Category Archives: Dick Locke

Is China Starting to Clean Up its Act?

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.)

There’s an interesting discussion going on over on Spend Matters about whether or not China is manipulating its currency. Well, I think it’s interesting because I’m participating. I don’t believe pegging a currency to the US dollar meets a normal definition of “currency manipulation.” Your mileage may vary, of course. The discussion can be found in last Friday’s Rant on Spend Matters (Should We Rethink Free Trade).

One of the other participants brought up the issue of China’s poor environmental standards. That’s true, as has been true of all developing countries. Back in the late 60s, Tokyo was one of the more polluted cities on earth. Traffic police wore oxygen masks. Electronic signs in Ueno and other places posted the CO and CO2 levels in the air. By the mid 80s the place was pristine. No outside pressure was brought to bear. The Japanese just got fed up and fixed the problem. It usually takes some degree of economic development before this starts to happen.

I’ve always hoped the same thing would happen in China. It looks like it’s starting to happen. I’m glad, because China is too big for the environment to continue to accept their volume of pollution. Most importantly, it’s happening because of internal Chinese policies, not foreign pressure. Thomas Friedman has a column in today’s New York Times titled “The New Sputnik“. It’s about Red China becoming Green China. (You can read the opinion for yourself.) Friedman is less than totally optimistic, saying pollution is going to continue in parallel with development with solar and wind industries. He also points out that the US seems to be missing this market and most solar cells are coming from China already.

Dick Locke, Global Procurement Group and Global Supply Training.

Uh-oh … Looks like Chinese tire manufacturers are going to take a hit for health reform

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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 “U.S. Adds Punitive Tariffs on Chinese Tires” (NY Times), Edmund L. Andrews states that:

The tariff, which will start at 35 percent this month, is a victory for the United Steelworkers union, a crucial ally in President Obama’s health care overhaul.

and that

the decision signals the first time that the United States has invoked a special safeguard provision that was part of its agreement to support China’s entry into the World Trade Organization in 2001. Under that safeguard provision, American companies or workers harmed by imports from China can ask the government for protection simply by demonstrating that American producers have suffered a “market disruption” or a “surge” in imports from China.

It also looks like the Times has an editing problem. It’s not a punishment at all, unless you regard a penalty for mere success as punishment. The tariff isn’t connected to any misdeed by a Chinese company.

And the connection to health reform is rather tenuous. The union would continue to support reform even without this tariff.

At least this step is better thought out than former President Bush’s tariff on Chinese steel. That wasn’t connected to any misdeed either. Because the tariff applied to the steel only, and not to products containing the steel, it made it more efficient to build steel-containing products outside of the US. I don’t think this one will hurt the US car industry like the previous tariff hurt US steel fabricators.

It’s an unfortunate trend though. Rather than take the time to build a case against Chinese tire manufacturers on the normal grounds (dumping, safety violations, pollution) they took the lazy way out. There’s no way for the Chinese companies to defend themselves. The only response can be retaliation.

Dick Locke, Global Procurement Group and Global Supply Training.

It’s Good to Have an Entire State on My Side

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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.)

Back on August 1 of this year, I posted an article that included these paragraphs:

 

Here’s the tactic for the day.

Run a grammar check on your contract using Microsoft Word with “check readability statistics” turned on. Look for a “reading ease” score of 40 or higher and a grade level requirement of 11th grade or less. Remember, the document probably won’t be in the supplier’s language. Once you achieve that, then print the document in an attractive format. Pay attention to typography and white space. Make it easy to read.

 

If your lawyer struggles with this, get him or her a copy of the SEC’s A Plain English Handbook . It has lots of guidelines and tips. Another good source is Plain English for Lawyers, which you can find on Amazon.

You probably read that advice here first.

It was good to get reinforcement from the State of Rhode Island. On August 19th, The NY Times published an op-ed article titled Plain English is the Best Policy. The article said that Rhode Island is going to require health insurance policies to be written at the eight grade level. Apparently that’s the average adult reading level in Rhode Island. The State will determine a contract’s education level with the same Flesh-Kincaid score that I recommended. It’s probably built in to your word processing software.

