Monthly Archives: November 2009

Overcoming Cultural Differences in International Trade with Thailand

Today’s post, which is partially based on materials from Dick Locke’s seminars on International Purchasing, is edited by Dick Locke, Sourcing Innovation contributor and President of Global Procurement Group.

This post is going to examine some of the cultural differences that you may encounter (as an American or Canadian Sourcing / Procurement Professional) if you are doing business with Thailand. We start by discussing each of the eight key cultural considerations outlined in our introductory post and then highlight a few other points that you should be aware of.

As per our initial post, this discussion is high-level and general in nature and, as Dick Locke points out in his classic text on Global Supply Management, while it is too easy to stereotype a country, individuals in each country will vary from the stereotype. You need to take time to get to know the people you will be dealing with because their behavior may be nothing like the usual behavior of the country in which they reside and there is always a chance that you might run into people who are trained to act like you … while in your presence.

Thailand, which has maintained unbroken control over its territory since 1238, is fiercely independent, astutely diplomatic, and a very distinct trading partner to deal with as over 95% of its population declare themselves as Buddhist, with the majority belonging to the Theravada school of Buddhism. As a result, in negotiations, you should be prepared to avoid direct confrontations at all costs.

  • Power Distance

    The power distance is high. In Thailand, authority and power are natural to the human condition and hierarchy is good for you. Decisions, especially sensitive ones, come from the top.

  • Uncertainty Avoidance

    Uncertainty avoidance is very high in Thailand. With security before risk-taking and a belief that easy work for sufficient pay is better than hard work for high pay, there is a large reluctance to initiate change.

  • Individualism

    There is a strong sense of familial and filial piety in Thailand and a strong desire to fulfill one’s place in society. As a result, individualism, as in most Asian countries, is rather low.

  • Polychronic vs. Monochronic Time

    Buddhists have a cyclical concept of time. Everything repeats. As a result, they are in no rush to seize an opportunity, as it will come again and success is as much due to luck as it is to anything else. They do not believe that the use of time equates with earning a living, reject the Western work ethic, and hate deadlines. As a result, they are much more polychronic than monochronic, but polychronic doesn’t really capture their views on time.

  • Personal / Impersonal

    They are very personable as long as you keep your “cool”, speak and act in moderation, stand close (without touching), and take your time. Negotiations can not be hurried and are usually preceded with 3 to 5 days of “getting to know each other” before business is even introduced.

  • Buyer / Seller Rank

    While Locke and his colleagues, who mirror Hofstede, indicate that the buyer is given high rank, I would argue that, despite appearances, it’s not really the case in Thailand. Buyers and sellers don’t have status or rank in the Thailand belief system, people do. Both senior negotiators will be equal and there will be a desire to work together to create harmony.

  • Importance of Harmony

    They have a deep desire for inward comfort, outward peace and acceptance of their place in society, and maintaining face for others. So harmony, which takes on somewhat of a different meaning than it does in many other Asian cultures, is important. However, their definition of harmony also includes balancing business and pleasure, which results in both being mixed at all times. Social interactions will regularly take place in the office and business discussion will regularly take place outside of the office at a dinner, social, or sporting event. It’s a harmonious continuum.

  • Importance of Face

    While hypocrisy is not always negative, saving face for others is of vital importance … and white lies are permissible if the goal is achieved. This is why many decisions will be ambiguous, as it insures that no one loses face.

Probably the most important piece of advice you can be given is to learn the basic teachings and beliefs of the Theravada school of Buddhism. It has such a large influence on their daily life as a whole that it will be difficult to really understand how they do business if you do not understand their dominant and ever-present religion.

Finally, as I strongly recommended in my first post, if you plan to start doing business with any new international country, including Thailand, you should do a thorough job on your homework. You can start with:

  • Dick Locke’s course on the Basics of Smart International Procurement (which is offered through Next Level Purchasing and counts towards the SPSM2 certification or ISM Continuing Education Hours), or
  • a customized seminar from Dick Locke’s Global Procurement Group. Dick Locke and his associates each have decades of experience doing business with over two dozen countries, including the fifteen biggest importers and exporters to and from the United States, and Thailand. A single day with an expert like Dick Locke could save you months of headaches.

Again, a big thank you to Dick Locke for serving as editor for this special series of posts and providing some up-to-date materials and information for the purpose of this series.

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Take Lean to the Next Level with Tech

I enjoyed this recent article in Industry week that noted technology can help manufacturers take lean to the next level because technology is a critical component of lean planning in modern operations. While it might be appropriate to start with the “technology agnostic” philosophy that so many experts cherish, you can only get so far on generic process improvement alone.

For example, if a company is introducing a new product, the early-warning portal can be integrated with enterprise resource planning systems and other shop-floor applications and measurements to provide detailed information about additional materials that may be required at assembly line supply point. This allows plant personnel to view color-coded kanban alerts that show where a demand or engineering change may impact supply cycles and get lean right the first time.

