Category Archives: Global Trade

The Physical and Financial Supply Chain Integration Struggle

If the two supply chains could be truly interwoven, there is the potential to shorten the procure-to-pay cycle, reduce the costs of goods sold, and free working capital. And this is just the beginning, as noted in a recent Global Logistics & Supply Chain Strategies article in Supply Chain Brain on how “Companies Struggle to Integrate Physical and Financial Supply Chains”.

However, this is easier said than done because organizational barriers often prevent these two disciplines from working together harmoniously. And even if the walls come down, there’s still the issue of integrating the disparate and unconnected systems that run procurement and finance. As a result, billions of dollars are trapped in corporate supply chains, and opportunities to reduce costs through better financial management are unavailable.

As Jonathan Heuser, VP of Supply Chain at JP Morgan Chase astutely notes, while the purchasing discussion typically is around getting the lowest unit cost for goods and the supply chain discussion is around meeting delivery dates, these discussions don’t take into account the ramifications that associated payment terms and methods have on a company’s working capital. Similarly, financial managers don’t have the visibility they need into the physical supply chain, which only serves to magnify the inefficiencies.

Furthermore, as Kurt Cavano, CEO of TradeCard, notes, product cost savings can be offset by operational expenses associated with managing global transactions, financial risk and the requirement of additional, more expensive capital. In addition, late payments come with penalties when the company could have taken advantage of discount opportunities that many companies will offer for quick payment.

If the two systems are integrated, which makes sense since they both need to work off of the same fundamental information, procurement professionals could see the true costs of buying from a supplier in China, which would include all import and export tariffs, capitalization costs, and associated risks. In addition, finance professionals would see when capital was needed, where there are savings opportunities in the forms of discounts or favorable exchange rates, and when there is free capital to invest in short term opportunities for profit.

In addition, since there are a large number of redundancies between the information needed for purchase orders and invoices, the information needed for global trade documents, and the information needed for financing and payment, integrated systems can reduce the administrative overhead and associated costs. In addition, it would be much easier to apply real-time risk management since each group would understand where a project was in the process.

However, that’s not likely happen as the majority of buyers and suppliers still struggle with Supply Chain Finance (SCF) and the significant opportunities that it offers if done correctly. Most companies that are currently pursuing SCF are doing so not because they have a good grasp of what it can do for them, but because they are under substantial pressure to lower the costs of goods sold as raw material and energy prices continue to skyrocket and they are grasping at anything with the potential to save them money.

However, before companies can truly save money with SCF, they have to be ready for it. For a company to be ready for SCF, they first have to address automation, total cost modeling, and working capital management. If a company is not comfortable with e-payment, automated trade document creation and e-document exchange; is unable to use modern modeling and strategic sourcing decision optimization to make true total cost of ownership decisions; and doesn’t understand the different options it has available for capitalization, investment, and supplier payments, it will be unable to fully implement and take advantage of supply chain finance and all that it has to offer. So brush up on your e-Procurement, dust off your global trade, and master your strategic sourcing decision optimization and you will be ready to take the supply chain finance leap.

Culture Matters

Culture Matters. Especially when dealing with overseas suppliers whose native language is not your own. After all, you don’t want to accidentally call your best customer Mr. Stinky Fish Face, do you? (Unless, of course, you’re using UK SuperMarket Negotiating Tactics (UK Telegraph), in which case, maybe you do.) That’s why a recent article in SourcingMag titled “Culture Matters: Communication and Culture Tips for Global Managers” caught my eye because, as the article points out, whenever difficulties arise, it’s often due to “communication problems”.

The article had tips for global managers who needed to manage projects, communicate on a personal level, and deal with cross cultural boundaries.

When managing projects, a project manager should:

  • insure a first-rate project management information system is in place
  • integrate project management processes with those of business partners
  • train team members on all aspects of enterprise communication processes

Translation:

  • Carrier Pigeons won’t get the job done
  • Parallel lines never meet
  • Leaving Bob alone with his trusty fax when the rest of the team has moved to e-mail is asking for trouble

In order to ensure the communication capability is there, a project manager should:

  • assess communication skills as part of the hiring process
  • identify gaps and provide remediation through training and coaching
  • develop team cultures that are self-reflective and self-correcting with regards to interpersonal miscommunications

Translation:

  • If you’re communicating in English and the best a candidate can muster during the interview is “Me For Job, Yes?”, you’re probably going to have a problem
  • If one of your team members responds “Mr. Roboto” when your Japanese supplier says “domo arigato”, you’ve got a communication breakdown
  • If you have a team of Loud Howards … time for a new team!

To help bridge any cultural communication differences, a project manager should:

  • assure region-specific cross-cultural awareness
  • insure your partner is doing the same
  • involve everyone in cross-cultural training

Translation:

  • Japan and China might use the same kanji character set, but they don’t speak the same language or have the same culture (and if you confuse them, calling your partner Mr. Stinky Fish Face might be the least of your worries)
  • Make sure they understand that American English is not the Queen’s English … ( unless you want a room full of blank stares if a British counterpart starts using local colloquialisms in a Dallas boardroom )
  • Don’t forget religion awareness if your overseas outsourcing partner has followers of religions with a lot of praying and / or chanting at regular times during the day (so your employees can understand and adapt)

Another Notch on the Belt for Procurement

It was great to see Procurement take center stage in a recent Forbes article article by Knowledge@Wharton that interviewed Marshall L. Fisher, director of Wharton’s Fishman-Davidson Center for Service and Operations Management. It was even greater to see the article start off by noting that Procurement, historically an uncelebrated topic among business strategists, is now taking center stage and that these days, purchasing departments are playing pivotal roles within global firms in ways old-fashioned purchasing managers could never have imagined.

