thailand or Mexico can provide a ready substitute.

Keeping up by harnessing innovation

Second, buyers and suppliers recognize the need to collaboratively capture innovation especially those of technological innovation, namely, using IT innovations to manage procurement and the associated challenges faced in keeping up with new disruptive innovations. The right use of inexpensive IT solutions to monitor and better manage procurement activities is always welcome by industry. This has to be balanced against the right fit for functionality and the complexities of integration. There is already a movement among the bigger buyers toward e-procurement tools, e-bidding for commodity buys, and internet based auctions with e-vendors.

Going Green

Third, another area, which is relatively nascent in Asia, is that of the green procurement movement. In this regard, there has been some empirical work to determine the qualitative and quantitative benefits of green procurement, which is capable of still meeting business goals and visions. In this aspect, the obvious interest is on how to make informed environmentally sustainable procurement decisions. In short, it is about corporate responsibility and sustainable procurement or making money in a responsible manner. In that sense, the green procurement initiative would have an impact on the product lifecycle and hence any new product development which now needs to embrace ecological friendliness.

Effective Outsourcing

Fourth, the study on effective outsourcing or what is sometimes termed as best sourcing is still a relatively engaging topic especially when we consider the procurement of components or semi-finished goods from emerging markets where labor cost is much cheaper than developed locations in Europe or the Americas. The constant re-evaluation and improvement of the outsourcing process is an ongoing exercise. This then leads to the re-organising and de-layering of the buying centre structure. The need here is to consistently realign purchasing activities towards current business strategies, to redefine the relationships between internal and external vendors, and the decision-making criteria for multiple short-term vendors versus the select few long term partners. Related to this vexing question is on how to best work together with overseas (presumably culturally different) vendors/providers towards richer procurement activities, and how to conduct far-away on-site vendor evaluations without increasing the cost of ownership unnecessarily.

Looking To The East

Fifth, perhaps arguably the most challenging question of all and constantly on every journal and conference agenda is that of procurement firms from developed countries looking East towards China and India. The focus here is on expanding procurement into these countries. The research question is what makes global businesses look towards China and India for procurement volume expansion, and understanding the risk involved in these countries. The main issue here is on how to effectively manage the increased sourcing in these locations, without compromising the other business performance imperatives.

Arising from a recent survey jointly conducted with the Berlin University of Technology on global procurement, we now present some of the salient results on international procurement in emerging markets as it relates to the above trends in procurement in Asia. Where necessary, we will also compare the procurement practices found in the EU and Asia.

In terms of the functions undertaken by the procurement departments of firms operating in Asia, it was found that the procurement practices in Asia are tactical or operational in nature and procurement personnel are more likely to entertain issues related to supplier management. However, increasingly more procurement departments are taking control of strategic procurement, presumably to ensure that procurement activities and efforts are aligned to current business strategies. This is in sync with the fourth trend mentioned above. However, the involvement of procurement personnel in Asia still lags that of the EU procurement experience in that at least seventy percent of the procurement personnel in the EU are directly involved in operational and strategic procurement, and supplier management. One reason could be that the recognition of the key importance of the procurement department and hence the elevation of this role within the firm. Hence, purchasing departments in Asia assume lesser strategic orientation.

More value for your money

So, why do firms place emphasis on procuring from emerging markets in Asia? The current response set suggests a few reasons. First, common to the EU too, firms in Asia source from cheaper locations, due to reasons of cost even though the relative cost differential between emerging markets in Asia and that of advanced Asia is smaller than that compared to the EU. Indeed, the reason for a cost driven sourcing strategy is more compelling in the EU (85% for the EU vs. 60% for Asia). Another reason for sourcing in emerging markets in Asia is to tap the potential market growth or to establish a robust local supply chain. Presumably, this is to also source and manufacture close to the cities in Asia, which have higher demand potential. This correlates with trends #4 and #5 above. At the same time, procurement firms source in emerging markets in Asia to develop supplier partner capabilities in preparation for the long haul engagement with some of these Asian suppliers, who are anticipated to provide the necessary technical know-how and a large stream of skilled engineers needed for some of the buyer industries (see trend #1). Therefore, the strategic goals of companies in Asia procuring from emerging markets are threefold (i) cost saving (60%), (ii) technical know-how (47%), and (iii) supplier development for long term partnership (46%). Compared to the EU, which ranks (i) cost saving (85%), (ii) support of local production (55%), and need for local content (39%), we observe that the motivations are clearly and strategically different and go beyond cost.

