Category Archives: Guest Author

Best Cost Country Sourcing and the Concept of “Riskturn”

 

Today I’d like to welcome Ashton Udall of Global Sourcing Specialists and the author of the Product Global blog [WayBackMachine].

Low cost country sourcing; high cost country sourcing; near-shore sourcing; home-shoring; off-shoring…keep ’em coming. The manufacturing and distribution industries are just starting to get interesting. It can be tough to keep up. But, you only need keep up with the best concepts out there. And “best cost country sourcing” is one of them. Merging the “best” of risk and return?

Michael Lamoureux of Sourcing Innovation recently wrote a post entitled Best Cost Country Sourcing. His post was based on BrainNet’s white paper, “Best Cost Country Sourcing”, which I have yet to find a working link to. But fear not. Michael has summarized some of the concepts and made noteworthy commentary:

Taken from the white paper:

…cheap labor is better suited to cheap products and cheap services and not necessarily an advantage for the premium products that industrial countries are known for.

It all started with the buzz words “Low Cost Country Sourcing”. This wording, put politely, misses the point by a long shot. Criteria such as quality, logistic risks, intellectual property risks among others, have to be considered and evaluated thoroughly to assure that these measures are successful. Establishing innovations on the supplier side as a competitive advantage and managing your new suppliers actively are only two from many important success factors.

I agree. Generally speaking, you get what you pay for. But you have to take it on a case-by-case basis and think of it in terms of your overall competitive strategy. If time to market is too important, or you need components that are very high quality and technologically sophisticated, or exposure of your IP could sink your whole company, countries further along the development path with higher costs might end up saving you money in the long run.

Two basic concepts found throughout business, risk and return, are critical to the supply chain and sourcing. The problem is, it’s much more fun to speculate about substantial returns and savings, than try to quantify, measure, and assess risk. Thus, risk, and potential sources of risk and their effect on return, often fall off the radar. Perhaps someone should coin the term “riskturn”. Wait…I just did. It follows the whole celebrity gossip magazine promotion of co-identity: two things fused together which we dream will never be broken up again. People-Magazine-reading 14-year-old girls and desperate housewives have their Brad Pitt and Angelina, “Brangelina”, or Ben Affleck and Jennifer Lopez, “Bennifer”. Now CEO’s and sourcing managers will always remember “riskturn” and know that risk and return are a couple made in heaven.

Back to sourcing … Michael astutely notes:

In other words, LCCS alone is not the answer, not a quick fix, and not a saving grace to a flailing company. In order for a company to be assured of value in their global sourcing initiatives, they at least need to progress upward to a BCCS initiative, understand the advantages and disadvantages of each of their options, and understand that such initiatives will take considerable time and effort. It’s not just the flick of a switch.

In my case, Michael is preaching to the gospel. It’s right on and it’s worth promoting this kind of information more. ChinaLawBlog did a post eloquently entitled “China Defeats Vietnam in Sourcing Smackdown” which covered a post I did “Offshore Sourcing: An Ever-Shifting Landscape, Part II”. In my post, I talked about the fact that many fashion apparel manufacturers that moved production to Vietnam to avoid the risky/costly quota situation with China, then had to gather up their threads and needles again and head back to China and other countries when the US government announced that they would be monitoring Vietnam’s fashion industry for possible anti-dumping actions. In the comments section of ChinaLawBlog’s post, he noted that huge multinational corporations which fall into $5 million mistakes in trying to source the lowest costs or be the first to enter developing markets is not a strategy for all to follow. His point being, a smaller company making a $500,000 mistake might be up the Mekong Delta without a paddle, because they just don’t have the deep pockets to absorb those kinds of mistakes from a financial perspective like MNCs do.

Chasing lower costs undoubtedly disrupted supply chains, and perhaps order fulfillment, for these companies when they had to deal with a more unpredictable trade relationship between Vietnam and the U.S. For smaller companies, disruptors like this could be devastating. Best Cost Country Sourcing for smaller companies would involve hedging risk by looking for lower overall costs (rather than lowest hard costs) in a country where things like economics, trade, supply, materials, and other things are more predictable. I believe China retains this position over many other countries for smaller businesses looking to source consumer goods. At the very least, it’s certainly a good place to start for many. In many cases, maybe the best…?