Here’s a “before and after” from the article:

Before:
In the event a third party, including your employer/agent, is or may be responsible for causing an illness or injury for which we provided any benefit or made any payment to you, we shall succeed to your right of recovery against such responsible party. This is our right of subrogation. If you do not seek damages for your illness or injury, you must permit us to initiate recovery on your behalf (including the right to bring suit in your name).

That paragraph required 13.5 years of US education and got a reading ease score of 45.

After:
Your injury or illness may have been caused by someone else. If so, we can collect from that person any claims we pay on your behalf. For example, if we pay for your hospital stay, we can collect the amount we paid for your hospital stay from the person who hurt you. We can also collect payment from that person even if he or she agreed to pay you directly or has been ordered by a court to pay you. If the person who caused your injury has already paid you, we can collect from you the amount he or she has already paid to you. This is called subrogation. In addition, if you do not try to collect money from the person who caused your injury, you agree to let us do so in your name.

This material requires 7.9 years of education and the reading ease score is 75.

My advice had to do with writing an international purchasing contract. Perhaps I set my standards too high. I thought 11 years was an appropriate level.Here’s a more pertinent example I use in my training programs

Before:
Supplier will not make any changes to the Products or to processes supporting Products which have been certified by Buyer, without Buyer’s prior written consent, such consent not to be withheld unreasonably. In the event of such changes, at Buyer’s discretion Supplier will either: (i) replace all such Products with Products approved by Buyer and reimburse Buyer for all actual and reasonable expenses incurred that are associated with such Products replacement (including expenses associated with problem diagnosis, testing, and replacement of Products in normal inventory, finished goods inventory, distributors inventories, and with customers); or (ii) credit or refund Buyer the Price of the Products. In the event of upgrades to the Products, Supplier will offer Buyer such upgrades as soon as commercially available.

 

That’s 12th-grade material. Reading ease is an abysmal 15.

I rewrote this in conjunction with a client’s attorney who was very nervous about my rewriting her work. I shortened the sentences, eliminated passive verbs, added more bullets and numbering and removed the distracting mid-sentence capitalization of common words.

After:
Unless buyer consents in writing, supplier will not:

  1. Make any changes to products, or
  2. Make any changes to supporting processes that buyer has certified.

Buyer will not withhold such consent unreasonably.

If supplier makes such a change without buyer’s consent, buyer may chose one of the following two options.

  1. Supplier will replace all such products with products that the buyer approves. Supplier will also reimburse buyer for all actual and reasonable expenses that buyer incurs in replacing the products. Expenses include expenses associated with problem diagnosis, testing and replacement. Buyer may require replacement of products that are in normal inventory, finished goods inventory, distributor inventory, and with customers. OR
  2. Supplier will credit or refund buyer the price of the products.

If supplier upgrades products, supplier will offer buyer such upgrades as soon as commercially available.

This requires 10.3 years of education and got a reading ease score of 43.7.

Enjoy working with your attorneys.

Dick Locke, Global Procurement Group and Global Supply Training.

Blogging on International Contracting?

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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.)

After I made a brief comment on international contracting, the doctor suggested that “maybe I could write an expert piece about international contract construction?“.Well, that piece would be way too long for a blog format. I take about an hour on this topic in face-to-face seminars and that’s after a session on cultural differences.

What I can do in this format is give my philosophy and a tactic or two.

Why do people write purchasing contracts? (And not everyone does.) I see two reasons. First is to get a written document that describes what each party is going to do. Second is to enable bringing in a powerful third party (a court) to get a company to do what they might not do otherwise, such as pay liquidated damages.

When you cross borders, cultures and language barriers, the first reason becomes more important than it is domestically. The second reason becomes less practical. Adjudication and enforcement can be awfully difficult and expensive.

