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Manufacturers feel the heat over emerging market sourcing

Contact: Tom Imbesi
Deloitte
Partner
+61 (0) 3 9671 7329

Increased publicity over product recalls has made product safety, product quality and environmental standards in emerging markets a hot issue according to Deloitte’s '  Innovation in Emerging Markets' annual study.

Two-thirds of the surveyed executives from developed and emerging markets said that over the last 12 months these issues had become more important. As a result, global companies choosing emerging market suppliers are taking additional steps to address the risks.

The Deloitte study, which captures the views of more than 650 global executives, explores how manufacturers from developed and developing countries view and handle their exposure to risk stemming from sourcing in emerging markets—and how the most successful companies are working to manage this risk and turning it to a competitive advantage.

Product sourcing from emerging markets has increased. Roughly three-quarters of the developed market executives surveyed said they had increased their use of emerging market suppliers over the last three years, with almost half saying they had increased it significantly. In terms of where they look for suppliers of components and parts, 66 percent cited China, while 36 percent named Mexico and Central America. Central/Eastern Europe, India, and Southeast Asia were each cited by one-quarter or less.

“Manufacturers are feeling the heat - especially with all the negative publicity related to issues of sourcing from emerging markets,” says Tom Imbesi Deloitte Lead Manufacturing Partner.

“But the more successful companies are not avoiding the risks inherent in sourcing from emerging markets. Instead, they are intently focused on understanding and managing these risks in order to continue to reap the benefits that emerging market sourcing provides.”

Just over one-third of the developed market executives surveyed by Deloitte felt that their companies had been very successful in sourcing from emerging markets. These companies appeared to be more attuned to the risks involved. Their boards of directors and senior management are more involved in product safety and quality issues, and their companies work closely with their suppliers to inspect supplier facilities more often.

“Deloitte’s research found that executives from both developed and developing markets anticipate a greater demand for higher standards and transparency,” added Mr Imbesi.

“In addition to upgrading standards and testing, many viewed the need to provide customers with more sourcing information to allay fears about safety, quality, and environmental standards.”

Forty-one percent of developed market executives surveyed believed cost increases were very likely, as companies respond to the demand for more stringent standards. Emerging market executives were even more likely to anticipate higher operating costs, with 59 percent believing these were very likely.

“Manufacturers have the opportunity to turn this situation to their advantage,” said Mr Imbesi.

“In fact, some executives surveyed view the entire risk scenario in emerging markets as an opportunity to stand out from the competition by providing guarantees of meeting strict standards—which may allow them to command higher prices.”

The benefits can go far beyond price to include increased market share and the building of brand equity for the developed market manufacturer.  Emerging market suppliers also stand to benefit. Adhering to higher standards may also make it easier to attract and keep global customers, especially when those standards are contrasted with problems afflicting competitors in the local market as well as in competing emerging markets.

“Competing on cost alone can be short-sighted when the potential for brand-crippling damage is so real,” warns Mr Imbesi. “Companies that raise standards are likely to find that their competitors will follow suit. To maintain their advantage, they will need to execute quickly and be prepared to continue to upgrade to more rigorous standards.”

“Finding the right suppliers that are both willing and able to comply with rigorous standards and nurturing these relationships are important to success. When choosing emerging market suppliers, successful manufacturers are going beyond the basics of quality, cost, and reliability to place much more emphasis on the overall reputation of the supplier.”

The study indicates that successful manufacturers have been engaged—or will likely engage—more rigorously in other risk management activities, including:

  • more frequent visits to suppliers’ facilities
  • willingness to address managerial skills and working conditions during visits
  • an expectation that testing levels will increase significantly
  • contract requirements that call for more visits to facilities and for the approval of subcontractors.

“Setting standards is one thing, but ensuring compliance to those standards over time is another,” adds Mr Imbesi. “Monitoring emerging market suppliers is a real challenge, especially in light of “extended enterprises” that rely on far-flung, complex webs of suppliers and strategic partners.”

The study reveals that although executives recognise the importance of effective monitoring of their supply chain, they also acknowledge there is significant room for improvement. Product safety, product quality, and environmental issues have hit the radar of the public, government, and manufacturers’ competitors. Like so many aspects of the manufacturing industry, these issues will not hold still—they present a dynamic and evolving challenge. Those companies that can move quickly and intelligently to propagate higher standards throughout their supply chains are likely to see fewer negative impacts from these issues—and even use them to derive new benefits.

To view the Deloitte Global Manufacturing Industry Group’s 'Innovation in emerging markets. 2008 annual study,' please visit

Innovation in emerging markets

Notes for the editor:

About the 'Innovation in Emerging Markets' annual study

The Deloitte '  Innovation in emerging markets, 2008 annual study' surveyed 651 executives on product safety, product quality, and environmental standards in emerging markets: 237 executives from manufacturing companies headquartered in developed markets and 414 executives from manufacturing companies headquartered in emerging markets. The executives represented a range of industries and countries. The 2008 study follows a 2006 study that examined the steps global manufacturers are taking to successfully design and sell their products in emerging markets and a 2007 study on operational issues such as talent management, risk management, and operating structure. Additional information was gathered from in-depth interviews with senior executives at leading manufacturers, as well as from the experience of Deloitte member firms in assisting manufacturing companies in emerging markets around the world.

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