Thanks Ashton!

P.S. I expect the comments to start rolling in from Mr. Locke any minute now …

The Top Three XI: Dale Earnhardt

Today I’m thrilled to bring you a guest post from The Blogging Thunder From Down Under. It’s been a while since the MacQuarie Bank let him out of the vault, so I hope you enjoy Doug Hudgeon’s guest post – as it might be a while before they let him out of the vault again.

Aaah, the number three. Is there another number so pregnant with metaphor and meaning? Tripartite systems have been in vogue for centuries with everyone from Euclid (triangle) to the Christian God (Trinity) to Adam Smith (Rents, Wages and Stock Profits) speaking in threes. Given our apparently innate tendency towards triposis, Michael has chosen wisely his topic of the Top 3. I associate “Top 3” with Dale Earnhardt, who dominated the NASCAR speedways driving car number 3 – he was undoubtedly, the Top 3 of his era. And from there, I am reminded of a terrific article by David Ronfeldt, “Social Science at 190 MPH on NASCARs Biggest Speedways” on FirstMonday.org.

The article discusses the conditions under which competitors cooperate on the NASCAR circuit (cars drafting in a line travel faster) and the conditions under which they compete (a driver can ‘defect’ from the car in front by pulling aside from the lead car’s bumper thus trapping the lead car outside the drafting line causing the car to lose as many places as there are cars in the line; whilst running the risk that the third car may follow the first thus leaving the ‘defector’ hung out to dry).

The article concludes that the best strategy is tit-for-tat, cooperating with those who cooperate with you and punishing those who leave you hung out to dry. This allows you to develop allegiances with ‘friends’ and discourages your friends from defecting. The drivers viewed as most capable of leading others to the front will develop the most friends – success breeds success.

There’s lessons in this for all of us.

Spend Analysis: What Purchasing.com Got Wrong

Purchasing’s recent article on  “How to Select a Sourcing Strategy” wasn’t the only article that just didn’t make the cut in my book. “Their ABCs of Spend Analysis”  article missed the point as well. However, knowing that Eric Strovink of BIQ (acquired by Opera Solutions, rebranded ElectrifAI) would also be taken aback by this article, I invited him to shed some light on what the article missed. So, without further ado, here’s Eric’s guest post on What Purchasing.com Got Wrong.

Occasionally an article crosses my desk that seems well-written and insightful, such as
Purchasing.com’s “The ABCs of Spend Analysis” — but only if I’m willing to accept
assumptions with which I can’t agree.

“A: Acquire the data skills”

Wait, stop right there. In my view, it shouldn’t be necessary to
“acquire data skills” in order to manipulate and report on spend data.
This limits usage to a fraction of the business users who otherwise could
deeply improve their understanding of what’s going on. Any requirement to
dump data out of a spend analysis system and import it into Microsoft
Access or any other database management system is a glaring indictment
of the spend analysis system itself. It’s supposed to be a “spend analysis”
for goodness sake, so where’s the “analysis?” Similarly, a requirement
for SQL skills or other IT expertise in order to construct a report
is equally an indictment of the spend analysis system.

We should not allow tool limitations to dictate that business users
must become IT experts in order to analyze their data. That’s like saying
drivers must become mechanics before they can use the interstate highway system.

“B: Bring the data together”

One could hope that “ETL (Extract, Transform, Load)” would not be
the theme of this page, but of course it is. In fact, the only letter
that’s relevant in this tired acronym is “T” (for “Transform”). If
you can’t load data into your spend analysis system, then find one
that makes it easy. If you can’t dump data out of your ERP or accounting
system(s) in some reasonable flat file format (like .csv), you didn’t
try very hard. Every accounting system I’ve dealt with in the last
four years, old or new, has a perfectly reasonable and simple method
for dumping its data, almost always a method that requires no IT
assistance at all.

