Daily Archives: May 4, 2007

The Top Three X: It Keeps Going and Going

Chris Jacob Abraham of @ Supply Chain Management posted his forward piece on Supply Chain Management 2.0 in anticipation of his pieces on the top three issues in Supply Chain Management and gave us his first post on supply chain talent.

Randy Littleson of Kinaxis on Response Management posted his piece on strategy, strategy, and people.

Eric Hiller of Cost Cents offered his initial post on Design for … What?.

But more importantly, a number of bloggers still haven’t entered the fray. Between non-stop travel (Vinnie Mirchandani), London Lag (Tim Minahan), SAPPHIRE fixation (Jason Busch), last minute assignment (Greg Holt, since Paul finally managed to sneak away for a short vacation), analyst schedules (surprise guest bloggers from Aberdeen and AMR), a burning need to do multiple posts (Chris Jacob Abraham and Eric Hiller), and the desire to build up anticipation (one or more surprise guest bloggers), the fray is destined to continue for another week. ( Of course, they might just be waiting for your adoration, in which case a comment on their blogs indicating how much you value their opinion and how great their last post was could speed things up. )

Low Cost Country Sourcing Leeriness

In addition to Carl Greppin‘s two-part interview over on eSourcing Forum (parts one and two), a few other decent articles have hit the presses in the last month or so.

The first article of note is Paul Snell’s Sourcing Hotspots article over on SupplyManagement.com which notes that LCCS is an intimidating subject to approach and that just knowing where to begin, where to go and how to balance the risks are enormous challenges for buyers.

The article starts by noting that before thinking about where you want to go, you must decide what it is you want to achieve and that reaching these decisions is an intensive process taking anywhere between two and six weeks. You will need a team of procurement people to dedicate themselves to the issue to make the right decisions.

Start by dividing the budget into a reasonable number of categories to identify where the biggest spends are and where the largest opportunities are. Once these opportunities are identified, they need to be weighed against the complexity of sourcing these products in a low(er) cost country.

If the consensus is that the savings that will be achieved are significant, start by selecting a small number of categories of the least complex items. If everything goes according to plan, you will have a foundation to build on and a small success story for the affected parties to buy into.

Be sure to meet the suppliers in person, and, preferably, visit their facilities before making a selection. This builds lines of communication and reduces the potential for (costly) mistakes. Make sure the suppliers selected are willing to break down their cost structure to help you evaluate where the savings will materialize.

The next article I found to be of interest was Mickey North Rizza’s Supply Chain Management Review article on Revisiting LCCS in a Demand-Driven World.

Mickey notes that exactly where you source overseas can make a significant difference on the bottom line but that for buyers to be effective and provide the right sourcing answer at the lowest total true cost, they need to understand the complete picture, including risks and supplier development. They need to understand LCCS within the context of a demand-driven supply network.

By purchasing a product outside of the country in which it had traditionally been purchased, the buying firm faces a number of challenges. The taxes, duties, customs, banking requirements, transportation, overhead of an international procurement office (IPO), inventory buffers, and long lead times from the point of shipment to the point of use can add up quickly in terms of costs. Add in language, culture, currency exchange rates, and timing factors… and the sourcing process can become a daunting task.

The article also notes that after a successful pilot program, companies find that sourcing agents, supplier-development engineers, and “in-country” expertise is required to cut costs and ensure continued reliable supply. The recommendation is to establish a procurement office in the country you intend to source from either by building the operations internally or engaging the services of firms that specialize in hosting those operations for you. However, it will still be the buying company’s responsibility to build out supplier-development and quality control infrastructure.

This article also makes the important point that technology applications can enhance the LCCS value proposition by streamlining work flows and providing collaborative opportunities among the network of buyers, services providers, and suppliers. It also reminds us that buyers need to become savvier, incorporating risk, supplier development, and soft- and hard-dollar costs in the total-cost-of-ownership equation. By doing this, they will gain a better understanding of the true costs in the sourcing equation. Smart buyers (1) focus on total delivered profit analysis vs. total landed or “true” costs and (2) explore “right shoring”. While offshoring provides clear reductions in the product cost, the associated overhead and processes required don’t always sustain the value.