Category Archives: Dick Locke

Was it Nearshoring? Or Bullwhip Effect?

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.)

China’s exports in February were up 45% from last February. (LA Times)

My opinion: the rapid decline and unsustainable increase in Chinese exports were from the bullwhip effect of a long supply chain. A small change in final demand can cause huge swings in upstream supply.

This mainly applies to those using ships to transport from China. If you can use air, China isn’t much further (in hours) than Mexico.

Dick Locke, Global Procurement Group and Global Supply Training.

Simplified Contracts, Part 3

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 in August I posted a blog suggesting that contract language should be tested for readability. I pointed out that it’s especially important for international contracts, because the chances for confusion are higher than when both parties are in the same country. (The original post Blogging on International Contracting, is in the archives). I suggested using your word processor’s grammar checker with “show readability statistics” turned on. The Microsoft Word grammar checker gives two figures: Readability (high scores are good) and required grade level (low scores are good). I suggested shooting for an 11th grade education level.

Then, in the same month, the State of Rhode Island said the same thing in a different context. The state is requiring health insurance policies to be written at an 8th grade level or lower. They suggested using the same readability checking tools, as I discussed in my post on how It’s Good to Have an Entire State on My Side.

Since then a couple more things happened.

On a personal level, my homeowner’s association asked me to sign a liability release that scored a perfect zero on readability. I balked, and in preparation for discussions with the association’s attorney I found an archive of Plain English columns from the State Bar of Michigan.

It’s a series of columns in a magazine aimed at lawyers that teaches the rudiments of good (and plain) English writing. The articles cover everything from the nuts and bolts of using Word’s grammar checker to examples of good and bad writing to suggesting a 10th grade standard. I’m glad to see that at least one state’s bar association is getting on board. It’s good ammunition if your attorneys balk at simplifying their writing.

Then I ran across this article on how to Test Your Procurement Skills (By) Find(ing) the One Word Death Trap over on The Vendor Management Office Blog. In it, Stephen Guth challenged readers to find the one word in a contract clause that made it useless. Full disclosure: I didn’t find it.*1 I was so irritated by the writing that I had trouble focusing on the content. The average sentence was 73 words long. It scored a 12 on reading ease and requires an astronomical 23 years of education.

Two thoughts: First, was this written by a supplier? It looks like it. Purchasing people should not be working from a supplier-written contract. Of course it does happen occasionally, but the buying company should be writing the contract for anything that it purchases frequently. Second, why should someone have to read this material? Shouldn’t a procurement department require contracts to be written in plain English?

I expressed these thoughts to Stephen Guth, the author of the blog, and he disagreed with me. He thought that a buyer who insisted on plain English would be whispered about, laughed at and/or fired.

Of course that is possible in some companies. But it’s all a matter of leverage and negotiating power. Certainly if high level purchasing execs are not supportive of a plain English effort, a buyer will have a difficult time. Certainly a purchasing department will have more leverage in some circumstances than others. The chances of success depend on the relative strength of the parties in the negotiation.

What to you think? Have any of you started to insist on clarity in your contracts?

Dick Locke, Global Procurement Group and Global Supply Training.

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*1 Editor’s Note: the doctor couldn’t find it either, which is to be expected since a PhD is only equivalent to 21 years of education. (12+4+2+3=21).

Buying Across Borders … How Hard Could It Be?

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.)

Professors Hausman and Lee of Stanford University have written a paper titled “How Enterprises and Trading Partners Gain from Global Trade Management: A New Process Model for the US-to-China Trade Lane”. (Free registration required.) It’s been getting a lot of attention on the supply management blogs.

In the paper, they present a flow chart of 106 process steps needed to identify a potential supplier and to place, receive and pay for a cross-border order. One hundred and six! Wow! How can a two-day purchasing training program cover that? Well, I dug into their flowchart and here’s what I found:

  • Six steps are ‘optional’ and are mainly error checking and correction
  • Thirty-one are necessary for domestic transactions as well as international transactions. They cover issues such as issuing a PO, counting the goods and putting the goods into stock.
  • Seventeen are only necessary if the buyer is using letters of credit. (Shame on those buyers.)
  • Seven are only necessary if there is special “trade financing” arranged through a bank or other lender.
  • Fourteen are very specific to China. The supplier executes all of those steps.
  • One only applies to quota goods
  • One only applies to specific consumer products

That leaves 29 steps that apply to all global transactions and wouldn’t be needed for a domestic transaction. The supplier executes seven of them, and the buyer or the buyer’s agent executes 22. The training aspects seem much more manageable than the 106 step statement implies. Actually, most of those process steps are executed by a freight forwarder and a customs broker. Training for buyers mainly consists of explaining what those companies do and what an appropriate standard of service is.

