In a recent Ariba Exchange post, I examined why a growing number of manufacturers are rethinking their sourcing strategies in (formerly?) low-cost regions like China and India.
The reasons are quite simple: these regions don't offer as great a cost advantage as they once did thanks to rising wages and higher commodity and energy costs. In fact, a recent study from benchmarking gurus at The Hackett Group projects that inflation in these two regions will climb more than 10% this year. Factor in the challenges, risks, and logistics costs of doing business halfway around the globe and more companies are looking at alternative regions for low-cost manufacturing and outsourcing labor.
A growing number of sourcing teams are beginning to move supply to other lower-cost regions, such as Vietnam. A point that seems to be validated within the Ariba Exchange community based on members seeking advice on how best to source in the region. In fact, by some estimates,"companies sourcing from Vietnam could achieve 17% cost savings over sourcing from China." In addition, inflation is fairly stable in the region and worker attrition rate in Vietnam's services sector is miniscule compared to the 30% turnover in India.
While Vietnam is alluring, analysts at Ardent Partners predict that Kenya and other regions in Africa will be the next big low-cost country sourcing hotspot. Average GDP projections for the major commercial regions on the continent (Congo, Ghana, Mozambique, Nigeria, and Zambia top 6.5% through 2015, according to the IMF. Growth in some regions, like Ethiopia, is even higher (8.1%). And, while not up to Western standards, infrastructure in these regions is improving, thanks to pioneering sourcing efforts from major mining and natural resource companies and, interstingly, government-backed investments from other low-cost powerhouses like China and Russia.
But sourcing in Africa (or any emerging region) is not without risk. In addition to infrastructure challenges, the region also grapples with corruption and health concerns that could disrupt supply lines. Yet, as we've seen in other low-cost countries -- including Vietnam and, before that, China -- these issues are resolved quickly as more business and wealth flows into the region. As we've seen before, pioneering businesses willing to make investments to develop supply in emerging markets like Africa could gain a leg up on more risk-adverse competitors -- an advantage that could last more than five years.
Ardent advises that companies bold enough to source in the region must develop a "deep understanding of the infrastructure, capabilities, and an associated risks (i.e. political, trade, cultural, weather, etc.)" The analyst firm also warns that extracting your company from your existing low-cost country may prove to be a challenge unto itself:
"The total cost of a move to any region (including transportation to the destination countries) should be calculated and different scenarios should be run to ensure that the move will still make sense if the market experiences dramatic shocks (we are seeing more and more of these with each passing quarter)."
There are numerous members of the Ariba community that are already sourcing in Africa. Share your thoughts on whether you believe Africa is the next low-cost region as well as any experiences you've had sourcing there already in the comment section below.