Category Archives: Global Trade

Why You Need BTCHaaS!

Nine years ago we told you that you needed MROaaS, and you most definitely do, but it’s not enough anymore, now that you can’t predict what your parts are going to cost now that you’re Back in the U.S.S.R, you also need BTCHaaS: Border Transport Cost Heuristics as a Service.

Basically, now that USA border tariffs (and counter-tariffs from Canada and Mexico) are more unpredictable than the weather (where 3 day forecasts in some areas approach 97%, East Coast Canada excluded, and 10-day forecast accuracy is approaching 50%), and come and go on a daily basis, you need a border transport (BT) solution that uses predictive analytics solution that minimizes your tariff impacts that uses cost heuristics (CH) derived from similar prior patterns in similar tariff announcements and withdrawals, costs per day of delay, and spoilage risk.

Basically, you have this dilemma. When a tariff is announced on the border your truck is scheduled to cross for the day it is scheduled to cross, do you

  1. accept is a cost of business, do nothing, and have it cross as normal
  2. send it to a truck stop and tell it to wait for a revised decision tomorrow
  3. turn it back around, unload, and do without (for now)

Depending on:

  • the value of what’s in the truck
  • the risk of spoilage
  • your contractual requirements
  • storage costs on the other side of the border
  • the tariff(s) that will be applied

Your best option on any particular day will vary. For example:

  • if the tariff is likely to be rescinded in the next three days, and you can wait a day or three, maybe you tell the driver to wait and pay an extra one to three days of salary/transport fee
  • if the tariff is not likely to be rescinded in the next three days, but likely within the next few weeks, and the tariffs would be in the tens or hundreds of thousands of dollars, and you can do without the goods for a few weeks, maybe you send the truck to a local warehouse and pay a temporary storage fee
  • if the tariff is not likely to be rescinded at all, and you can do without the goods in the short term, and you are not contractually obligated to take them (which might also be the case if the tariffs are so high that they qualify as force majeure), maybe you turn the truck around and drop them off where you picked them up
  • if the tariff is not likely to be rescinded, and you can’t do without the goods, then you should just cross the border

But that’s not an easy decision to make on the spot. You need to know

  • the transport, and waiting, cost per day
  • the (potential) cost of (additional) spoilage (i.e. 5% of produce may spoil)
  • the (potential) cost of any delay
  • the cost of the tariff
  • the cost of localized storage (plus the additional unloading and loading fees)
  • the likelihood of a decision change within a short time frame (3 days) and a mid-time frame (3 weeks) based on market data and sentiment analysis to tariff announcements

and do all the calculations and make recommendations based on the possibilities for you, a human with human intelligence (HI!), to accept or reject. After all, if the truck is carrying 2 Million of electronics or auto parts, a 25% tariff is 500K, and it doesn’t cost anywhere near that to make the driver wait an extra couple of days (and to hire a few security guards to keep it safe), and will be worth it if the likelihood of a reversal, or significant reduction, is high.

So yes, MROaaS is not enough anymore … you now need BTCHaaS!

Is this FINALLY the time of Specialized Supplier Discovery?

Supplier Discovery applications are not new. They’ve been around for quite some time. Two notable examples that you might not think of as Supplier Discovery are Tealbook and ScoutBee as Tealbook is now focussed on powering your procurement with trusted supplier data and Scoutbee X is now the AI-powered procurement network. Why? Because no one actually bought supplier discovery!

Why? Business have always thought they know their suppliers, they know who their suppliers’ competitors are, and that if they need to find a supplier, for the last 25 years, that’s what Google was for. And they kind of did. If they were sourcing from China, they knew all the major competitors in China. From South Korea or Japan, the same. If they were sourcing regionally in Asia, they knew enough. And if they didn’t, Google. They might miss one or two of the top 10, but if you knew 80% of the suppliers you might do business with, constructed a good RFP, vetted properly, you usually acquired a decent product at a decent price and went on merrily about your day, especially if you saved 2% on a category in the last RFP.

But that was a time of relatively free global trade. Yes there were tariffs, and yes they changed from year to year, but for any given trading partner pairing of countries, they were relatively static and predictable. With the exception of a country like Brazil that, for a while, was changing tariffs weekly, you knew how to compute your TLC (Total Landed Cost), where you wanted to do business, how to find the majority of suppliers, qualify them, and do business with them.

