Originally posted on on the e-Sourcing Forum [WayBackMachine] on Thursday, 23 August 2007

Design for Sourcing

Successful innovation designs for sourcing. Waiting until the prototype phase, after engineers have made material and component choices, increases the chances that all designed-in-costs will be locked in. Considering that the Defense Advanced Research Projects Agency (DARPA) estimates these costs to be, on average, 80% of product costs, this is significant. Furthermore, failure to involve procurement early could risk increased direct material costs, unacceptable risk in supply, unexpected component obsolescence, missed regulatory compliance, the inability to expand into new geographies, the lack of ability to take advantage of sourcing leverage, increased quality inspection costs, raised manufacturing costs, and missed launch dates.

New Product Development is more challenging now than ever before since the majority of products require expertise across disciplines and organizational boundaries. Most products are so complex that it often requires cross-disciplinary teams across the supply base to design, prototype, and bring a product to market. Furthermore, innovation, which is as much as broadening the product development view as it is about managing the product lifecycle, requires input from almost every business unit.
Managing this innovation is no easy feat, but great results are much more likely if one follows the best practices of best-in-class companies that dedicate leadership, centralize control, standardize processes to capture and leverage results, employ technology to facilitate the process, and measure constantly.

Innovation on Demand

Innovation on Demand is an advanced version of TRIZ, Teoriya Resheniya Izobretatelskikh Zadatch, a topic I first discussed here on e-Sourcing Forum in “Purchasing Innovation II: TRIZ”. TRIZ is a methodology, tool set, knowledge base, and model-based technology for generating innovative ideas and solutions for problem solving and the advanced version employed in innovation on demand, sometimes known as invention on demand, is important because, as pointed out in this CPO Agenda article, it can be used by CPOs who want to help their firms escape the clutches of patent-protected, monopolistic suppliers.

Furthermore, as CPO Agenda points out, invention on demand can do more for a company than just improve terms from a patent-protected supplier or bypass it altogether. “It can replace expensive components with cheaper ones. It can generate product improvements in combination with target costing. It can be applied to any technical problem, whether for reasons of technical improvements, the value-price ratio, or both.” The process as a whole can considerably boost a company’s performance. As an example, CPO Agenda points out the Korean conglomerate Samsung where TRIZ has become part of Samsung’s culture. In 2000, Samsung’s market capitalization was less then a quarter of Sony’s. Today, it is almost double.

Home Country Sourcing

A lot of companies have hopped on the low-cost country sourcing bandwagon, so many so that many low cost countries are not low-cost anymore. This has inspired some of the more progressive organizations to focus not on low cost country sourcing, but on right cost country sourcing. Right Cost Country Sourcing is a process of not only selecting the right country, but selecting the right country quickly and, more importantly, being able to reverse that decision and select a new country should circumstances change.

However, the most progressive organizations will be those that find ways to source at home and do so competitively on a global basis. After all, when an organization looks at the global risks the World Economic Forum is tracking, it sees retrenchment from globalization, failed and failing states, interstate and civil wars, the US account deficit, and a potential Chinese economic hard landing topping the economic, geopolitical, and societal risk watch lists. This clearly indicates that any organization that can source competitively in its own country definitely has an edge over the competition, considering any one of these risks could bring production to a halt in any organization unable to effectively mitigate such risk.

Visibility First, Consolidation Second

Some organizations hear the oft-quoted fact that, typically, 80% of spend is with 20% of suppliers and go on a consolidation spree, eliminating as many suppliers as possible as fast as possible to get to a number where all supplier relationships can be tracked and managed and associated risks identified and mitigated. This sounds great in theory, until the organization realizes it just cut the only supplier capable of producing the custom GPS chip for the new model of mobile phone it planned on introducing next year, or, even worse, it cut the only supplier capable of producing the guidance chip for the top-of-the-line SUV it is currently manufacturing.

The reality is that most organizations that do not do proper supplier relationship management and proper spend management probably have three to five times (if not more!) suppliers than they need, but the reality also is that until such organizations have visibility into who their suppliers are, what they are supplying, where it is being used, and how they are performing, they are not in any position to do proper supply base consolidation, which, in some cases, might actually dictate the addition of new suppliers where key parts are being singled sourced. Thus, it is important that they acquire visibility into their supplier network before consolidating.