Interestingly, less than a quarter of the respondents in Asia (22%) mentioned quality issues as a problem, compared to some 89% of the EU respondents who appear to have faced problems with quality when sourcing from emerging markets. One reason for this outcome could be due to the buyers being in direct and constant contact with the suppliers. This again links back to the more tactical and operational profile of the procurement role in Asia. In short, there is less complexity involved in the sourcing process. This logically reduces the need for more complex quality inspection and the supplier development process is thus more straightforward. Again, trend #4 could be a good explanation in terms of a de-layered buying centre structure. Hence, there appears to be fewer issues in sourcing complexity and supply quality.

On the resourcing situation in Asia, it is found that there is a need for more cultural competence within the project team involved in sourcing projects in Asia. Nearly two-thirds of the respondents commented that outstanding effort and resources are needed to make the sourcing project successful. This is slightly more than the 46 percent of responses from the EU counterparts. In this regard, two traditional pillars of support, to ensure the success of any sourcing project, are desired, namely, (i) financial resources (75%), and (ii) top management commitment (50%). Perhaps, as procurement professionals in Asia deal predominantly with operational procurement, the clear signal of support from top management is viewed as necessary to ensure the success of the sourcing project. In Asia, there is a need for greater top management influence and availability to oversee the procurement project, ready availability of financial resources. This contrasts with the case of the EU where only a quarter of the respondents indicated that top management support is less than sufficient. The good news is that more procurement professionals are assigned to purchasing related projects. This could be due to the need to manage the greater cultural diversity involved, despite the move toward e-procurement as indicated by trend #2, or simply more procuring is being conducted in Asia. Hence, we can expect more procurement activities in Asia.

On the question of the best means to identify suitable suppliers in emerging markets, there are again some differences between EU and Asian firms. First, firms in Asia attach greater importance to the respective chambers of commerce for soliciting contacts of suppliers. Next, exhibitions or trade shows are deemed to be more important in Asia than in the EU. Third, Asian firms tend to travel less to search for suppliers compared to their EU counterparts. Hence, the external conduits such as chambers of commerce and trade fairs serve as vital information channels.

With regard to the desired level of supplier integration in the product life cycle, some differences have again surfaced between firms in the EU and Asia, notably in terms of new product development and distribution. Firms in Asia tend to place a medium to high level of integration with their suppliers when it concerns new product development and distribution. In the case of the EU, this emphasis is at best medium. One reason could be the challenges involved in transportation in Asia where congestion at ports and airports are common. Another reason could be the capability transfer process between buyer and supplier as mentioned by trend #1. Yet another could the need to dovetail new product development with green procurement (see trend #3). Hence, supplier integration is higher in Asia.

Related to supplier involvement or integration in the procurement process, there is naturally the informational aspect of procurement. In this regard, the current survey suggests that the need to manage inventory levels well and exchanging information between suppliers is moderately important for procurement firms in Asia. This is to be expected given that more firms in Asia are focused on supplier management and operational procurement. Further, as expected, the delivery dates of shipment and quality planning are accorded much lower levels of importance compared to the EU since firms in Asia do not possess the same strategic procurement orientation. Hence, the intensity of data exchange with suppliers varies at different levels.

In the area of risk management, only procurement related activities such as the analysis of sub-suppliers, the financial of the suppliers, ex-works delivery, and multiple sourcing are considered to be moderately important (ranked at least 3 and above). Procurement professional are cognizant of the need to mitigate the supplier risk, Incoterms, and product quality issues arising from multiple sourcing. Most of these risk concerns are expressed by firms based in the EU as being moderately important. Indeed, procurement firms in the Asia, like those in the EU, are increasingly realizing the need to engage suppliers on the joint analysis of quality problems. Hence, quality based risk management of suppliers are perceived to be currently less important in Asia, which may counter trend #3.

Conclusion

In summary, most of the key findings of our recent survey support the trends on procurement in Asia. Some differences do exist between the EU and Asia, presumably due to the stage of the procurement development lifecycle. As a parting note, it suffices to mention that proactive risk management in procurement secures future savings for the environment generally and for sustainability for the firm specifically.