Plus, there were few countries with sanctions that affected you, and you didn’t have one of the major global economies cut off to you if you want to do business in the EU. Moreover, no matter where you did business, you did business in dollars if you wanted to. That’s because, for most countries, currency exchange rates were more or less stable for a period of time and easily predictable.

However, those good times in global trade are gone. Long gone. Not only did you have to deal with countries shutting down completely during COVID, but then you had to deal with sanctions against Russia, canal slowdowns and effective closures due to Panamanian droughts and Houthis in the red sea, dynamic exchange rates as a result of recent elections, and now rampant trade wars.

Your supply chain is in shambles, and, frankly, there is a portion of your current supply base that, even if it is still available, you can’t afford to use anymore. That’s because 25%+ tariffs in some category are just too crippling. So you need to find new suppliers, preferably at home, but most of the time that won’t be possible (as you were outsourcing because there wasn’t enough [competitive] capacity in your own country), so you at least need to find suppliers in a low cost, low tariff country — and likely one you haven’t done a lot of, or any, business in before.

And you need to find these new suppliers, and send them RFPs, fast. You should have done it yesterday. But you need to be 98% sure these suppliers can actually serve you before even sending the RFP because you don’t have time to wait for a response, review the RFP, and then realize they can’t do what you need and that you have to find another set of suppliers and repeat.

But you can only do this if you not only have deep data on what they make, but what equipment they have, processes they support, capacities they can meet, their tier 1 supply chain they have immediate access to, and so on. Some of this might be on their website, if they have one, in a language you don’t read, and a format you’re not used to.

In short, you don’t have the information you need, you can’t get it quickly, and that means identifying your next supplier is going to take months — months you don’t have — unless, of course, you use a Supplier Discovery platform that has all of the information on the global supply base you need to make this decision. That has the majority of suppliers in an industry. That has deep data on their products, capacities, equipment, processes, and factory locations. That can take in detailed requirements and/or a detailed BoM with production requirements and instantly identify 10 suppliers not in a set of regions that will meet your need. That will help you analyze appropriateness, cost differentials, and suitability to your business before your first contact. That has the contact information you need to make the right contact.

In other words, you need Supplier Discovery, and maybe even a market research platform like Forestreet, more than you ever did, there are platforms out there (a few old, a few new) that can help you, but will you wake up to the fact and finally incorporate these tools into your Procurement platform? (And let’s be clear, no matter what they tell you, Suites are NOT Enough.)

There is a Price of Relocating to “Friendly Countries”, but There Are also Corresponding Cost Reductions

This originally posted on January 3 (2024), but is being reprinted in case you missed it due to the rising importance of near/home shoring!

A recent article in El Pais on the price of relocating factories to ‘friendly countries’ noted that according to the European Central Bank (ECB), 42% of the large companies in the Old Continent that it has recently surveyed have resolved to produce in allied countries as a means of reducing risks. However, this relocation carries economic consequences, and international institutions — such as the IMF and the ECB — warn of its impact on growth and soaring prices.

The article is right. Some prices will go up as countries move out of countries in, or likely to engage in conflict, both of the physical (war) and the economic (closed borders, significant tariff increases, rolling lockdowns, etc.) variety, and move to more “friendly” countries. (As far as SI is concerned, it shouldn’t just be “friendly” countries, it should be “friendly countries close to home”. At least companies are realizing that China and/or the lowest cost country is not always the answer when that answer comes with risks that, when they materialize, could lead to skyrocketing costs and losses that dwarf five years of “savings”.

Furthermore, even though 60% of those contacted said that changes in the location of production and/or cross-border sourcing of supplies had push up their average prices over the past five years, this hasn’t been true across the board, it doesn’t have to be true, and some of those could still see savings as they optimize their new processes, methodologies, and supply chain network. (Changes don’t reach full efficiency overnight, and sometimes it is two or three years before you can optimize a supply chain network due to existing contracts, infrastructure, etc.)

Why are costs (initially) going up for many companies?

