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12/03/2010

Accurate targeting of future procurement markets

In recent years, international procurement further gained in importance due to cost pressures. Aside from perennially successful China, three regions especially are currently being scrutinized: India, Brazil and Turkey.

By Gerald Boess, Partner International Investments, Kerkhoff Consulting

In recent years, international procurement further gained in importance due to cost pressures. But quality aspects have also increasingly been the focus of attention because of numerous scandals – ranging from carcinogenic toys to dermatologically harmful jeans. Moreover, sourcing high technology from abroad is becoming a viable option today. Thus, markets characterized by technological innovations and by establishing higher quality standards increasingly attract the interest of company executives responsible for global sourcing.

Gaining ground: India, Brazil and Turkey

Aside from perennially successful China, three regions especially are currently being scrutinized: India, Brazil and Turkey. In addition to its IT and services sectors, India increasingly excelled in mechanical and plant engineering. In recent years, suppliers for mechanical engineering companies have been greatly building up – especially foundries, steelmakers, job order contractors, and hydraulics & component manufacturers. Moreover, India has an excellently trained and highly efficient workforce, especially technicians and engineers. Cultural barriers are low due to English being the official language and also due to India's high educational and training standards.

More and more companies also have Brazil now on their sourcing map which is currently the market with the strongest growth according to the MSCI Global Emerging Market Index. The country is suitable as a promising procurement market, especially in the sectors of agriculture, automotive, energy, and plant engineering. Brazil is characterized by its high economic productivity, short logistic routes due to comprehensive raw material resources, and a high level of technical developments.

Many companies are also increasingly looking towards Eastern and South Eastern Europe. Advantages: Logistic and cultural proximity to suppliers. Turkey is currently a hot tip. Framework conditions for German companies have improved not only due to Turkey's economic growth annually increasing by about seven percent, but also due to its increasing economic integration in the European Economic Area (EEA). Turkey is of particular interest as a procurement market for the automotive industry, as well as for electronic components, job order manufacturing, and foodstuffs. The country continues to be leading in textiles. In the price wars with East Asia, Turkey's suppliers can hold their ground because they are convincing with short delivery periods and high quality. At the same time, suppliers can be audited faster and thus cheaper because of their geographic proximity.

Software supports decision-making process

Many companies even today still approach their development of new procurement markets without any specific strategy. Yet, trial and error methods may cause great financial losses. The implementation of globally oriented procurement concepts will require, up front, considerable investigations as well as procurement market research – all of which takes a lot of time and costs a lot of money.

Sophisticated companies will back up individual research about a country with software applications for global sourcing. Specialized applications are on the market today which, due to comprehensive databases, will calculate the exact transaction and unit costs for any global shift in product procurement. Such applications precisely know which wage costs are to be paid in which country or how the political framework conditions will impact logistics.

But even today, company executives still need to make visits or inspections on location: If they want to know what their targeted business or facility looks like and whether its business culture will fit in with that of their own company, they still have to travel and also talk directly with their (potential) suppliers.