21 July, 2021
Supply chain diversification, tectonic political shifts across the globe, and low labor costs are contributing to sourcing becoming a local affair. COVID-19 has hastened the transformation as more organizations have started looking within.
Raleigh, North Carolina, July 21: A crucial part of the automotive industry is the market for spare parts that also contributes to superior customer service. According to Beroe’s report, auto component buyers are planning to shift gears in their sourcing practices in the long term by engaging with either local or regional suppliers. However, there is always a need for global sourcing in the auto industry for procuring high volume–high precision products.
“Auto component buyers are diversifying from the dominant supply bases to ensure supply risk mitigation and reduce the cost per unit of auto components. Buyers from the auto industry plan to take on this strategy slowly and are therefore diverting their partial sourcing activities away from the dominant bases,” said Vignesh Premkumar, a research analyst at Beroe. “Buyers have started looking for local sourcing opportunities.”
There are several reasons why the automotive industry is looking to shift toward more regional suppliers in supply chain diversification. In the past, OEM buyers would limit themselves to a few auto component suppliers. However, this is now changing due of the growing demand and the need to mitigate supply chain risks that have emerged due to the ongoing pandemic. Most major auto OEMs are currently strategizing for implementing supplier diversification; this will enable them to improve their sourcing flexibility when the demand levels are high. This also helps buyers bring their products to market with speed.
Another reason for the rise in local sourcing is increased labor costs. The cost of manufacturing is high in China due to the rise in minimum wages. The environmental regulations have forced several manufacturing plants to reduce their production activities. Southeast Asian countries, namely, Taiwan, Cambodia, and Laos, are now better alternatives for procuring labor at a lower cost.
COVID has added to the reasons why buyers are increasingly looking at local options to source auto parts. The supply chain has been impacted, and various manufacturing sectors have shut down their operations during the first quarter of 2020. China was significantly impacted and shut down its manufacturing operations completely. They, however, recovered quickly and are currently operating at 95-100 percent of their capacities. Other countries are still struggling to reach a steady momentum in managing their manufacturing activities.
“You can't anticipate events like a pandemic. Moreover, the tension between countries is unpredictable too. Such a scenario brings a lot of pressure for companies who source their raw materials from different countries. It disrupts their procurement and supply chain and, subsequently, their entire business. So, it's understandable that the companies in the automotive industry are looking at regional suppliers now,” said Vignesh Premkumar of Beroe. “This doesn't mean we're nearing an end of global sourcing. It simply means we're carving a parallel line to the existing model that helps stakeholders manage risks effectively.”
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Beroe is the world's leading provider of procurement intelligence and supplier compliance solutions. We provide critical market information and analysis that enables companies to make smart sourcing decisions — leading to lower costs, greater profits, and reduced risk. Beroe has been providing these services for more than 15 years and currently works with more than 10,000 companies worldwide, including 400 of the Fortune 500 companies. For more information about Beroe Inc., please visit https://www.beroeinc.com/.
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