  • wages: many of the “friendly” countries are more economically mature, or advantaged, with a higher standard of living buffered up by higher wages / better social systems
  • utility charges: in “friendly” countries that are using newer, cleaner, sources of energy or limiting energy production from burning (coal, oil, natural gas) have energy costs that are often higher as the initial infrastructure investment has not been amortized, water costs could be higher if more processing inbound or outbound is required, and so on
  • production overhead: chances are that the factories are newer, required a large investment that isn’t anywhere close to being paid off yet by the owner, and you’re paying a portion of the large interest payment to the investors/banks as part of the overhead

However, it’s important to note that:

  • productivity: will go up when you move to a locale where the workforce is more educated and skilled and is better able to employ automation and modern practices, and thus gets more efficient over time, countering the initial wage increase
  • energy costs: will reduce over time as a solar farm or wind farm can produce renewable energy for decades, with the initial investment often being paid back within one third to one quarter of that time; as a result, energy prices should remain flat(ter) over time than in the locales where they are still burning dwindling fossil fuels (which rise every year in cost) and have not yet invested in renewables
  • overhead: will decrease once the investments are paid back (and the interest payments are gone), which means it can stay flat as other production related costs rise (compared to older plants which will eventually reach a point where the revitalization investment becomes significant on a regular basis)

In addition to:

  • logistics costs: will reduce when you choose a friendly country closer to your target markets (since most freight is ocean freight on fossil fuel burning cargo ships)
  • disruption costs: will reduce as less risk translates into less (costly) disruptions over time

So while costs may go up a bit at first, at least relatively speaking, they will go down over time, especially as network and process optimizations are introduced and obtained from experience with the new network, suppliers, and technologies.

There are Perks and Pitfalls of Friend-Shoring — But The Answer is Near-shoring!

On Tuesday, when we told you the tariff tax is coming and there’s nothing you can do about it, we told you the long-term solution is near-shoring, and while others will tell you that the short-term answer is friend-shoring, we want to make it clear that it is NOT.

As a result of recent logistics disruptions, geopolitics, and global disasters, and all of the supply disruptions that have resulted, a lot of global companies are starting to pull back on global outsourcing and extended supply chains, at least where they seem to have options.

Apparently a number of these organizations are considering Friendshoring, as per yet another article on the subject, with a recent example being the perks and pitfalls of friendshoring in EP&T.

According to this article this strategic shift is buzzing among industry leaders and policymakers. Why, I’m not sure.

The article has the following benefits right:

  • enhanced security and trust as partners tend to trust each other and keep each other safe
  • improved compliance and standards as friends generally work to serve the same markets and are more aware of the standards and regulatory requirements that need to be met for all to benefit

And has the following challenge mostly right:

  • increased costs as most “friends” are in first world countries with higher labour costs, higher utility and operating costs, stricter environmental regulations, etc. etc. etc. so costs are generally a bit higher up front (at first)

But here’s what the article overlooks:

  • better quality since these friends usually operate at higher standards with better tech which typically translates into
  • more reliability and longevity which generally translates into
  • reduced returns and warranty costs as customers will generally discard or move on from the product before it breaks
  • higher sales prices as customers will pay more for quality

And here’s what the article really overlooks.

It’s NOT friendshoring, it’s nearshoring!

Preferably somewhere you can get to on land, or from a nearby port. For North America, that means we should primarily be outsourcing from Central America (since we can get our stuff on trucks if ocean freighter availability is low) and, if we can’t get it there, from South America — since we can get it from a ship that sails up and down the coast (and doesn’t have to pass through a canal that has limited capacity due to drought or is unsafe due to terrorist presence). NOT from China, unless it is a raw material we can’t get elsewhere.

The nearer the source, and the less countries and distance the materials or products have to pass through, the less chance for disruption.

Moreover, it’s NOT the friends you have, it’s the friends you need, which may not be one in the same.

For example, a company in the UK might be your “friend”, but the UK is expensive, crossing the Atlantic is expensive and risky at certain times of the year, and you might be able to invest in a supplier in Mexico to get the same product! Moreover, if you invest in a company to help them grow, they are much more likely to stay your friend than a company who is only your friend because they think you are locked in to them.

Plus, if you choose, and invest in, up and coming / new suppliers, you can help them with their processes, new technology selections and plant upgrades, and even sub-tier supplier and material selection. This can be more helpful to you than an established supplier locked into their ways and last-generation technology and production lines they paid too much for.

Some of your “friends” will be the right “friends”, some won’t. Analyze them all and make sure they fit all of your requirements: near, quality, reliability, and potential for future value creation. (Not just future cost reduction after you help them get efficient, but potential sales price increase, value added services, and other factors that might increase the overall profit equation. After all, Procurement is about increasing business value, not just about securing supply and controlling costs.)

Stay close to home, and even home-shore when you can, and you will see fewer disruptions, which should be your goal as supply disruption has been the biggest risk for at least the last 15 years.

The Tariff Tax Is Coming – And There Ain’t Much You Can Do About It!