Transformation is necessary in order to coerce data from incompatible
systems into a common format. A good transformation tool should be able
to move any field from one column to any other; create new fields;
eliminate fields; and create any output field as a function (including
string, math, and logical functions like “IF”) of any number of
input fields. It should be able to save the transform and apply it
on refresh.

And the translation tool should be — you guessed it — operable by
ordinary business users, not just by IT types.

“C: Change the way you source”

Wait, should we just plow ahead and start sourcing? It turns
out that accounts payable-level spend analysis doesn’t really
show you very much, and this section of the article reinforces
the point. “We realized we were spending more with Supplier K
than we had previously thought, and this gave us more leverage
in negotiations.” OK, but do you know whether contract terms
were met? Was the supplier over-charging? What were the exact
buy points and quantities with supplier Q for commodity X? Why
didn’t a contract with supplier Y result in the savings we projected?

Problem is, an A/P level cube only peels back the first layer
of the onion. You’ve achieved a reasonable idea of what was bought,
who bought it, and who supplied it, and that’s important. However,
spend analysis is an iterative process of first identifying macro
behaviors, and then zooming in using micro analysis on a
commodity-specific basis. The high level cube gives you an
indication of what might be wrong — too many suppliers, or
too few; too high a spend rate given [number of employees] or
[size of business]; too much off-contract spend. But that’s
all it gives you. You don’t really know, for example, whether
off-contract spend (Fred down in Order Entry buying a Dimension
800 from Dell) is an inferior price point to the company’s VAR
contract for ThinkPads — or whether Fred actually got a better deal.

If the high-level cube hints at a possibility for cost reduction,
should you run right out and start running sourcing events? Maybe
not. For one thing, it’s sometimes difficult to determine
whether high spend is a demand issue or a supply issue, and
sourcing won’t touch the demand side. Sourcing events are
politically disruptive, can take many months to implement,
and can upset long-term supplier relationships unnecessarily.
It’s entirely possible that quietly confronting an incumbent
supplier with a detailed analysis of buy patterns from
invoice-level data can not only change behavior immediately,
but also return money to the bottom line from overcharges. And,
it certainly will tell you if you have a demand problem. If,
at the end of the day, sourcing is still required, fine; but in
many cases it’s not. Few incumbent vendors want to go through
a sourcing exercise and potentially lose the business; they’d
rather meet Fred’s price point.

Thanks Eric! I could not have said it better myself.

Emptoris – Setting the Record Straight Part II

Ammiel was kind enough to respond to my comment and provide more information about their overall solution offering over on SpendMatters. However, given that I copied my comments here and that this is very good information for a prospective buyer, the comment deserves to be repeated.

Regarding in-depth briefings to “affiliated” bloggers — IMHO it is also applicable to analysts and press — Each briefing is a unique instance, and we take into consideration the topic as well as the nature of work the individual is doing with competitors. I Note that in my original post the briefing exclusion was narrow, and specific to this very topic – not a broad brush statement towards you. As a CTO for hire there is a big difference between the type of work you do and what Jason and Andrew Bartels do – especially in the area of optimization. Kudos for the above board disclosure policy, as noted, we did not feel that we were deceived, etc.

My statement on the MindFlow team joining Emptoris made no mention of team size, etc. It was simply to state that we are qualified to judge the relative strengths of the two offerings (given Product Management and Engineering talent), you may have read more into this than was specifically stated.

Regarding our assessment of MindFlow capabilities, this was done from the End-User perspective, as a whole-product capabilities assessment. In the case of 5(a), 5(c), and 6(b) the MindFlow Front-end simply let down the back-end. On 5(b), we specifically meant the ability for suppliers to enter the constraints themselves – this area of our solution is very robust, and has evolved into a feature set that we’ve called Creative Negotiations in the past, and which has now matured to Supplier Decision Support. (Link)

Speaking of whole-product, that is very much the point of the Advanced Sourcing Service. It is all about running mega-events better and with much less risk (Think of $50M+ riding on a single event). It is not just an engine that we provide, we help the customer by providing e-Sourcing category experts specific to help these mega-event *optimization* problems (Transportation – Ocean, Truckload, LTL…, Packaging, Print, Fleet Acquisition, etc.). When we say infrastructure, we talk about a complete HW/SW stack along with instrumentation and surrounding services to ensure that the event will not go down, etc.

