Category Archives: Global Trade

Is China Proving that International Trade is a Zero-Sum Game?

Recently, state-controlled Sinopec spent $4.65 billion (US) to become the first Chinese multinational to buy a direct stake in a major producing oil-sands project in Alberta (Canada) and buy out ConocoPhillips‘ 9% stake in Syncrude Canada Ltd (which is the trophy of Canada’s oil sands projects, producing 350K barrels a day). According to the Globe and Mail, the deal represents the next stage in Chinese investment in the oil sands, as Beijing-controlled companies scour the globe for energy resources and look to diversify the country’s growing imports away from the Middle East.

Sinopec is a subsidiary of China Petroleum & Chemical Corp., which started buying into Canadian Energy projects in 2008 with an initial purchase of a 40% interest in the proposed Northern Lights project in northern Alberta. (It is now a 50-50 partner with France’s Total SA.) China Petroleum & Chemical Corp. is also active in Canada, and will acquire a 60% stake in Athabasca Oil Sands Corp.’s Mackay and Dover projects, a 20% stake in Vancounver-based Teck Resources Ltd, and, in turn, a 20% share in Suncor Energy Inc.’s Fort Hills oil sands project. This is in addition to other holdings in Canada, Venezuela, Brazil, Argentina, and the Middle East.

Wondering what it all meant, I asked Dick Locke, SI’s resident expert in international trade. This is what he said:

Well, it means that sometimes international trade is a zero-sum game. That’s when multiple countries chase a disappearing resource.

 

The US is ill-equipped to deal with this one. Our government and opinion-makers are captured by the duology (if you’ll allow this as a word) of oil producers and car manufacturers who are very conservative about energy strategy. Our population patterns have way too many people living on large lots beyond the reach of effective public transport. China is doing a great job in both solar and wind power development. You probably saw that Applied Materials moved their solar cell manufacturing site and technical expertise to China (Technology Review).

 

While the Chinese government has real problems with human rights, it does think long term and is doing what’s best for its people in this aspect.

In other words, China knows that it needs more energy than it’s currently producing if it’s going to continue to support and modernize its population, and that, just as the world is looking to China as a producer of consumer goods, China needs to look to the world as a producer of energy … and will have to spend much of what it is making to acquire that energy. At some point, the outflows will have to equal the inflows and international trade will China will become a zero-sum game.

Dick Locke, Global Supply Training.

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Global Sourcing: Addressing Myths with Capabilities Part IV: Politics, Local Context, and Enabling Infrastructures

Today’s post is from David Henshall, Founder of Purchasing Practice. Dave can be reached at dhenshall <at> purchasingpractice <dot> com.

In this four part series, we examine eight dimensional capabilities that will help you overcome the myths surrounding global sourcing. In today’s post, we will focus on the final dimensions of politics, local context, and enabling infrastructure. (Yesterday’s post addressed risk and opportunity.)

Dimension #6: Politics

Politics matters in LCCS. As stated in my introduction to the series (Part I), much of the political noise from politicians, humanitarians and environmentalist can be misleading, resulting in flawed policies and strategies for governments and companies alike. This noise generally consists of allegations of:

  • Job exportation
  • Sub-standard quality
  • Child labour
  • Slave wages
  • Environment pollution

The problem with many of these allegations are that they come from a benchmark of western standards applied in a developing nations context. The assumption is that if we apply these standards it must surely help the people in developing countries. However, there is a real risk that codes of conduct, when applied inappropriately, may worsen social and environmental conditions for workers in these communities. To avoid such unintended consequences, Wilding & Braithwaite (of the Cranfield School of Management) advise companies that they must:

  1. anticipate the ultimate impacts of implementing codes of conduct,
  2. contextualize their application instead of simply demanding compliance with conditions that make little sense in a particular developing country context, and
  3. incorporate the voices of workers and communities in the design, implementation, monitoring, and impact assessment of codes in order to ensure a better fit between what workers and communities prioritize as opposed to what Western society think they ought to prioritize.

Some companies panic in response to negative media exposure of poor working conditions or the use of child labour at their supplier factories, and choose to sever their connections with these suppliers. Companies need to resist this ‘cut and run’ response and engage deeper with suppliers in applying policies which fit the local context.