Since you have been ignoring the home-shoring/near-shoring that a few of us experts tried to warn you about almost a decade before the first of the predictable tragedies happened (with articles appearing in the late 2000s on the dangers of outsourcing and the advantages of near-shoring — here are 3 SI articles from 2009, 2011, and 2013), you will now have to pay the tariff tax.

(Note that we are now on the fourth predictable tragedy. The first was the COVID pandemic, which the WHO and WEF were warning us about for a good decade [even though they didn’t know what the pandemic would be, they knew a pandemic was inevitable]. The second was geo-political conflicts and sanctions that cut off entire markets. The third was the double whammy of Panamanian droughts and Houthis in the Red Sea, cutting off the fast shipping lanes and forcing a return to routes around the Capes. Now we have tariffs, a predictable result of home-first economic policies that always return in times of tense geo-political climates … and especially in countries run by leaders who believe they have autocratic power, even if they aren’t supposed to.)

So now you will get hit by tariffs. No ands, ifs, or buts about it. And there is nothing you can do to prevent it. Why?

  1. Tariffs are going to be applied across the board. Thus, changing locations isn’t going to prevent them, just minimize them.
  2. In most countries, tariffs on products don’t change weekly. But sales can based on the perceived economic situation, so stocking up on inventory can increase inventory costs beyond expectations as well as logistics costs if you have to expedite shipping.
  3. Locations with cheaper tariffs without supporting supply chain networks will actually cost more, especially if the average competency of the workforce is lower than other locations.
  4. Proclamations are not actualizations. Actual tariffs could be more or less. You could switch from a location expected to see tariff increases to one that sees even more tariff increases.

If you want to protect from tariffs, which are likely only going to get worse as time goes on, there is only one option — re-shore as close as you can! You want to be as close to home as you can to not only protect against tariffs, but to minimize other costs and risks. Logistics risks, and costs, are less. Re-supply times are less. Risk response is faster. And new development and innovation is easier.

So even though costs will increase in the short-term — as you build/upgrade/refine factories and production lines, retrain workforces, build new supply lines, design new distribution chains, and so on. Especially when you re-shore to a location with higher energy or workforce costs. However, over time, the workforce will become more skilled and productive, automation will improve, and supply and distribution lines will optimize. Costs will go down, and they will be more stable than costs half a world away you have no control over.

The key is figuring out what you should re-shore and what you shouldn’t. You should only re-shore what you can do cost-competitively unless you are certain you would lose access to supply otherwise. While the end goal should be that you only outsource for what you can’t get near, or at, home, the reality is that you have to stay in business, and that means staying competitive. So, at least in the short-term, you have to pick-and-choose. So how do you do that?

What-if cost modelling, optimization, and predictive analytics. You need to accurately model the costs associated with pulling acquisition and production back over time. First production batch, 6 months, 1 year, 2 years, etc. Plot the costs over time and if the trend indicates the costs will match the outsourcing/offshoring costs within a few years, you go for it. These costs will require predicting all the component costs with predictive trend analytics, building detailed cost models, and optimizing them against all the different options. A lot of modelling, calculation, and what-if. But if you have the right advanced sourcing platform it can be done. (Although you will need to reach out to platform and modelling experts to figure out how.)

In the interim, for those of you panicking in the USA, just remember that some of the proposed tariffs is just posturing to force American allies to give into other US demands (more defence/border spending, less tariffs for US products). Others are promises to take revenge on countries that didn’t play nice or line certain pockets the last time the administration was in charge, unless those countries do exactly what is asked this time around. Thus, you don’t know exactly what will happen, all you know is that, since not everyone will meet the demands, more tariffs are coming. (And even if the worst don’t come now, who knows what the administration in four years will bring. Tariffs are coming!) That means you can’t select alternative locations ahead of time, or predict when to pre-buy. Moreover, you can only hold so much inventory, and can only get so much here so fast, so pre-buying wouldn’t help much anyway, if it helped at all.

The only sure fire way to minimize tariffs over time is to start re-shoring what you can relatively cost-effectively, as that will protect you no matter what, and even though it will take time, it will payoff in the long run. (And again, to be blunt, you should have started this fifteen years ago when Sourcing Innovation first started echoing the warnings of the inevitable disruptions that were going to come from too much off-shoring if a significant event happened, and now that we have had multiple — COVID, “special military operations” and sanctions, logistics challenges in Panama and the Red Sea, and now anti-trade policies in many countries — it’s time to act before even more disruptive events happen).