Sunday 24th Sep 2017 - Logistics & Supply Chain

Back and forward

January 1, 1993 marked the inauguration of the Single European Market – now we face the prospects of extending this to a raft of new member states. The Single Market remains for many purposes more aspiration than reality – although goods and capital move pretty freely, when it comes to the procurement of utilities and other services, fiscal regimes and legal incorporation, national borders are still very real.

Different European nations still maintain widely varying schemes of support for specific sectors, especially in energy and in the primary and agricultural production industries, ranging from open subsidy to closet protection. And although mechanisms such as the Public Procurement Directives have made abuse more transparent, enforcement mechanisms have been found lacking. Given the need to support our new Eastern friends through their early years of EU membership and the varying strains imposed by the euro currency straitjacket, it is safe to predict that significant distortions of trade will survive ten years hence.

The Single Market helped make the idea of sourcing from beyond the local supply base respectable, but perhaps not in the way intended. Cecchini and his colleagues, when they planned the Single Market, envisioned correctly that the removal of trade and other barriers, and the introduction of common standards and methods would make buying and selling across Europe more attractive. They can hardly be blamed for failing to anticipate that the combination of cheap transport and all-pervading communications, especially the internet, would lower the trade barriers to other parts of the world even more rapidly.

The implications of globlisation
‘Globalisation’ hit the front page, sometimes violently. This has had implications, both good and bad, that will be played out over the next decade. The emergence (or re-emergence, for anyone whose ancestral memory extends prior to the Great War) of a global marketplace ensures that the ‘Festung Europa’ model of a united Europe more or less divorced from global trends and prospering through internal trade, is unlikely to prevail.

On the other hand, the task facing the new entrants becomes harder. Labour and social costs in Poland, Hungary and the rest will approach Euro-norms much more rapidly than will productivity, while ‘old’ Europe may lack the capital and the will to fund necessary infrastructure and other improvements.

The heyday of Central and Eastern Europe as a location for manufacturing investment may already be past. Globalised sourcing has brought both consumers and industrial buyers sustained reductions in cost, and often improved quality, for many goods, albeit at considerable pain for the more sclerotic of European communities and industries.

A confident prediction for the next decade is that procurement attention will increasingly be focused on services. While factory input prices remain static or continue to fall, cost inflation in many service sectors is rising, often by several times the general inflation rate.

This is partly the consequence of implementing Social Chapter policies in labour-intensive industries but largely it is due to the supposition by both providers and buyers that services, unlike goods, are not internationally tradeable. The internet, again, is changing this. Many firms have become accustomed to the idea that their call centres are run cheaply and effectively out of Bangalore or Mexico: they are unlikely much longer willingly to pay first world premiums on financial services, insurance, brokerage, chartering, advertising and marketing, auditing, payroll and all the other supports that modern business depends on. Especially since Enron and the discovery that a brass plate in Wall Street, Zurich or the City of London is no guarantee of efficiency or probity.

Probity is going to be big for sourcing and procurement. It was already an issue when we launched ten years ago, but largely in terms of individual personal ethics – taking backhanders from suppliers and the like. Focus has now shifted to the wider issues of corporate social responsibility (CSR). Ten years ago, it was normal, even by the more sophisticated groups such as Friends of the Earth, to see social and environmental problems exclusively as being caused by big business, to be remedied by the mass action of individual consumers. Now many are prepared to concede that corporate sourcing and procurement policies and strategies are part of the solution, not necessarily the problem.

In the UK, as for much longer in the US, activist shareholders are prepared to hold firms to account and wreck the share price, not only over their own actions but also those of their suppliers: child and slave labour, health and safety, and environmental protection.

‘Fair Trade’ and corruption in government contracts are procurement issues that will not go away. Nor are they issues solely for firms trading with the impoverished Third World. Consumers who have enjoyed the cost benefits of unfettered global sourcing are beginning to ask why they can’t have at least most of that benefit through local sourcing.

So, a final prediction is that, over the next ten years, ‘Logistics Europe’ will be reporting on an increasingly complex and multifaceted sourcing and procurement scene. It will be more and more a graduate or post-graduate function; of ever-greater importance to corporate strategy and success, not just in bottom line terms; increasingly represented at Board level.

 

Briefing points

  • Globalisation of sourcing is here to stay, but will operate more selectively as price ceases to be the single dominant factor in the equation.
  • Commercial buyers will seek to drive service costs down using the techniques and technologies that have successfully controlled many material costs.
  • Strategies to demonstrate corporate social responsibility will form an integral part of the sourcing/procurement toolkit.
  • The professionalisation of the function will continue, with great opportunities for highly educated people with a wider worldview

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