Forget Savings … Avoid Cost in the First Place

Most organizations have a myopic focus on cost savings, but considering there ain’t no saving in a perfect world, this is a level of foolishness that even the SpendFool wouldn’t tolerate! In fact, the SpendFool, in full foolishness, would go Donald Trump on the organization! “You’re fired!”

A leading procurement organization doesn’t look for ways to reduce spend, since this is the result of overspending, which a good procurement organization that does a should-cost analysis on all purchases and makes proper total value awards would not do, but for ways to avoid spend in the first place. Leading procurement organizations will employ substitution strategies, lead innovation-on-demand initiatives, improve inventory management, revolutionize processes, and find ways to get around “fees” and “maintenance charges” that essentially represent low-value to the organization and pure profit to the vendor.

For 16 more great ides on how to take your sourcing to the next level, and more detail on the ideas presented above, see the “Next Generation Sourcing” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Tuesday, 16 October 2007

Low Cost Country Sourcing, often abbreviated LCCS, defined as a procurement or sourcing strategy in which a company sources materials from countries with lower labor and production costs in order to cut operating costs, is not a new subject. In fact, it’s a rather hot topic today. Googling “low cost country sourcing” (without the quotes) generates a whopping 1.9M hits. However, given the dizzying array of information, it’s hard to know where to start.

However, before you start, the first thing you should do is familiarize yourself with the challenges you will need to overcome in order to have a successful project. LCCS comes with a number of challenges that include product quality, supplier quality, resource quality, logistics, reliable delivery, supply assurance, supplier bankruptcy, and the inherent complexity of remote supplier management. Furthermore, the reality is that even today, many large global organizations are not fully prepared to embark on ambitious LCCS projects.

First time LCCS projects, especially those that are poorly planned, are often wrought with budget overruns caused by underestimated transportation costs, additional inventory costs due to uncertain lead times and long order cycle times, bad data, and fluctuating demands. Furthermore, there is a significant variation in supplier capability and sophistication in developing markets, in specific verticals in a specific developing market, and even within individual operations and factories. In China, a factory might have state of the art production equipment recently bought from a U.S. supplier (as a result of the weakening US dollar) but that same factory might not even have the capability to ship a standard palette.

This gives us our first step to success – before selecting a supplier, it’s important to meet with the supplier and conduct on-site visits and assessments. But it’s even more important to do good research on the supplier in a pre-qualification process to make sure the supplier has a decent chance of living up to the requirements, or the organization might end up wasting a lot of time and money. Use third party information services such as those provided by Austin Tetra and Open Ratings, do reference checks, collect detailed information on operations and capabilities through eSourcing tools from the suppliers themselves, and have introductory calls and video-conferences before investing in the remote meetings and site visits required by a full qualification.

The next step to success is to take a total cost of ownership approach when evaluating a potential low cost country supplier – not just a total landed cost approach. This includes increased inventory carrying costs, duties, import and export taxes, and additional financing costs. Furthermore, this calculation must be updated regularly throughout the process, as it can often increase as one progresses further into a project. If the point is reached where the estimated savings are not worth the increased risk, the project should be dropped, at least with respect to the categories one was considering outsourcing.

The final step to success that is going to be mentioned in this blog entry is to hire top-notch external expertise with experience, and this is especially important for small and medium sized organizations which likely lack some of the skills necessary to succeed in a low cost country sourcing effort. It’s true that the right consultant might not come cheap, but the value such a consultant can provide the organization will pay for the consultant many times over once a successful LCCS operation is in place.

For more insights on Low Cost Country Sourcing, check out the “Low Cost Country Sourcing: A Blogger’s Perspective” wiki-paper over on the e-Sourcing Wiki [WayBackMachine] which includes an interview with Carl Greppin (Transpac Access) and blogger insights on the challenges, destinations, and required steps to success.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Thursday, 30 August 2007

The Global Trade import and export cycles are quite involved, each involving at least 14 steps, which can be summarized as follows.