Dimension #7: Local Context

Dr. Peter Lund-Thomsen, a visiting Researcher with the Copenhagen Centre for Corporate Responsibility, advises that organisations need to take the social, economic, environmental, and linguistic contexts into which codes of conduct are being implemented into consideration if we want to avoid producing unintended, often negative, consequences for the intended beneficiaries of codes.

The implementation of codes in isolation is unlikely to bring about sustained improvements in working conditions. Lund therefore advises that the emphasis needs to be placed on incorporating the concerns and voices of the ultimate beneficiaries of codes of conduct in the design, implementation, monitoring and impact assessment of codes.

Dimension #8: Enabling Infrastructure

For buyers, technology is a key component. The capability to view supply chain data on a single platform can be critical to achieving the real time visibility necessary to successfully mitigate the risk in extended supply chains. Technologies such as RFID can also support the transactional visibility as goods move between handling units in the supply chain.

Buyers can play a role in enforcing local legislation and in providing the necessary expertise, resources, and infrastructure that enable developing country suppliers to meet their legal obligations.

Organisations who engage with suppliers over the long term, in terms of providing the necessary resources and expertise that will enable them to improve their social and environmental performance, are likely to be the most successful in maximising the benefits of LCCS. The ‘cut-and-run’ response in relation to negative media publicity is likely to do more harm than good if the aim is to improve the workers’ conditions and reduce environmental pollution at supplier factories.

Thanks, Dave.

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Global Sourcing: Addressing Myths with Capabilities Part III: Risks & Opportunities

Today’s post is from David Henshall, Founder of Purchasing Practice. Dave can be reached at dhenshall <at> purchasingpractice <dot> com.

In this four part series, we examine eight dimensional capabilities that will help you overcome the myths surrounding global sourcing. In today’s post, we will focus on the dimensions of risk and opportunity. (Yesterday’s post addressed corporate social responsibility.)

The decision to pursue a global sourcing strategy will ultimately depend upon the amount of value that it creates. Value in this context, however, should include not only the available savings opportunities, but also the inherent risk after considering the organisational capabilities in managing the increased vulnerability from sourcing in higher risk countries or region.

Dimension #4: Risk

Increased risk comes in the form of damage to brand and reputation, unplanned cost, supply chain failure, delay, currency fluctuations and IP theft, for starters. Professor Richard Wilding & Professor Alan Braithwaite, from the Cranfield School of Management in the UK, have identified six capabilities for the effective management of global sourcing risk:

  1. ‘Total Acquisition Cost Management’ – the ability to analyse and predict the total cost of a good from the source of supply to its final point of sale. They advise it is important to analyse and build into the costing the inherent lost sales risk of the product by developing and applying a market-risk and cost risk profile. The inventory holding cost through the chain must also be factored in.
  2. ‘One touch information flow’ – to avoid double entry, duplication, mistakes and inconsistency as the same transaction moves through the many points of contact in the chain. Accuracy of information is a precondition of pro-active management and the ability to exercise risk mitigation measures. This capability is systems enabled; it is critical to have the widest view of the total chain on one information platform with the ability to recognise inconsistencies.
  3. ‘Total product identification and compliance’ – to ensure fast accurate product and handling unit identification that feeds the “one touch information” requirement without delay. The use of bar codes and RFID (Radio Frequency Identification) to the correct standards is the enabling technology; this needs to be quality assured and enforced on the ground across many sites with failures being fixed where they occur.
  4. ‘Real time routing through dynamic visibility’ – the capability to see through the chain, know what is coming, and test for events that have not happened as planned; to interpret the implications of failures in a pro-active way and make decisions to minimise their impact.
  5. ‘Vendor development’ – cycle time compression linked to real demand’ – the capability to understand and improve the long-term performance of vendors in terms of cycle times, timeliness, quality and accuracy is central to time compression and risk reduction. Based on historical performance of the end-to-end chain, it is possible to identify improvement programmes to develop supplier reliability. The ultimate goal is to issue orders and schedules on shorter lead times, reflecting real demand or more accurate forecasts. Understanding the underlying performance of the vendor, and his category of products in the marketplace, is the starting point for this; it is dependent on information across the chain.
  6. ‘Information platform’ to provide consistent and timely information – the capability to put in place, operate and maintain a full supply chain visibility solution. All of the above capabilities are anchored by the operational skill to secure and maintain the information backbone with the diverse data structures that are needed by each supply chain function.

