Monthly Archives: November 2009

Some Companies Will Move To China, Others Will Move Closer To Home

As noted in this recent Supply Chain Management Review article on “the short tail” (near sourcing trends create winners and losers), analyst Jeff Rubin estimates that the cost of transporting imported goods into the United States is now equivalent to a 9% tariff on imports. Nine Percent! That’s a significant cost considering it’s supposed to be “low cost country sourcing”. In addition, the cost of fuel is now about 40% of carrier operating costs — it used to be about 15%. And the U.S. dollar has significantly decreased in value against the Yuan, Yen, and Euro over the last three years, close to 20%. In fact, the decrease is so significant that, as I noted in a recent post, the “United Nations Conference Is Calling For A New Global Currency”.

When you put it all together, near-sourcing is starting to look pretty good, and a lot of smart companies are going to do it. And they’re going to win big.

Furthermore, so are a number of other companies as well. Who’s going to benefit, besides the companies that near-source to save transportation related costs? The SCMR article points out three types of companies who can win big with the coming shift:

  • Near-Sourcing Transportation & Service Providers
    Truck and rail is poised for growth, and so are 3PL firms that manage near-sourcing transportation.
  • Warehousers and Packagers
    Companies that can offer warehousing and packaging services to near-sourcing companies are also poised for growth.
  • Domestic Raw Materials & Manufacturing
    Near-sourcing means local production, and that means local manufacturing and raw materials.

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Overcoming Cultural Differences in International Trade with India

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 and Global Supply Training.

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 India. We start by discussing each of the eight key cultural considerations outlined in our introductory post and 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.

India is the 7th largest nation by area and the 2nd largest by population, with over 1.1 Billion residents. Furthermore, its population is growing rapidly and it is expected to be the most populous nation by 2030. It’s middle class is constantly growing, and, at over 300 Million, roughly matches the entire population of the United States.

It also has a long cultural history, like China, with roots that go all the way back to the Indus Valley civilizations in 3,000 BC. However, unlike China, where Mandarin (standard Chinese) is spoken by over half the population, India, with its dozens of languages, and hundreds of dialects, has five languages in the top 20 (Hindu, Bengali, Telugu, Marathi, and Tamil) compared to China’s three (Mandarin, Wu, and Yue [Cantonese]). It makes for a bit of a fractured society. However, thanks to its colonial history (the British Raj), a large percentage of the upper class, and a growing percentage of the middle class, speak English. Over 10% of its population speaks English as a first, second, or third language … so there is a very good chance you will be able to conduct your business entirely in English.

  • Power Distance
    India is based on the caste system (which you should never discuss) and its values are still strongly held. They accept a hierarchy of responsibility and duty and, as such, they have a large power distance.
  • Uncertainty Avoidance
    Many Indians are risk-takers and experimenters. Overall, they have a moderate tolerance for uncertainty.
  • Individualism
    Despite the caste system, and the fact that tasks are a collective exercise in India, I’ve always found them to be very individualistic, once you get to know them. But there is a duality at work between the harmonious culture prescribed by the caste system and the major religions of Hinduism, Buddhism, Jainism, and Sikhism and what I see as a fundamental need to be themselves, especially after the colonization by Britain in 1858.
  • Polychronic vs. Monochronic Time
    While there is a strong tendency towards monocrhonic time in their business dealings with the west, they are historically a polychronic culture that does not work by the clock.
  • Personal / Impersonal
    They tend to be personal and open, probably because privacy is rarely indulged in or sought. That being said, within India at least, personal relationships may be dictated by the caste they belong to.
  • Buyer / Seller Rank
    Equality, more or less. In India, relationships are more important than they appear and the deal, if any, will ultimately depend on whether or not you build a relationship. (But remember that in negotiations, price comes last. When you agree on a price, the negotiation is done. All terms and conditions that you require must be agreed on first.)
  • Importance of Harmony
    Harmony underlies many of their major religions, and is important. Tasks, and decisions, will normally be group efforts. In addition, you may find them reluctant to criticize as they believe that business failure can be attributed to bad karma.
  • Importance of Face
    Always give them face. Although they may make little attempt to conceal their true feelings, face is very important to them.

Finally, as I strongly recommended in my first post, if you plan to start doing business with any new international country, including India, 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 India. 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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One out of Eight Organizations Get It. What Do We Do About The Other Seven?

According to AMR’s latest research, summarized in this piece on “driving supply chain transformation through the Chief Supply Chain Officer”, only one out of eight organizations have a CSCO, CPO, or equivalent that reports directly to the CEO.

The supply chain is the life-blood of a modern company but seven out of eight companies still don’t have a C-suite leader?! This is just crazy. What can we do? If you have any ideas, I’d love to hear them!

What Are The Requirements for Collaborative Innovation?

We all know that collaboration is important, because we know it gets results. What we don’t always know is what is required or how to get there. This recent article in Industry Week on Collaborative Innovation (CPG Leaders Discuss Best Practices for Manufacturers) provided some insight.

