Sourcing Diversification: New Countries, New Risks

With the outbreak of COVID-19, it became clear for many companies that there was a need for diversification in their supply chain-sourcing base. Businesses worldwide have become dependent on China, but leaving the country is not an option for all of them. The trend of avoiding trade war-related tariffs that had already started a few months earlier is persisting and brings new options to the table.

China’s advanced role in global manufacturing makes it almost irreplaceable in the short term. Although the diversification of manufacturing options mitigates the risk of one central point of production, the challenges of new developing sourcing locations are to be assessed within the development of a new sourcing strategy. Vietnam, India and Indonesia seem to be some of the preferred destinations for upper-end furniture goods, while Malaysia is typically targeted for promotional to lower-middle price wood and upholstery items. Other industries, such as toys and DIY, are also changing their focus to other sourcing locations, with India a top destination followed by other SEA countries such as Vietnam.

what are some of the challenges to keep in mind?

China has been an industrial superpower for the last decade, accounting in 2018 for 28% of global manufacturing output. The mature industrial setup developed by the manufacturing powerhouse is yet to be replicated by some of the new manufacturing countries. In many occasions, a shift or sourcing diversification is not supported with the addition of local teams on-site, which combined with the current travel restrictions, lack of knowledge of the local manufacturing practices, and the impossibility to replicate the systems already functioning in China due to its inadequacy with the local situation, increases the risk of compromising the production’s safety and quality.

68% of companies considering sourcing out of China think of product quality as the greater risk
(Source: PwC ‘Global Sourcing Shifting Strategies’ report)

Some of the main challenges of the new sourcing destinations include:

Lack of parts and components locally
As an example, the furniture industry may face shortages of some metals and stone when producing in Vietnam, limited access to some wood species and components in Indonesia, or inadequate access in India to some hardware.

Less globally qualified workforce
Although some areas benefit from a highly skilled workforce, some countries present challenges when compared with China’s mature market, such as more limited finishing capabilities or limitations when working with some materials.

Lack of traceability of process and engineering changes
Reduced visibility in terms of product development and adjustments in the manufacturing process increases the need for a more accurate and standardized manufacturing process when compared with China.

New setups and lack of previous experience
The new processes make it difficult for the local workforce to prevent inadequate factory practices and anticipate risks.

Systems not adjusted to real risks of quality and safety
Limited risk mitigation before design and production results in products of potentially lower quality, and longer lead times.

Specialized solutions, such as technical audits, can help mitigate these risks in addition to assessing new suppliers when shifting sourcing locations and helping to secure production.

A technical audit will allow you to identify whether the factory can correctly manage the supply chain and has an adequate setup to mitigate risks. A factory with good procedures, instructions, and a clear record will be more likely to run properly – even with a less experienced workforce – thus reducing the risk of product quality and safety.

Some of the common points checked during a technical audit will cover:

• Quality management
• Product development
• Incoming quality control
• Production process control
• Finished product quality control
• Resource management
• Measuring and testing equipment control

Our Technical Solutions

At API, we support our clients in their relocation to new destinations, helping them assess their suppliers’ risk.

Our proven experience has strengthened our customers’ ‘out of China’ strategies, benefiting from our expertise and supply chain knowledge. For example, we supported one of our customers in the relocation of some of their furniture lines to India with a tailor-made program with eight key steps that allowed the brand to shift a significant part of its orders in less than six months.

“A tailor-made program with eight key steps allowed the brand to shift a significant part of its orders in less than six months”

Some of the critical points addressed were:

• Identification of the local manufacturing specificities and inadequate factory practices
• Product risk and quality improvement
• Lead time improvement

Some of our solutions to support brands, retailers and manufacturers in their relocation to a new sourcing location include:

• Technical Audits: Our technical audit solutions cover the critical points addressed by industry standards, and our expert approach combines product expertise and manufacturing knowledge.
• Dedicated Local Support: A lack of local support from your own teams in a new sourcing location can be remedied with API’s Dedicated Local Technical Support Program. Benefiting from our experts’ support on-site will allow a smoother relocation and help maintain quality during production thanks to an adequate risk assessment, resulting in process amelioration and improved product quality.

Interested in learning more about how we can support you in shifting sourcing locations?