All of these capabilities relate to management information and the skills to apply that information with greater precision; information on the extended chain in terms of accuracy and speed of availability is central to these capabilities.

Dimension #5: Opportunities

Global sourcing can facilitate both supply side and demand side opportunities. On the supply side, Ford Motor Company cites these as:

  • Annual cost reductions in LCC markets have consistently exceeded those in mature markets due to:
    • Expanding scale
    • Deepening relationships with suppliers
    • Competitive environment
  • Wage rate growth in China and India will be limited by the large number of under-employed:
    • China has 1.338 Billion people living in the country
    • India has 25 million English-speaking, educated workers, and this number is expected to increase every year (as there are 232 Million people who speak English as a second or third language)
  • Labor rate differential is so large, gap is expected to remain substantial for the foreseeable future

On the demand side, global sourcing can facilitate the pursuit of export opportunities. Organisations can leverage supplier relationships to open the global marketplace, allowing them to market and sell their products in new markets across the globe.

Part 4 will examine Politics, Local Context, and Enabling Infrastructures of global sourcing.

Thanks, Dave.

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Global Sourcing: Addressing Myths with Capabilities Part II: Corporate Social Responsibility

Today’s post is from David Henshall, Founder of Purchasing Practice. Dave can be reached at dhenshall <at> purchasingpractice <dot> com.

In this four part series, we examine eight dimensional capabilities that will help you overcome the myths surrounding global sourcing. In today’s post, we will focus on the the dimension of corporate social responsibility. (Yesterday’s post addressed cost and quality.)

Dimension #3: CSR

CSR is important in global sourcing in that it helps drive and support:

  • Business Principles & Values
  • Business Benefits realised by improving environmental and working conditions (which improves performance), lowering energy cost, reducing waste, increasing productivity, improving safety, decreasing turnover, and increasing training
  • Brand Risk Management as companies cannot rely on regulation and enforcement of environmental and labour laws in LCCs

The business case for a strategic approach to CSR in global sourcing has come to light in high profile businesses such as Ikea, who dismissed two Russian employees for allowing a supplier to pay a bribe. Further, in a recent CIPS report on Africa, bribery was seen as just a part of doing business.

From the media, we often get the impression that most multinational corporations have already adopted CSR as an integral part of their LCCS strategies. In reality, only a small percentage of the world’s international corporations, and their suppliers, have seriously embraced CSR.

Those that have typically implement a code of conduct for their suppliers. For example, Apple recently highlighted serious non-compliances with suppliers in countries such as China and Taiwan during a recent audit. The violations included employment of underage workers, improper hazardous waste disposal, false records and suppliers signing contracts with uncertified vendors.

Unilever describes CSR as the impact of the business on society. When taken broadly, this definition clearly allows scope for determination of whether a policy is a power for good, or not, within the local context by conducting an impact assessment. When backed up by an ongoing program of continuous improvement, this can prove to be a powerful tool which can support the necessary response to the media should unintended consequences arise.

Implementing a CSR Sourcing Strategy – a Category Driven Approach:

The governance model shown starts at the organisation’s overall strategic level to ensure CSR objectives and targets are consistent with the business’ overall goals.

The CSR issues should feed into the overall sourcing strategy through detailed analysis (processes, spend, supply base, and feedback from the field and SRM initiatives for all categories).

This helps establish both a baseline on a category basis and a holistic view of the global sourcing environment. The baseline then serves as the basis to prioritise future initiatives and also to measure their success. When getting started, it is best to focus on categories which have low complexity and to set achievable targets to establish quick wins. Ensure that the approach is cross-functional and that lessons learned are fed back into future initiatives.

CSR Governance Model
Click to Enlarge

Part 3 will examine Risk and Opportunities in global sourcing.

Thanks, Dave.