That means first of all, it’s much more important to get a good supplier than to get a good contract. Second, it means that the contract should be written to help with communication between the parties, not hinder it. It should be clear and easy to read (no size eight gray type please.)

Here’s the tactic for the day.

Run a grammar check on your contract using Microsoft Word with “check readability statistics” turned on. Look for a “reading ease” score of 40 or higher and a grade level requirement of 11th grade or less. Remember, the document probably won’t be in the supplier’s language. Once you achieve that, then print the document in an attractive format. Pay attention to typography and white space. Make it easy to read.

If your lawyer struggles with this, get him or her a copy of the SEC’s “A Plain English Handbook”.  It has lots of guidelines and tips. Another good source is “Plain English for Lawyers,” which you can find on Amazon.

As a final note, I just happen to be doing my one and only public Global Supply Management seminar for 2009 in the Chicago area on August 11-12. Check this link for details.

Dick Locke, Global Procurement Group and Global Supply Training.

What’s all this talk about risk?

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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.)

The issue of global supply chain risk gets a lot of attention nowadays, and it certainly should. However, I’ve seen a few silly statements. One is that global sourcing is sooo over. Another is that nobody should buy in China. (OK, I exaggerate, but just slightly.)

Here’s my perspective:

First, we need to clarify what “sourcing” is. Wikipedia says “In business, the term word sourcing refers to a number of procurement practices, aimed at finding, evaluating and engaging suppliers of goods and services“. That’s the definition I’ve always used, too. It doesn’t mean actually buying, it means looking around. Global sourcing just means looking around globally.

With that definition, you can see what sourcing globally gets you. It gets you intelligence on the prices, costs, and viability of potential sources all over the world. In other words, it gets you a potential reward in the form of the lowest supply costs. Rewards in purchasing, as in investing, go hand in hand with risks. You can’t evaluate the risks without knowing the rewards. Fortunately, in purchasing higher rewards don’t always mean higher risks.

Let’s suppose a global sourcing program shows that the lowest landed cost suppliers are in some place various gurus find risky and you can save a tremendous amount by your company standards if you actually buy there. Would you walk away from a deal just because it’s risky? I hope not. That’s not the road to success. The computer industry ships about $30 billion dollars annually from China to the US. Quality and intellectual property problems are rare. What are some of the steps computer companies take? I can name four: Include quality experts in sourcing evaluations right from the start, buy only from foreign invested companies in China, have not just feet on the ground in China but trained brains too, and carefully reference-check for intellectual property issues before proceeding. It helps, too, that products such as laptop computers are “economically dense” in terms of cost per kilogram so that air freight makes sense.

Philosophically, when you evaluate risk during a sourcing process, you are not comparing the risk of one choice to a mythical risk-free world. You are comparing the risks of choosing one supplier to the risks of choosing (or staying with) another supplier.

Some risks are digital or binary. They are go no-go tests that should be applied before a potential source is even allowed to quote. A propensity to steal intellectual property is one such test. Lack of adequate quality standards and practices is another. But please don’t claim that no supplier in a country can meet those standards.

Other risks are more like analog. You can measure their severity. The best way is to see how often or how much or how often a situation would have to happen before what looks to be the lowest cost supplier is no longer lowest. Exactly how much would a supplier’s currency have to appreciate before it becomes (in hindsight) the wrong choice? Exactly how often would you have to ship by a premium method at your expense before your lowest cost supplier is no longer lowest? While you’re doing this remember that the second and third lowest cost suppliers have their own risks too. If volatile fuel prices (or cap and trade programs) cause one supplier’s cost to go up, they will also affect other suppliers’ costs.

I have a concern is that every company has strong momentum to stay with their existing supply base. If consideration of risk is not done well, it becomes just another excuse to keep on doing what the company has been doing all along. I saw it at HP when I was developing its global sourcing program. It took a few years to overcome.

Dick Locke, Global Procurement Group and Global Supply Training.