I also noticed that the chart completely neglects one very important issue: Exchange rate risk protection. That will require close coordination inside the buyer’s company. They probably left it out because the yuan is pegged to the US dollar. Overall, I wasn’t very impressed with the chart. The overall paper extolled the virtues of a Global Trade Management system. That’s a good idea for any company with significant international purchasing.

Dick Locke, Global Procurement Group and Global Supply Training.

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Nearshoring? Not on this planet. At least not yet.

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.)

One of the predictions (or purported trends) we heard a lot about in the last few years is “nearshoring”. Google has 78,000 references to the term. Supposedly, trans-Pacific supply chains are so unreliable and complicated that US businesses are leaving their Chinese suppliers and moving to closer areas such as Mexico. If that were happening, I expect we would be seeing Mexican imports to the US being an increasing percentage of Chinese imports. Here’s the data. See for yourself. There was a surge in early 2008 but it went away. The data source is the U.S. International Trade Commission.

 

Dollar

value of US imports from Mexico as a percent of imports from China
2007 2008 2009
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
68 67 62 64 72 71 59 57 59 59 57 n/a

 

Here’s why I think many predictors are going astray:

First, they don’t differentiate between goods that usually travel by air and goods that travel by ocean. If your goods travel by air, an 8000 mile supply chain is only 12 hours longer than a 2000 mile supply chain. I agree that trying to have a long flexible supply chain is only possible if air freight is economically feasible. The economics work for laptop computers but not for clothing.

Second, the predictors overlook the main reason companies buy from a given country … that’s where the best suppliers are. You shouldn’t just say “I’m moving from country X to country Y” unless country Y has equal or better suppliers. (“Best” here means best against criteria that include landed cost.)

Economics Professor Michael Porter wrote a book called The Competitive Advantage of Nations. It has a great chapter on how countries become centers of excellence in building things. He says it requires four conditions:

  1. High degree of domestic competition
  2. Related and supporting industries
  3. Demanding customers
  4. Adequate factor conditions

Too many predictors focus on condition four, factor conditions. That includes labor, overhead and material costs, infrastructure efficiency and overall business environment. The other three conditions are also necessary. If factor conditions were the only criterion, Japan never would have become excellent in building cars.

I’m not saying that nearshoring will never happen. It will happen first in purchasing products that can’t be shipped by air and require supply flexibility. For any product, today’s best countries will not be best forever. Some external shocks to the system can speed up the process. If China allows the yuan to float, costs for the Chinese content of China’s exports will go up with respect to the US dollar. If energy costs soar or emissions from aircraft or ships are tightly controlled, the “best” countries could change. Both of these changes are likely to happen sometime.

The typical purchasing company cannot solve these problems. You can’t generate a nearby supply base for the parts needed to manufacture your supplier’s products if it doesn’t exist already. Because of that, “insourcing” may often be a better solution than nearshoring. If starting to manufacture something you are now buying isn’t practical, the company best positioned to solve the problem is your current supplier. I suggest you start probing your Chinese supply base about what they would do if the yuan increases in value. Farsighted Chinese companies are already looking in Africa and Latin America for both sourcing and manufacturing.

Dick Locke, Global Procurement Group and Global Supply Training.

Immigrants in the US Workplace

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 US Census Bureau recently announced that one out of six people in the US workforce is foreign born. In four states it’s more than one in four and in one state it’s more than one in three.

Here’s an excerpt from the NYTimes article Census Finds Rise in Foreign Workers:

 

Nearly one in six American workers is foreign-born, the highest proportion since the 1920s, according to a census analysis released Monday.

Because of government barriers to immigration, the share of foreign-born workers dipped from a 20th-century high of 21 percent in 1910 to barely 5 percent in 1970, but has been rising since then, to the current 16 percent.

 

In 2007, immigrants accounted for more than one in four workers in California (35 percent), New York (27 percent), New Jersey (26 percent) and Nevada (25 percent).

Do you like this? Does it make you nervous? Here’s an observation from someone in the training business. (That would be me.) A while back I had two extremely large computer companies as clients at the same time. Even though the companies were in the same field and about the same size (and had been sequentially managed by Gene Richter [The Man Who Made Supply Strategies Work]) there were big differences between the two.

I usually ask if any of the seminar attendees were born in a different country than where the seminars take place. I enlist those people to help in discussions of cross-cultural issues. One of the companies had a high proportion of immigrants or other temporary foreign residents in its US procurement staff. In the other, non-natives were extremely rare and those who were born elsewhere seemed almost embarrassed about it. The seminars at the company with a lot of immigrants was much higher in enthusiasm, spirit and level of discussion that the other. At one of the “all American” company’s seminars, when I suggested getting to an unfamiliar country a day early and touring a museum or some other cultural location prior to engaging in business discussions, a person chided me saying “We don’t do that at (company name).” Exactly, and it showed.

I suggest US companies make an effort to recruit people from other cultures. The ideas they bring will broaden horizons.

Dick Locke, Global Procurement Group and Global Supply Training.

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