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Global Sourcing: Addressing Myths with Capabilities Part I: Cost & Quality

Today’s post is from David Henshall, Founder of Purchasing Practice. Dave can be reached at dhenshall <at> purchasingpractice <dot> com.

In this four part series, we examine eight dimensional capabilities that will help you overcome the myths surrounding global sourcing. In today’s post, we will focus on the two dimensions of cost and quality.

The myths surrounding global sourcing are many, widespread and often misleading. They usually revolve around business conducted in developing countries, the so called low cost country sourcing (LCCS) countries. LCCS is fertile ground for the politicians, humanitarians and environmentalist alike, covering misleading sound bites ranging from the export of jobs to the exploitation of child labour and the carbon footprint of the 3000 mile salad.

With the prospect of such reputation damaging headlines, it is critical for firms engaging in global sourcing to get their strategy right. This strategy must be supported by sound operational capabilities that not only manage the supply chain and the relationships within it, but that also make use of a well thought out communications strategy (should unwanted publicity arise).

Purchasing Practice has developed a global sourcing framework (GSF) that incorporates these concerns into a logical management structure, and categorises them under eight dimensions.

 

The Eight Dimensions of the GSF

  1. Cost
  2. Quality
  3. Corporate Social Responsibility
  4. Risk
  5. Opportunities
  6. Politics
  7. Local Context
  8. Enabling Infrastructure
Global Sourcing Framework
Click to Enlarge
The Breakdown of Global Savings Costs
Traditional Model

(based on industrial products example)
labor savings 20-25%
depreciation 5-10%
materials and components 10-15%
economic development incentives 0-5%
savings on manufacturing cost (subtotal) 50%
logistics, inventory costs -10-15%
ongoing management costs -5-10%
taxes and duties -0-5%
net cost savings 25%
Procurement Strategy Council Model

(factoring in hidden costs not considered in the traditional model)
cost savings in traditional model 25%
business partner non-participation -8%
business partner non-compliance -6%
savings (subtotal) 11%
resource intensive sourcing activities -4-5%
reputation risk exposure and mitigation -1-2%
actual savings realized 4-6%

 

Dimension #1: Cost

Whilst costs are typically a primary driver of global sourcing, organisations must not only factor in total landed cost but also issues such as infrastructure cost and increased risk. This can include the cost of setting up a local office or hiring external auditors to monitor your suppliers in a particular country. Additionally, an upfront investment is frequently necessary in order to ensure the sourcing relationship is aligned with business goals and policy.

When these factors are quantified in a sourcing decision, the incremental savings from sourcing to a higher risk region or country are sometimes eliminated, especially when the principle benefit is labour arbitrage. However, many organisations are finding that the benefits of global sourcing still outweigh the investments if the right global partner is in place.

According to a Procurement Strategy Council report:

“Traditional models assessing the costs of global sourcing most often consider higher logistics and inventory costs due to longer supply chains, greater management costs to oversee remote and (often) unfamiliar supplier relationships, and higher taxes and duties. While these costs can reduce net savings by roughly half, emerging markets still provide a significant cost advantage of upwards of 25% savings.” See the breakdown of global savings cost table (above).

So whilst there are low cost countries, global sourcing will always be worthy of a buyer’s attention. Buyers should, however, be aware that the state of comparative cost advantage is dynamic, not static. This is true both within and between competing countries. Buyers must therefore possess the skills and motivations to monitor these dynamics as part of their overall sourcing strategy.

Dimension #2: Quality

Quality is usually a given in procurement organisations these days and is not ‘knowingly’ compromised for cost savings. Successful LCCS can deliver quality that is equal to, if not better than, local sources. This is in part achieved by working with suppliers to help them reach the desired quality standard prior to calling off production. When this is the case, it must be recognised as an additional cost of doing business and factored into sourcing decisions over the long term. The key lies in putting in place all the right quality processes and checkpoints throughout the supply chain by qualifying inputs before they become embedded in products.

The increased risk of materials substitutions (i.e. lead paint and low grade materials) can also be driven by the refusal of Western buyers to allow suppliers to pass along cost increases which become amplified during a recession. So buyers must consider this when reviewing prices with suppliers.

Part 2 will examine Corporate Social Responsibility in global sourcing.

Thanks, Dave.

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