Daily Archives: May 11, 2011

Disadvantages of Home Country Sourcing

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.)

I’m afraid it was a Republican who used the line “There you go again” in a US Presidential debate. But … there you go again.

I have a few specific comments on the doctor‘s article on the advantages of home country sourcing:

  • Lower freight costs:
    Often true. However, consider that the distance from nearly all of Mexico (except the Zihuatenejo area) to Chicago is less than the distance from San Francisco to Chicago. And Shanghai is closer to San Francisco than Rio is.
  • Air freight is too expensive except for electronics:
    Often true. However you should do your own risk analysis. If you are considering ocean freight, also get an air freight quote. See what percent of the volume would have to go by air before the lowest cost supplier is no longer lowest cost. I’ve seen analyses showing more than 100 percent would have to ship by air.
    Incidentally, this is the basis of risk analysis during the sourcing phase. Find the lowest landed cost supplier and then evaluate several risks to see how much would have to go wrong before the lowest cost supplier is no longer the lowest cost. Consider if the same thing would happen with the second lowest cost supplier. If possible, assign costs to risk-mitigation techniques.
  • Fuel Prices increasing:
    True. That will raise costs for all forms of transit. It will be a smaller increase for ocean freight than it would be for air or truck.
  • Lower inventory Times:
    Having to hold safety stock is a risk mitigation technique. Do a risk analysis and see how much safety stock you would have to hold to make sourcing from the lowest cost supplier the wrong decision.
  • Time Zone Advantages:
    That’s right, unless you are in about the same time zone. It is tiring to make and receive those phone calls at odd hours. On the other hand, during development, there are advantages to having a supplier working during your night shift.
  • Labor productivity:
    Possibly true. The US has the world’s highest labor productivity. However, it might not apply to your product. And labor productivity isn’t the only factor affecting cost. Purchasing skills at the suppliers is another.
  • No Culture Clashes:
    That’s just silly. Try telling your boss that you can’t source from country X because you can’t deal with cultural differences. In most companies, proclaiming ignorance isn’t the road to success unless you state it as part of a training request. It’s a bit self-serving for me to suggest this but there are international purchasing training programs available. Good ones will help you understand the differences between domestic and international purchasing. Cross cultural skill is one of the most important.
  • Low cost factory repair:
    It might well be true that it’s cheaper to repair product at the manufacturer. That’s of course true for domestic suppliers too. But wouldn’t you require the supplier to cover transportation costs for returned goods? And why are you buying from a supplier from whom you expect failures?

It’s the easiest thing in the world to raise objections to buying outside of your home country. Unless you make that decision on a product by product basis based on facts and unless you separate costs from risks, you aren’t doing your job right. At the very least, any professional buyer should know the costs of products, shipping, and duties from major potentially supplying countries.

Dick Locke, Global Procurement Group.

Hackett’s Myths and Realities of Global Growth

After a keynote presentation by David Kepler of Dow, Chris Brennan and Sean Kracklauer dove right in and hit the attendees hard and heavy with Hackett Research focussed on the key enablers of global growth. A key part of the presentation was focussed on the myths and realities of the three key enablers of global growth and blasting through the ill-conceived perceptions that must be abolished before companies can achieve world class performance. Here are the three big myths for each area.

Global Leverage

Myth Reality Proof
Our organization is too complex or unique to manage end-to-end. Most processes can be designed and managed end-to-end. (At most, 20% of processes will need some localization.) 80% of top performers are either on the path or already there.
Most companies are only beginning the globalization journey. Most companies have their globalization initiatives well underway. Within 2-3 years,

  • 67% of top performers will have predominantly or fully global policy & strategy processes,
  • 50% of top performers will have predominantly or fully global functional management processes,
  • 66% of top performers will have predominantly or fully global technology and support operations, and
  • 62% of top performers will have predominantly or fully global process design.
The costs to move to end-to-end processes is prohibitive. The costs of fragmentation far exceed the cost of transformation. Hackett has found that transformation and consolidation will save a $10B company 44% in the finance organization alone!

Better, Broader Information

Myth Reality Proof
Enterprise Peformance Measurements (EPM) addresses our enterprise issues. EPM is mostly financial and historical. That’s why 59% of world class companies use analytics in proactive decision making vs. 44% in the peer group.
Shortening planning cycles will get us to world class performance. Emphasis must shift from calendar to event driven decision making. That’s why 67% of organizations now use rolling forecasts.
Our company requires ever more information to make a decision. Companies require less, but more targetted information, to make a decision. That’s why there is 38% utilization of self-serve drill-down dashboards and reports in management by top performers vs. 8% in the peer group and 50% utilization in operations by top performers vs. 23% in the peer group.

Agile Execution

Myth Reality Proof
Centralization & Standardization erodes service quality. Centralization & Standardization actually reduces cost and improves service quality. We’re talking a 2X reduction in cost and a 5X improvement in quality!
Deep functional expertise is enough for global business services success. Global business services success requires a value mindset. The proof is in the pudding. World class organizations meet 100% of cost targets vs. 61% in the peer group, 100% of quality targets vs. 66% in the peer group, and 94% of delivery targets vs. 75% in the peer group. In addition, world class performers acheive more than 40% savings 73% of the time vs. only 33% in the peer group.
Optimization of technology and process will get us to world class performance. Without employee engagement, you’re only half way there! Not only are talent management leaders 16X more likely to link employee engagement to business impact, but there is 21% higher employee engagement in double-digit growth companies when compared to single-digit growth companies.

In other words, blast through the myths and you’re on the path to double digit growth.

Cargo Costs Getting You Down? Go Fly a Kite!

It takes a lot of fuel to carry a (post/new) Panamax vessel across the ocean and the 3,001 to 14,500 TEU (twenty-foot equivalent units) of cargo they contain. Even though they might be more fuel efficient than air transport, and account for 90% of international trade, they’re still a very dirty mode of transportation. A single contain ship can emit more chemicals than 50 Million cars and the ocean shipping industry as a whole, which is mostly unregulated from a clean-air standpoint, emits 6,000 times the emissions of every single automobile on the planet. (Source)

That’s why I was thrilled to see this article over on Industry on how Cargill is Flying a Kite to Reduce Fuel Consumption. According to the article, Cargill is in the process of installing a 320 square meter computer-controlled kite on an ocean cargo ship that will function 100 to 420 meters above the ship and generate enough propulsion under ideal sailing conditions to reduce fuel consumption by 35%. Working with German-based SkySails, Cargill plans to have the kite based propulsion up and running by 2012. Given that Cargill alone transports more than 185 Million metric tons of cargo a year, this will have a significant impact on its carbon footprint.