Pure lean principles need to be looked at in tandem with industry-leading best practices in supply chain, such as intelligent inventory management, response management and demand management, in order to create the ideal lean plant. Furthermore, the approach of avoiding software is no longer realistic in today’s environment due to the simple fact that there are too many constraints, which cannot be handled manually with ad hoc tools.

So use technology earlier in the process. You might just find that results materialize faster than you expected.

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Intel Reduces Atom Supply Chain Costs By 70%, But Is It Enough?

A recent article in Supply Chain Digest noted that Intel needed to reduce supply chain costs for its Atom chips by 80% to stay competitive and that, so far, it’s managed to shave costs by 70%. For most companies, this type of cost reduction would be unthinkable. But is it really?

Let’s think about supply chain costs and the opportunity for bloat. We have inventory. We have distribution. We have packaging. We have duties and (value added) taxes. We have inputs. We have production. Etc. Any one of these costs can be extremely bloated. You might think you need nine weeks of inventory when you only need three — there’s 66% bloat. You might think you need air freight when better planning could allow for ocean freight. There’s 50%+ bloat. You might think you need a certain type of packaging when a redesign could be just as sturdy with half the material. There’s another 50% bloat. You might think a tax is unavoidable, but a slight change could eliminate the tax. For example, under some free trade treaties, shipping the printer cartridge separate, instead of pre-loaded, eliminates a VAT. You might think that you need expensive raw material X, when a slight redesign would allow you to produce a better quality product with cheap raw material Y. A slight, lean, re-design of your manufacturing layout might double throughput. Etc. It is a possibility, especially if you have a lot of levers.

However, Intel only had one. Cost-service tradeoffs were off the table, as the chip had to work. Computer chips have about the highest value-to-weight ratios that you can get, which leaves little or no room to improve distribution costs. Intel’s packaging has been getting smaller and smaller over the years, so little room was left in packaging. Once a chip is designed, the raw material needs are locked in (and it still takes years to bring a fundamentally new chip design to market). Due to the nature of chip fabrication, once the plant is built, the process can’t be (significantly) changed. A chip is a single well-defined component, so there’s no wiggle room where duties are concerned. All that was left for Intel was the inventory lever.

For it’s traditional chips, which sold for $100 or more, as compared to the $20 or less selling point for the new Atom chip (which was being designed for the low-cost mobile device market), Intel operated on a nine-week total order cycle time. During the first seven weeks there were typically a large number of order changes — over 90% of orders were changed after initial placement. This led to significant inventory builds as factories spent considerable time optimizing and re-optimizing the factory schedule. However, if Intel could move to a true “make-to-order” model, reduce cycle time to two weeks, plan within four days and allow no changes after that time, the small hit in factory utilization that might would result would be swamped by the reduction in inventory, storage, and handling for all the chips what were currently routed to the DC.

Even though the internal perception was that you can’t truly build to order in the chip industry, an Intel factory was chosen in Asia as the pilot plant and an iterative approach that incrementally ratcheted down from nine to (a little over) two weeks was implemented. The end result was that supply chain costs were brought down from about $5.50 per chip to about $1.40 and that the minor hit that was expected to factory utilization did not materialize.

But is it enough? While Atom chips may be selling for close to $20 now, the market will very quickly force the cost down to about $10 (or less) per chip as more chip makers focus their sights on the mobile markets. Intel expects to get its supply chain costs down to under $1.00 per chip in 2010, but if disruption causes chip prices to fall rapidly, that could still be in excess of 10% per chip! And while supply chain costs of 10% would be welcome in some industries, it’s rather high in the chip industry where they have been traditionally been around the 5% mark, or less.

While I think supply chain will be Intel’s saviour, I think their work is just beginning and that they will have to pull off multiple revolutions to keep Intel at the forefront. Especially since Intel’s legal bill is going to skyrocket yet again as it just agreed to pay $1.25 Billion to settle disputes with AMD and has just been accused of bribing computer makers. This is on top of the $1.45 Billion the E.U. fined Intel in May.

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‘Made in China’ Now ‘Made in Egypt’

I got a bit of flak for my last global sourcing post on how Some Companies Will Move To China but Others Will Move Closer To Home despite the fact that before the China revolution, Mexican manufacturing was all the rage — and the fact that Mexico still has capability and lots of capacity. While my antagonists may be right in that some verticals will stay in China due to the significant investments that have been made in China in those verticals, not all verticals have made the same level of investment as the high-tech vertical, for example. Also, as per this recent article in Industry Week, even China is adopting near-sourcing!

According to the article, so far, around 950 Chinese companies have set up operations in Egyptian free zones, which represents a total investment of about $300 Million. The breakdown is about 55% (manufacturing) industry, 33% (service), and 12% other (agricultural, tourism, etc.). This is because Egypt is now offering cheap labor (as salaries compete with those in China), investment incentives, and unrestricted exports. Furthermore, given that China is already quite comfortable with Africa (where it invested 7.8B in 2008, up from $0.5B in 2003), this is just the beginning.

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