The article, which resulted from a survey of 30 global CPG manufacturers and retailers and a panel discussion with Coca-Cola, Aerosoles, and Unilever, highlighted four requirements for successful collaborative innovation in the manufacturing and retail sectors. While they may not form a complete recipe for success, they certainly provide a good starting point:

  • Non-Adversarial Mindset
    I would go one step further and say that you need to be able to trust the the party.
  • The Ability to Learn to Speak “Another Language”
    Every profession, and every group, has their own “language”. You are going to need to learn it or you might as well only speak English while your collaborator only speaks Mandarin as the communication gap will be just as broad until you do.
  • New Metrics
    The metrics that got you to today won’t necessarily be the metrics that get you to tomorrow.
  • Willingness to Share IP
    Everyone has to bring something to the table.

In addition, the article highlighted four key lessons that you should heed:

  • Look for Opportunities that provide Mutual Success.
    All parties have to be engaged. This is more likely to happen if it’s a win for everyone.
  • Conduct Collaborate Business Planning that Meets the Needs of Each Partner
    You need to focus on everyone’s needs, not just yours.
  • Build Trusted Relationships
    As I noted, you have to go beyond the non-adversarial mindset and actually work toward trust between all parties.
  • Get Your House in Order Before Attempting External Collaboration
    If you’re not ready to collaborate, your efforts will be for nought.

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Drew Hofler on “Supplier Liquidity Options when Credit is Still Frozen” (Part II)

Today’s guest post is from Drew Hofler of Ariba (Working Capital Solutions).

In our last post, we noted how the last couple of weeks have really driven home how important cash flow and access to credit is for suppliers right now as well as how the last couple of weeks have also served to illustrate the credit dichotomy between large, cash-rich, investment grade companies and their mid-sized & smaller suppliers in the current economic environment.

While suppliers are finding it difficult to access short term cash flow through traditional markets, they do have options and there are alternatives that are becoming more and more popular with both Buyers and Suppliers to reduce supply chain risk and inject liquidity into the supply chain.

Suppliers options really fall into two categories; collaboration/cooperation with their buyers OR working independently to create liquidity.

The first set of options requires a close working relationship between buyers and suppliers.

  • Discount Management
    Buyers who have stockpiled cash while the Fed Fund Target rate lies between 0% to 0.25% are earning next to nothing on that cash right now. At the same time, their suppliers can not access credit and are paying upwards of 12% to as high as 24%+ to accelerate their cash flow through high cost credit vehicles. It only makes sense for Buyers and Suppliers to take advantage of this rate arbitrage to collaborate on early payment terms to give suppliers access to the liquidity pools of their buyers at rates that lower the supplier’s cost of capital while at the same time significantly increasing Buyer’s short term return on cash. Companies may find the best investment of their cash is not holding it or buying down debt, but paying suppliers early if the terms of early payment represent a favourable ROI, typically in the form of Discounting. Companies can meet their suppliers in the middle through collaborative networks that enable dynamic discounting, where a supplier’s desire for early payment can meet a Buyer’s desire for favourable return on cash, resulting in a win-win situation.
  • Supply Chain Financing
    Alternatively, companies can continue to hold on to cash while at the same time helping suppliers get paid early. Rather than simply beating suppliers over the head with terms extensions, large companies can utilize third party financing to allow their suppliers to access early payment, often at costs of capital far lower than they could get otherwise. Utilizing this type of financial product, both buyers and suppliers can win, turning “bare-knuckle negotiations between companies and their customers and suppliers” into the handshake of a win-win agreement. (WSJ article)

The other alternative is for suppliers to control their own destiny and look at ways to monetize their receivables. Many have done this before with traditional factoring options, but found they came at a heavy price and become somewhat of a last resort. And as the CIT bankruptcy underscores, there is significant risk to suppliers in being bound to one financing provider. But, as it has been covered before, options like The Receivables Exchange (a partner on the Ariba Supplier Network) can yield the same results — cash flow for outstanding receivables — but extremely quickly and at a lower price since the market bids on the receivables to drive down the cost through an automated system in real-time.

  • The Receivables Exchange (TRE)
    Even with Buyers implementing draconian measures (such as Anheiser-Busch, who “told suppliers it would take as many as 120 days to pay its bills from 30 days previously“, as per this WSJ article), suppliers are no longer completely at the mercy of big buyers, stingy banks and single-source providers like CIT. New technology-based options, like TRE, opens the door for suppliers to access broad segments of the capital markets they otherwise could not access, as capital providers compete to pay them early. Even when banks are curtailing credit to many and making it more expensive to all, there are billions of dollars waiting to invest in the receivables, which are the greatest assets of many small firms. Technology platforms like TRE open the door to access that market and can provide much needed liquidity in a competitive environment that drives down the cost of capital for the supplier and reduces their risk of exposure to a single capital source.

There is no doubt that the credit and cash flow situation is difficult for suppliers in this economy. And while credit markets may be thawing, small and medium size companies are still by and large frozen out. But the same dynamics that are causing so much distress are also opening the doors to new cash flow alternatives that can lower suppliers cost of capital, reduce the liquidity risk in the supply chain and provide Buyers and Suppliers alike with win-win options.

Thanks, Drew!

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