Diversification is the new watchword for sourcing leaders.
PwC recently surveyed 40 leaders in two industry sectors— retail and branded products, and industrial products and services—and found that almost 95 percent intend to prioritize a diverse sourcing base over the next three to five years to reduce transit costs (92 percent) and counter geopolitical uncertainty (90 percent). Meanwhile, 40 percent say they prefer not to move more than 25 percent of sourcing dollar volume to a single country.
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Respondents represent a variety of global companies, including Fortune 500 companies, that rely heavily on direct sourcing. The survey asked about their plans, strategic priorities and challenges for the year ahead. Here’s what they said.
The path to diversification
The vast majority (70 percent) intend to reduce their reliance on China. Topping the list of reliable alternative sourcing locations is India, identified by 64 percent of executives, followed by Mexico (48 percent) and Vietnam (40 percent). Meanwhile, 50 percent are already working on a nearshoring strategy, with an additional 24 percent exploring nearshoring possibilities.
Bigger needs require more diversification
The companies with the most comprehensive sourcing needs—those spending more than $2 billion annually on sourcing—are pursuing the most aggressive diversification goals, with half planning to diversify more than 30 percent of their spend over the next five years.
More than 80 percent of the companies surveyed told us they’ve already moved sourcing volume to new geographic locations in the last two years. Of those, almost 90 percent have moved sourcing operations out of China and some 80 percent reported that they had been able to find cost-effective alternative locations.
While many companies still struggle with setting geographic diversification targets, clearly the majority are moving their supply bases while balancing surety of supply needs.
C-suite support includes tracking progress
Of the sourcing executives polled, 71 percent said their boards and C-suites support global sourcing diversification initiatives. At these companies:
- Almost all (93 percent) monitor diversification progress.
- At 55 percent of companies, supplier diversification metrics are tied to core performance.
- 50 percent evaluate supplier diversification continuously or quarterly.
- At the business-unit level, support for diversification goals and metrics are highest within the supply chain team (97 percent) followed by finance (69 percent), pricing (38 percent), tax (34 percent) and merchandising (34 percent).
The role of the tax team
More than 80 percent reported involving their tax teams in the diversification of global sourcing locations to evaluate the financial impacts of different tax models and assess the tax benefits and risks associated with various global sourcing locations.
Challenges to diversification
While many sourcing executives have successfully diversified sourcing locations, some have cited the following challenges: finding suppliers that meet quality standards, cited by 45 percent of sourcing executives, and high switching costs (40 percent).
Looking ahead
Despite some challenges, the path ahead is clear. With the support of the board and the C-suite, diversification of global sourcing locations—including nearshoring—is here to stay. The jury is still out on how sustainable the next set of sourcing destinations will be in terms of cost, quality and supply chain responsibility across the various commodities. Many new regions for supply are dealing with high labor demand as well as inflationary pressures.
In a landscape of volatile supply chains and geopolitical uncertainty, executives are well-advised to work across the enterprise to evolve their diversification options.
Read more PwC insights about digital supply chains in consumer markets and industrial products.
Content contributed by Ron Klein, PwC Principal and leader of PwC’s Operations Transformation Global Sourcing COE.
