The advantages of working with a local manufacturer

If it’s more costly to purchase domestically produced materials than it is to contract an overseas supplier, many firms choose the latter option.

However, buying materials from foreign enterprises isn’t without its risks and disadvantages. Some of these concerns may outweigh the benefits of cheaper materials. In addition, the price benefit may not be as prominent now as it was a couple of years ago.

As of 8 August, 2016, the Australian dollar stood at $US0.77, according to foreign exchange company HiFX.
At first glance, this figure may be troubling to Australian engineers, architects and other parties involved in the construction industry. However, the news isn’t all that bad.

From the standpoint of the Australian economy as a whole, a low exchange rate generally means two things: higher import prices and greater export frequency. In other words, an Australian mining products manufacturer may export more goods now than it did before the exchange rate’s depreciation.

A meta analysis by the World Trade Organisation’s Economic Research and Statistics Division noted that that exchange rate depreciation caused exports to rise across eight Asian nations, including Japan, Indonesia, Philippines and Thailand.

The low exchange rate means two things for Australian mining, construction and other industrial operations:

  1. The price gap between Australian goods and foreign goods is not as wide as when the Australian dollar was stronger. This means it could be more feasible for general contractors to purchase goods from Australian suppliers, especially when considering other variables such as delivery risk, increased supplier collaboration and so forth.
  2. Because domestic imports are likely to increase, the country’s manufacturers will have more revenue to fund capital investments. Such activity both increases domestic manufacturers’ capital wealth and enables them to purchase equipment that allows them to produce a greater number of items at lower costs (assuming they make appropriate investments).

Although the low exchange rate may prompt quarries to buy new screening media and factories to purchase grated walkways and so on, cost is just one factor to consider when building supplier relationships. 

While economics is about allocating scarce resources to their most valued uses, in business it’s partly about making compromises in order to receive products and/or services that one values most.

For example, a consumer may buy a $10 razor instead of a $35 razor, even though he knows the latter will probably last longer. However, maybe he wants to use the $25 he saves to buy a product which he values more. It’s possible he doesn’t have to shave too often. So, for an Australian company, the choice of whether to choose one supplier over another comes down to making decisions based on immediate and future priorities. Is it more advantageous for a contractor to procure customised perforated metal facades from an Australian firm at a higher price than the “same” product from an overseas alternative at a lower price?

The Australian supplier’s decision makers, regardless of the current exchange rate, know they must provide additional services and consultation in order to win and retain business. To draw on the aforementioned example, the contractor may view this level of attention as valuable, therefore justifying the price he or she will have to pay for a manufacturer’s products.

Although the idea of a strong supplier-contractor connection is largely subjected to professional opinion, there are many things decision-makers would agree on.

A paper written by Dr Damian Beil, associate professor of technology and operations at the University of Michigan, outlined a supplier qualification screening process, which begins with financial status assessments and gathering references.

The old saying “it’s about who you know” applies to industrial operations just as much as it does in other economic sectors. Dr Beil maintained that contractors should speak with a supplier’s previous customers to understand how the supplier conducts business. In addition, contractors would do well to read published supplier ratings to determine whether the company has incurred debt or other financial woes.

Beil recommended assessing a supplier’s ability to deliver a large number of products in a short period of time.

Construction comes with a few uncertainties, which may culminate in disruptions in the middle of a project. For example, if the construction crew recognises that a particular kind of woven wire mesh screening isn’t compatible with a building’s frame, will the supplier go on-site to assess the problem? How quickly will the supplier provide a solution? In addition, contractors must identify how supplier personnel manage risk. How closely do they speak with the architects, builders and other stakeholders involved in projects? Do they use software to test material stability and other features?

Bottom line: things may go wrong. When a supplier’s leaders recognise this, it shows their willingness to resolve bad situations before they lead to excess costs. In other words, the attention and dedication a supplier can contribute to a project likely outweighs the immediate, material savings one would find from an overseas alternative. 

Source: Locker Group

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