The Global Trade Import Cycle

• Supplier Selection
• Purchase Order Generation
• Transport Insurance
• Financing
• Carrier Selection
• Document Creation
• Goods Departure
• Shipment Tracking
• Importation
• Goods Receipt
• Invoice Receipt
• Reconciliation
• Payment
• Tax Reclamation

The Global Trade Export Cycle

• Customer Approval
• Sales Order Receipt
• Order Approval
• Transport Insurance
• Receipt of Financing
• Carrier Selection
• Document Creation
• Shipment Tracking
• Exportation
• Goods Delivery
• Invoice Creation
• Payment Receipt
• Reconciliation
• Tax Reclamation

Even without a detailed description, one should be able to see that there are a number of core elements of global trade – seven to be precise – and it is through familiarity and mastery of these core elements that one becomes a master of global trade and all the benefits that can be derived therefrom.

The seven core elements of global trade are:

• Strategic Sourcing
  “Strategic Sourcing is a systematic corporate/institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company”. (Wikipedia) It one of the most important elements as the supplier selected impacts everything: the home country of the owners of the supplier corporation impacts financial status and trade restrictions, the location of the supplier impacts logistics, the supplier’s financial status impacts financing, and the supplier’s overall capability impacts quality, risk, and visibility, for example.
• e-Procurement
  e-Procurement is the counterpart to e-Sourcing, starting where eSourcing ends and ending where eSourcing begins. It is the “e” implementation of the procurement cycle which is concerned with the requisitioning, receiving, and reconciliation of the received goods as opposed to the analysis, auction, and award that takes place in the sourcing cycle.
• Supply Chain Finance
  Supply Chain Finance is the optimization of both the availability and cost of capital within a buyer-centric supply chain. The availability and cost of capital is usually optimized through the aggregation, integration, packaging, and utilization of all of the relevant information generated in the supply chain in conjunction with cost analysis, cost management, and various supply chain finance strategies.
• Trade Document Creation
  Trade document creation is the creation of the necessary documentation to satisfy import, export, customs, security, safety, port, and carrier requirements. Numerous documents are required by government bodies, customs, ports, and carriers, just to name a few, to move your products internationally. One industry estimate has noted that a single global shipment can require approximately 35 documents consisting of over 200 data elements to be created for up to 15 different parties.
• Logistics
  Logistics is determining how the goods are going to get from the point of origin to the point of destination. What methods of transportation are going to be used? Which ports? Which carriers? Which third parties are going to be contracted to assist in managing the process? Logistics can be quite involved when goods need to be exported and imported.
• Regulatory Compliance
  Even though the customs, logistics, and security requirements are enough to make an average person’s head spin, there is an ever dizzying away of acts and directives that a supply management professional needs to be aware of. In addition to the attention grabbing Sarbanes-Oxley Act (SOX), especially section 404 on the management assessment of internal controls, there is the Hazardous Materials Safety (HAZMAT) in the US, the European Union (EU) Restriction Of the use of certain Hazardous Substances in electrical and electronic equipment (RoHS), the forthcoming RoHS equivalent in China and other Asian countries, and the European Commission (EC) Directive on Waste Electrical and Electronic Equipment (WEEE); there’s also the EC Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), just to name a few.
• Risk Management
  Underlying each of the previous six aspects of global trade is risk. Failure to ignore Supply Risk Management today could be devastating to an organization.

For more insights on Global Trade, check out the “An Introduction to Global Trade: The Basics” wiki-paper over on the e-Sourcing Wiki [WayBackMachine] which includes an overview of the global trade import cycle, the global trade export cycle, and the seven core elements of global trade – each of which destined to have its own (set of) wiki papers, if it does not already.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on February 13th, 2008.

Free Trade Zones, Foreign Trade Zones, Special Economic Zones, and Sectoral Promotion Programs may all sound like the same entity, but, depending on the country, they can be vastly different. Where global trade is concerned, they can be a great advantage, if understood and used properly, or a relative disadvantage if not well understood.

In the US, a Foreign Trade Zone is an enclosed area, operated as a public utility under the control of US Customs, with facilities for handling, storing, manipulating, manufacturing, and exhibiting goods. Merchandise may be exported, destroyed, or sent into Customs Territory from the zone, in the original package or otherwise. The advantage of the zone is that, although items shipped from the zone are subject to Customs duties if sent into Customs Territory, they are not subject to customs duties if reshipped to foreign points! Furthermore, the usual formal CBP entry procedures and payments of duties are not required on the foreign merchandise until it enters CBP territory for domestic consumption, at which point the importer generally has the choice of paying duties at the rate of either the original foreign materials or the finished product. Foreign Trade Zones can have a huge impact on your working capital and supply chain financing requirements.