In the lengthy and informative article, Fisher noted that two of the biggest phenomenons in recent history are the outsourcing and offshoring of manufacturing operations, which is in sharp contrast to the 1980’s when the focus was on trying to strengthen and preserve US manufacturing. These days there are many companies that don’t make anything in the US, if they even make anything in-house. They’ve taken outsourcing and offshoring to “low-cost labor regions” to the extreme.

And “low-cost labor regions” evolved to meet the needs of companies that took outsourcing and off-shoring to the extreme. Fisher gives the example of Luen Thai, a company in southern China that is one of the largest private-label apparel manufacturers in the world. In order to meet the growing needs of their global client base, they set up a massive facility that is known as “supply chain city” just to produce apparel. It was designed as a “one stop shop” that does everything from initial design through final production, including prototyping and redesign on the spot.

Another example Fisher gives is Foxconn, “Hon Hai” in China. They’re a 32 Billion company that produces a large percentage of branded consumer electronics globally, with clients that include Dell, Motorola, and Apple. They have 12 facilities, and one facility alone is so large that it’s literally the size of a small city with 245,000 employees, as well as its own police force, hospital staff, and school.

But once the low-cost labor regions proved themselves, like China, business started pouring in, and then the same problems that were encountered a decade earlier when everyone was outsourcing to Japan came back. Labor became scarce and costs started to rise. And then we had the recent slate of quality issues. In other words, in outsourcing to low-labor-cost countries, you get a short-term benefit, but there is a risk you may be spawning a competitor.

In summary, procurement is taking center stage, but the global supply chain is more challenging than ever.

(Logistics) Flux Management

No, this isn’t an article about Flux Capacitor management and how to keep your DeLorean in peak condition, but about managing in emerging and developing markets when rising labor costs, increasing transportation costs, and shifting demographics are constantly chancing the success equation in these markets.

The inspiration for this post is a recent article in Logistics Management by Bill Read and Michael Tse of Accenture who noted that emerging and developing markets like China and India will be the key battleground for the years ahead for those multinationals eager to grow in the ever changing global economy. The reality is that the emerging middle class in the fast growing markets in China, India, Taiwan, Malaysia, Thailand, Indonesia, and the Philippines represent a significant opportunity for those companies poised to take advantage of global opportunities.

According to the article, mid-size companies need to build unique capabilities in four key areas in their efforts to ensure success:

  • Entry Strategy
    It’s not just about red-tape. Where are you going to get the resources and partners you need for success? Where are you going to launch? Chances are, the middle class aren’t just emerging in the tier one cities, but the tier two and tier three cities where populations are also exploding.
  • Channel Strategy
    The majority of people in countries like India, China, and Vietnam still reside in rural areas. Even though the countries are rapidly urbanizing, you could missing out on a large market segment if you just focus on the urban centers.
  • Supply Strategy
    How are you going to get your supplies and distribute your products? Building a new network from scratch can be a challenge – you’re likely going to need a local 3PL provider – but who?
  • Workforce Strategy
    Local talent is critical to the success of a market entry in Asia for a host of reasons, from language skills to market insight to just plain practicality. How are you going to attract and retain this local talent?

Each of these strategies is critical, and each comes with a host of questions that need to be answered. The article is definitely worth a read.

The Economist and The Fragility of Perfection

It’s nice to see a major publication like the Economist tackle supply chain, even if the picture painted isn’t all that rosy, as in The Fragility of Perfection. The article, which starts off “ONLY Connect”, the words of the novelist E.M. Forster that tidily sums up globalization today, notes that an international company may buy its software from California, send its data to India, purchase its electronic equipment from China and staff its canteen with workers from eastern Europe. And that this specialization is all fine and dandy, but it depends on one critical factor: the reliability of supply.

This dependence on supply reliability is a vulnerability of the global industrial system, but how bad is it? And more importantly, how bad does it have to be? The article quotes David Bowers of Absolute Strategy Research who draws an analogy between today’s supply chains and the recent boom in structure finance which saw banks distribute risk to specialist vehicles like conduits. These banks worried less about the creditworthiness of borrowers, but the risks ended up back on the banks’ balance sheets when the sub-prime crisis broke. Mr. Bowers believes that just as the banks mispriced credit risk, so companies have misjudged strategic risk. And I have to agree. Way too many companies are single sourcing or running their global supply chains too lean when there are dozens of things that can go wrong. (Why? Some companies don’t understand the risk, and some don’t know how to make good sourcing decisions when multiple companies are involved. But there’s no excuse for either, especially when there are good strategic sourcing decision optimization tools on the market to help a company, by way of constraints, mitigate risks AND save money.)

However, what I really liked about the article is Mr. Bowers’ belief that loose monetary policy in America is leading, via the currency markets, to inflation in developing countries. This, in turn, undermines the cost advantages of outsourcing, as the prices of raw materials and labor rise. I’m sure my fellow blogger over at Spend Matters would agree that poor monetary policies, like free trade restrictions, will only hurt the economy.

Furthermore, disruption to the supply chain is a huge strategic risk. Supply chain disasters have bankrupted companies in the past. Remember Aris Isotoner, Webvan, or Foxmeyer? No? Well, they were destroyed by supply chain fiascos. Although just-in-time inventory levels create savings opportunities, they also cause huge losses when suppliers do not deliver in time. The reality is that the more independence there is in the system, the wider the effects of disruption in any one part of it will be felt. A disruption anywhere in the world could prove catastrophic in dozens of countries simultaneously, as the recent earthquake in China might just do if certain factories stay offline for too long. And the resulting losses could be far greater than the fallout of the recent subprime-mortgage crisis.