In stark contrast to the strong rating of the significance of green issues to the development of the business only 23 per cent measure the carbon footprint of their products Over the last decade outsourcing the manufacturer of goods to distant, low-cost economies, such as China and India, has become the name of the game. But now with rising labour costs in China, Oil at over $120 a barrel and a growing awareness within companies of the importance of ”green” initiatives and the carbon footprint of products, are there any indications that such concerns are being reflected in companies” sourcing policies?
In the spring of 2008 Supply Chain Standard worked with market research and consultancy agency, YouGov, on an international survey into ”Future Global Sourcing Strategies”. The survey of Supply Chain Standard”s readership gained responses from 569 senior supply chain professionals. The results were revealing.
Responses from those sourcing from distant ”low-cost” economies indicate that China (81 per cent), East Europe (55 per cent) and India (46 per cent) were the leading locations with 63 per cent expecting an increase in the volume of goods sourced from these areas over the next 12 months. However, when asked ”Do you see any impact of rising oil prices on your sourcing decisions?” 71 per cent said yes. Together with environmental issues, rising costs in China and an oil price that could head to $200 a barrel, could we see East Europe playing a greater role in providing manufactured goods for Western Europe?
Environmental issues were regarded by the supply chain and logistics professionals surveyed to be significant to the future development of their business (88 per cent), with 31 per cent of the chairmen and CEOs surveyed rating environmental issues at the highest level of significance. Interestingly, the majority of supply chain directors and managers, although rating green issues as significant, do not give it the same level of importance as CEOs. Could there be a disconnect here?
In stark contrast to the overall strong rating of the significance of environmental issues to the future development of the business only 23 per cent of respondents currently measure the carbon footprint of their products in the supply chain. A resounding 67 per cent currently do not. And surprisingly, 10 per cent don”t know if they measure the carbon footprint of their products or not.
Further to this, of those interviewed who said that they do not currently measure the carbon footprint of their products 51 per cent do not even have plans in place to do so in the future (28 per cent do have future plans). But the number not knowing whether plans are in place rises here to 21 per cent – in fact 10 per cent of the supply chain directors surveyed ”don”t know”.
As yet, the majority of responding companies have not been asked by their customers for information relating to the measurement of the carbon footprint of products in the chain (63 per cent), but 24 per cent have, and with significant international initiatives underway to gather this data – such as the Carbon Disclosure Project which involves a great number of the world”s largest companies – this figure is likely to rise over the coming months.
Impact on sourcing policies
Most supply chain professionals we interviewed see green issues impacting their sourcing policies (66 per cent). This figure rises from within the discipline of purchasing with purchasing directors (77 per cent) and purchasing managers (87 per cent) expecting green issues to impact their sourcing policies. A resounding 90 per cent of supply chain directors see environmental issues affecting their sourcing policies.
But the ways in which sourcing policies will change were less clear. Of those who saw green issues impacting their sourcing policies 21 per cent said this would be by sourcing more locally. Considering respondents indicated earlier that 63 per cent of those who are involved in outsourcing were expecting to increase the volume of goods sourced from low-cost economies over the next 12 months, this may imply an expected proportional shift in sourcing from distant low-cost economies to nearer low-cost locations, such as East Europe. Over a third of respondents (37 per cent) said they would be looking to work with a logistics service provider to reduce their carbon footprint and a significant 32 per cent cited ”other” means, which on examination of sample comments included: reviewing packaging, use of recycled materials, developing an integrated logistics policy, purchasing environmentally friendly trucks, load consolidation, working with suppliers and customers to reduce footprints, and many included looking to sourcing more locally.
Overall, 71 per cent of the total survey group are looking at initiatives aimed at reducing carbon emissions/energy, including introducing electric vehicles, reducing packaging, using eco-fuels, and reducing air freight.
Questions relating to ethical sourcing issues proved to be most revealing. When respondents were asked ”Do you believe your brand is affected by ethical sourcing issues?” only 40 per cent thought they were, with 47 per cent believing their brand was not affected by ethical sourcing issues. However, looking at responses from supply chain directors, over 61 per cent agreed with the question. On asking all respondents ”Does your company have a policy on ethical sourcing?” the split was fairly even with 42 per cent saying ”yes”, 37 per cent ”no” and 21 per cent ”don”t know”.
Monitoring ethical compliance
Despite the fact that there is wide-spread public concern over ethical sourcing, only 33 per cent of respondents to the survey say they have mechanisms in place to monitor the ethical compliance of their suppliers. 45 per cent have no mechanisms in place and 22 per cent don”t know. However, the picture looks a little more reassuring when looking at the responses from supply chain directors: 52 per cent of supply chain directors surveyed said they have mechanisms in place to monitor the ethical compliance of suppliers. But considering the importance placed on this issue by the consumer there appears to be ample room for improvement.
Looking at the risk element of sourcing from distant locations most respondents (59 per cent) considered this activity as a ”medium risk” task. Holding more inventory is often seen as a hedge against the increased risks of extended supply chains, however, responses to our question ”Are you holding more inventory now than you were two years ago?” showed that the majority (56 per cent) were not, with only 31 per cent saying that they were holding more. Furthermore, of those holding more inventory only 25 per cent said that this was to off-set the risks involved in sourcing from distant locations. The majority (69 per cent) cited other reasons.
The main reason companies look to source from distant locations is the low cost of manufacturing in low-wage economies. Recent published concerns over rising labour costs are reflected in our survey findings. Some 52 per cent of the supply chain directors surveyed have noticed an increase in costs for goods manufactured in China and/or India, but 69 per cent of those supply chain directors see these rises as a ”medium increase” and the vast majority (75 per cent) are not about to change any sourcing decisions based on this. However, most purchasing directors surveyed had also noted the increase in costs and are split 50/50 on their future decision to change sourcing policy.
For those who have or are about to change their decision on sourcing policy as a result of the increases in cost of manufacture in distant locations, several illuminating sound bites were offered as to how policies will change: ”looking to shift production to East Europe”, ”Western Europe” and ”sourcing closer to home” feature quite heavily; ”too many eggs in one basket”; ”move from China to India, Bangladesh and Pakistan”; ”The price difference between sourcing from the far east and Europe is now at a point were there are no major cost benefits”; ”In some cases we have pulled out of sourcing from China due to increased costs caused by currency fluctuation RMB to the dollar, material prices and increased labour costs”; ”Produce more in East Europe”; ”certain products have become uncompetitive and sourcing has been moved closer to the UK”.
In conclusion, indications from this extensive survey suggest that sourcing from low-cost economies is set to generally increase in the near future. However, environmental issues, the rising cost of oil and increasing costs of manufacturing in China are causing purchasing directors and supply chain directors to re-evaluate current sourcing policies. A reasonable proportion are actively considering or about to act on moving production closer to home – perhaps, to more local centres of low-cost production such as Eastern Europe.
Green issues too were rated as of high importance but few have plans to or have implemented means of measuring the carbon footprint of products in the supply chain.
But, perhaps the most surprising finding was that despite the considerable pubic concern over ethical sourcing, only a third of respondents have mechanisms in place to monitor the ethical compliance of their suppliers.
Full survey statistics can be purchased from Supply Chain Standard by emailing Johanna.firstname.lastname@example.orgMost of those we interviewed see green issues impacting their sourcing policies (66 per cent). A resounding 90 per cent of supply chain directors see environmental issues affecting their sourcing policies
Some 52 per cent of the supply chain directors surveyed have noticed an increase in costs for goods manufactured in China and/or India