A Chinese Special Economic Zone is a different entity entirely. In the People’s Republic of China, a special economic zone is given special policies and flexibile measures by the central government to allow them to encourage foreign investment. The policies allow them to utilize a special economic management system that contains special tax incentives and greater independence for international trade activities. In a SEZ, there is no tax on foreign investor funded companies during start-up years before making a profit, no tax in tax in the first two profitable years, and only half of the normal tax in the third and fourth years.

In India, a Special Economic Zone, which was modeled after the China Special Economic Zones, is a foreign territory for the purposes of trade operations, duties, and tariffs. The specifics vary from zone to zone, as they do in China, but the zones also borrow some of the concepts that originated in the Foreign-Trade Zones Act of 1934 in the US, making them interesting entities.

Mexico has Sectoral Promotion Programs that establish lower tariffs on the importation of inputs for the use of various products, and the special economic zones of Brazil are different entities still. For more information on free trade agreements, foreign trade zones, and special economic zones, see the “Free Trade Primer” over on the e-Sourcing Wiki [WayBackMachine] which can be used as a good starting point for your research.

Originally posted on on the e-Sourcing Forum [WayBackMachine] on Thursday, 15 November 2007

e-Procurement is the counterpart to e-Sourcing, starting where e-Sourcing ends and ending where e-Sourcing begins. It is the “e” implementation of the procurement cycle which is concerned with the requisitioning, receiving, and reconciliation of the received goods as opposed to the analysis, auction, and award that takes place in the sourcing cycle. It is essentially the automation of the non-strategic and transactional activities that consume the majority of a buyer’s time, but one that comes with increased enterprise level visibility of all purchases.

The basic procurement cycle consists of up to nine steps, depending on the complexity of the buy and organizational policies. At a bare minimum, it consists of an order (requisition or purchase order), an invoice (which might be one with the receipt), and payment. For high-dollar purchases, the process will generally also include authorization and reconciliation of the invoice. In addition, if taxes were paid that the organization is capable of reclaiming, then the forms or entries to reclaim such taxes at the proper time will also be filled out or made. Finally, in a leading procurement organization, every step will be completed, although many will be completed automatically for low-dollar or non-strategic purchases by the eProcurement system using defined rules in the workflow engine.

• Requisition
  A buyer recognizes a need and places a request for goods or services.
• Authorization
  Each requisition made by a buyer gets routed to an appropriate approval agent. The approver verifies that the goods or services are needed, that they are either off of an appropriate contract or acceptable as a stand-alone non-contract order, and that the purchase amount is acceptable.
• Purchase Order
  Once a requisition is approved, a purchase order is created and automatically delivered to the supplier(s).
• Receipt of Goods
  Once goods are received, the buyer issues or confirms a receipt of such goods to the supplier.
• Invoice
  After a supplier prepares goods for shipment, an invoice is created that denotes the individual goods ordered by SKU and the amounts being charged.
• Reconciliation
  After the goods are received, the invoice needs to be reconciled to the purchase order and goods receipt before payment is made. Are the charges for the right goods or services? Are the amounts the contracted amounts? Were the quantities correct? Are any other charges, including taxes, valid and correct?
• Payment
  Once the goods have been received and the invoice reconciled with the order and contract, payment is scheduled and made using an appropriate payment method, which could be p-card, electronic funds transfer, or good old fashioned cheque.
• Reclamation of Taxes
  In some situations, the supplier of a good or service will be obligated to charge a tax, but the buyer may be eligible to retain some or all of that tax because of its corporate status. Examples include European Value Added Tax, Canadian Goods and Services Tax, and out-of-state sales taxes.
• Analysis
  After a number of procurement cycles have been completed, it is important to take measurements of the efficiency and accuracy of the procurement process.

For more insights into e-Procurement, check out the “e-Procurement Primer: 9 Steps to Procurement Success” over on the e-Sourcing Wiki [WayBackMachine] which not only dives into the 9 steps to success, but also discusses the core capabilities required in every e-Procurement solution, other important features of good e-Procurement solutions, the benefits an e-Procurement solution brings, best practices for implementation, challenges that may need to be overcome, associated costs, and tips on user adoption as well as a glossary of many e-Procurement terms and a rather extensive bibliography.