Daily Archives: January 28, 2011

And the Siemens Bribery Scandal Continues

Siemens, who just a few years ago was found guilty of serious bribery and fraud under the FCPA and who was required to to pay a record $800M in fines and disgorgement of profits, is facing legal action again. Already found guilty of fraud that spanned at least half a dozen countries, including Germany, Italy, US, UK, Switzerland, Russia, and Nigeria, and dozens of subsidiaries, Siemens is now facing legal action in Greece after an 11-month parliamentary investigation that estimated the cost to Greek taxpayers of the alleged bribery at 2 Billion Euros.

The bribery, which allegedly took place between 1997 and 2002, and which affected contracts and security prior to the 2004 Athens Olympics, included bribing of Ministers. According to this article from BBC News, a former Transport Minister told the investigating committee that he had accepted the equivalent of 100,000 Euros in 1998.

It just goes to show the importance of having an FCPA Compliance Strategy in place.

Economic Density and Flexibility are Critical to Your Supply Chain, Part II

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

In yesterday’s post I discussed how I’d just read the umpteenth recent article saying that buying from China is on its way out and that, like all of its predecessors, the article had a grain of truth but suffered badly by being far too general. The reality is that China was never the right place for some purchases and will be the right place for others for a long time to come.

In order to understand what purchases from China make sense, and what purchases don’t, one needs a framework. The framework I use is based on forecastability, which divides products into functional and innovative products, and economic density. Given these two dimensions, one can derive the following two by two matrix.

  Functional Products Innovative Products
High Economic Density 1 2
Low Economic Density 3 4

As indicated in yesterday’s post, the best country and logistics selection strategy depends on which quadrant one finds oneself in.

In quadrant 1, you could afford air transport but you won’t often need it. You should plan around surface transport and expect to occasionally have to use some emergency air freight. Here you should go for the world’s best suppliers. “Best” means lowest total landed cost, among other criteria such as quality and environmental aspects.

In quadrant 2, you must to use air freight for flexibility. Again, you should look for the world’s best suppliers. As long as there is a big international airport near you and the supplier, no place in the world is more than a day or two from your operation. “Best” still includes landed cost and the other criteria but now includes supplier flexibility.

In quadrant 3, you can’t afford air freight, so goods will move by ocean or some other surface method. You should look for the lowest landed cost suppliers but will probably find that freight costs will constrain your decision to relatively nearby suppliers.

In quadrant 4, you should stay close to home. You can’t afford air freight and you lose too much flexibility using ocean freight. These are the products that never should have been purchased from China in the first place. They include fashion goods and goods with a high degree of seasonality such as Christmas gifts. “Close to home” may not mean in your own country, of course. For example, the entire country of Mexico is closer to Chicago than San Francisco is. This is where the “nearshoring” makes sense.

Finally, what will not leave China soon? For one thing, electronic assembly work will be there a long time. The quest for best suppliers has led to a concentration that only China has and perhaps only India can equal. Foxconn alone has more than a million employees in China. To put that in perspective, the CIA World Factbook says that Vietnam has a labor force of 48 million people. Of that, 15% work in “industry.” That’s about 7.5 million industrial employees. Just to resource to Vietnam Foxconn would require employing 13% of Vietnam’s current industrial labor force. That’s not going to happen anytime soon.

Thanks, Dick.