The challenge with these categories is that when companies put out $100M+ on a single event, things become very risky in several business dimensions (e.g. if the event is mis-handled logistically then supplier relationships can be burnt for years, if the event runs 3 weeks longer than expected – that’s $750K in lost opportunity cost, if the event misses a key deadline then a price lock-in may be permanently missed given rising fuel rates, etc.) The benefit of the Advanced Sourcing Service is that we and our partners invest and in a sense under-write some of the logistical risks the customer faces.

A benefit of this complete solution approach is that it helps accelerate advanced optimization’s adoption within the sourcing domain. At the end of the day it makes the core technology even more approachable to a greater number of organizations. And that is something good that I believe we can all agree upon.

I would like to thank Ammiel for responding and providing clarifications not only on Emptoris’ prior comments but on the Advanced Sourcing Solution as well.

The Top Three VI: Straight to the Bottom Line

Today I’m thrilled to bring you a guest post from Doug Smock, editorial director of Global CPO (.com) and co-author of On-Demand Supply Management and Straight to the Bottom Line.

First I’d like to thank Michael for the invitation to participate in the blogathan. I’ve spent most of the last three years since I left Purchasing magazine writing two books about what I consider to be the biggest issues in the procurement world, and have already vented my spleen about such critical issues as CEO involvement/buy-in as well as world-class metrics (since 99.9% of all procurement departments I’ve visited have terrible metrics).

For this, I’d like to touch briefly on the need in American companies for greater cross-functional collaboration between procurement and engineering. The primary goals need to be reduction of specifications’ complexity, introduction of new ideas throughout the supply base, better understanding of “could” costs, improved management of products through their entire lifecycle, and dramatically improved product quality and user-friendliness.

When I first joined the staff of Purchasing magazine in 1977, we used to run a special issue called Value Engineering in which we ran reports of how teams of purchasing and engineering professionals met to reduce costs or improve performance of existing, or even brand new, products. I once visited Buell Motorcycles in East Troy, WI, and saw how product development began with a talk by founder Erik Buell on his vision for a new sports bike: the cost target, speed, look, and feel. Engineers and purchasing professionals then broke into platform teams and met with key supplier partners to develop components. One team replaced a 21-part front section of assembled metal pieces with a sleek-looking, stronger and cheaper single made through an outsourced metal molding process. When I returned to Purchasing as Chief Editor in 2000, I couldn’t really understand why the Value Engineering issue had disappeared. It also seemed to disappear at many companies in the blitz of wonders related to dotcomism.

That’s a shame because what suppliers bring to the table is incredibly powerful in this process. I saw it recently in the newly designed Cabrio and Duet line of laundry products from Whirlpool, where suppliers proposed solutions to technical problems that internal engineering teams felt were irresolvable. I hate to kick a dog when it’s down, but this to me is the most lamentable of all of the problems with the American automobile industry. Bob Lutz, currently chairman of GM North America and former head of Chrysler, once famously commented: “I was amazed (and a bit appalled) at the lack of functional integration at the companies I worked for.”

I know the blogs focus a lot on software, but I’d like to see a little more emphasis on blocking and tackling at the company level.

Editor’s note. Bold was introduced to help draw out Doug’s key ideas. Also, our blogs do occasionally tackle more than just software, and two posts in particular I’d like to point out are Jason Busch’s “Selling the Value of Procurement to the Business”* on Spend Matters [WayBackMachine] and Tim Minahan’s “Selling Supply Management to the C-Suite: Make it Personal” on Supply Excellence [WayBackMachine]. Also, keep your eyes on the eSourcing Wiki [WayBackMachine]. More content is on its way, including a wiki on perfecting your pitch for a procurement project to pointmen.

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.