Globalized procurement markets

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The results of the study confirm that exchange rate fluctuations, high corruption rates and insufficient quality of supplies are the biggest risk factors for international procurement. Particularly the BRIC countries (Brazil, Russia, India, China) are categorized as high-risk procurement markets. Due to globalization it is essential for companies to adjust quickly to growing dynamics within the various markets. Therefore, GEXSO continues to look at procurement markets in the following chapter and closes the gap between internal business development and external factors and market conditions. First, it is important to determine the criteria that particularly affect decisions on procurement activities in order to detect possible challenges for procurement markets and their appeal in the future. The chapter concludes with a matrix that allows for a categorization of the individual procurement markets in order to derive implications for necessary risk management.

Globalization criteria (procurement criteria)

GEXSO_Study-ChartThe most important decision-making factors for procurement activities in a country are product quality and material costs. For both parameters, companies are able to take advantage of regional differences at the operational level to the fullest extent.
Quantified, this means that a total of 47.4 per cent of the interviewed companies prioritize a combination of material costs and product quality. For 63 per cent of these a high product quality is the most important criterion, while 37 per cent see low material costs as the most crucial factor. An unrestricted access to raw materials only plays a minor role for procurement decisions. This suggests that the majority of the companies mainly procure parts, components or modules.

Additionally, GEXSO asked the participants to list the most significant barriers for first-time or increased procurement in local markets. They identified an insufficient infrastructure and the lack of protection of intellectual property as the largest obstacles. The latter in particular seems very feasible when looking at procurement activities, which, based on an evaluation of the decision-making criteria, mainly focus on parts and components. Here it is shown how important nowadays ideas, product data and product and process knowledge are for the success of the company.

Entry barriers can delay the commencement of procurement activities within a market, can cause an absence of procurement activities or – in the worst-case scenario from a business perspective – they can cause extremely difficult conditions. In addition to the identification of entry barriers across all industries, GEXSO was also able to detect a distinctive anomaly when comparing all industry sectors. The industry component manufacturers are the only sector that regards exchange rate fluctuations as a significant access barrier. This anomaly raises the question whether companies from this sector analyze so-called “best-practices” in the payment transactions of other industry sectors and then adjust and utilize them.

Challenges in procurement markets

GEXSO_Studie2_Grafik26GEXSO_Study-ChartThe previous paragraph discussed decision-making criteria for procurement activities and existing market barriers. The following chapter depicts a weighted presentation of individual countries and procurement difficulties. First, we identify existing difficulties that the interviewed companies currently experience. Then we compare the procurement markets in relation to their difficulties in order to combine those two variables in a matrix-diagram. With the help of this diagram we can assign existing difficulties to the individual markets and derive implications for an effective risk management. According to the companies, exchange rate fluctuations, high levels of corruption and insufficient delivery qualities are the biggest challenges in all procurement markets. However, there are differences between the individual industries. Exchange rate fluctuations only play a marginal role for automotive suppliers, while particularly the still centralized industry component manufacturers see risks in volatile currencies within international commerce. GEXSO depicts the number of mentioned procurement difficulties for chosen markets in a consolidated manner: Overall, the BRIC countries, especially China and Russia, are perceived as the most problematic procurement markets. While the greatest challenges in China are the lack of protection of intellectual property and the insufficient quality of supplies, Russia poses severe problems through its high level of corruption and its political framework. According to the interviewed companies, the Czech Republic and Slovakia are the two countries with fewest procurement difficulties. Both countries additionally convince with high appeal (see below). Their appeal is depicted in the following potential-assessment and could be particularly related to their EU membership, their proximity to domestic markets of the companies and their good infrastructure.
The matrix diagram represents the distribution of difficulties within individual procurement markets. Although the graph does not allow for a direct comparison of individual countries, it enables us to identify the most significant difficulties within each country. In addition, one can compare the graph representing an evaluation of the countries and the frequency in which each country is mentioned (see Figure 27). The combination of both graphs gives information on individual market situations. When comparing both graphs it is noteworthy that countries that are considered as difficult procurement markets generally also have more existential problems. The previously discussed markets in China and Russia are striking examples. Japan and the USA are seen as counter examples. Both countries are perceived as unproblematic – exchange rate fluctuations were mentioned most frequently.

Appeal of global procurement markets

GEXSO_Study-ChartFurthermore, GEXSO examined the attractiveness of individual procurement markets and their relevance for the examined regions in the next five years. Based on a model, this is discussed and compared with already examined difficulties. GEXSO assesses each country’s appeal.
Based on a weighted evaluation, the graph illustrates that the interviewed companies attest China, the Czech Republic, India, Turkey and Slovakia to holding a high appeal. In comparison, Mexico and Vietnam are perceived as the procurement markets with the lowest future potential. In an in-depth analysis we examined whether there is a relation between industry membership and how a company evaluates the attractiveness of a procurement market. Generally, there are no significantly different industry preferences. All examined industry sectors operate within the manufacturing industry and address similar issues in relation to their procurement activities. Only the evaluation of some few countries differs from sector to sector. Contrary to the other two industries, automotive suppliers evaluate Mexico as outstandingly attractive. Machinery and plant engineers are more interested in Turkey, Romania, Bulgaria, Hungary, the Czech Republic and Slovakia than automotive suppliers are. Industry component manufacturers seem to have a stronger interest in the United States. Similar to the machinery and plant engineers, industry component manufacturers see less procurement potential in Mexico.

GEXSO procurement market matrix

GEXSO_Study-ChartIn order to assess the individual components of the procurement market evaluation most comprehensively GEXSO makes use of a procurement market matrix. For a comprehensive examination of the assessed attractiveness and difficulty of procurement markets, the calculated average values of the individual markets were plotted on a vertical and horizontal axis. The result is a system of coordinates that is divided into four quadrants by the medians of both variables. We are able to compare the procurement markets based on their position within this system. Quadrant I combines great attractiveness with comparably few difficulties for procurement, quadrant II; great attractiveness and great difficulties, quadrant III; small attractiveness and great difficulties and quadrant IV; small attractiveness and few difficulties. In order to interpret the results correctly, it is important to note that both factors; great attractiveness and great difficulty, can apply to the same country without logical contradiction. The procurement market in China is an outstanding example for this combination as it is regarded as the most attractive future procurement market and simultaneously perceived as the most difficult country for sourcing by the interviewed companies. This could relate to China’s strong economical position. The sourcing difficulties in China mainly result from the lack of protection of intellectual property, high import tariffs and an insufficient quality of supplies. On the other hand, it is the largest individual market in the growth region East Asia. Therefore, it can be concluded that China has a significant impact on the growth dynamics within this region. This procurement market combines high difficulties with great future potential. The procurement markets in the Czech Republic, Slovakia and, with some limitations, the USA and Turkey are positioned in the desirable quadrant I. In comparison, the emerging markets Mexico and Vietnam perform the most poorly. As already indicated in the previous chapters, both markets are neither attractive nor uncomplicated enough for procurement activities. However, the Russian procurement market is rated as the most difficult market with the lowest appeal for future procurement by far.

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