Risk Management in Migration to Low-Cost Countries, Part I

Today’s guest post is from Diego De La Garza, Senior Project Manager at Source Once Management Services, LLC, and Source One’s expert on sourcing in Latin America.

A few decades back, corporations started to talk about migrating costs to low-cost countries. These discussions were driven by the inherent advantages that locations in East Asia, Eastern Europe, and Latin America presented. Today, this is no longer merely a strategic notion but a well-established commercial trend. Efficient migration to low-cost countries has become a necessary, competitive trait.

One of the primary reasons companies decided to migrate to low-cost countries in the first place was precisely to mitigate risk, whether by reducing cost or by decreasing the probability of supply chain or operational disruption. Eventually, this strategy became so popular that companies understood that without implementing structural changes to reduce their cost base, they could perish. Consequently, as the trend evolved into a global practice, it became clear that ignoring low-cost country sourcing within the corporate agenda was a risk itself. Today, the global sourcing paradigm is complex, and in many cases, world class organizations are now even moving out from well-known countries in Asia to “nearshore” locations in Latin America.

However, as ironic as it may be, low-cost country sourcing is so intricate that it carries significant risks if improperly managed. This preamble sets the tone to our main discussion, as risks factors, whether known or strange, will present themselves regardless of the low-cost country strategy.

Common sense dictates that risk mitigation must begin with proactive and diligent research on risk potential before setting a comprehensive strategy for the migration process. Surprisingly enough, many corporations overlook this first step because foreign market research can be both expensive and time consuming. Regardless of how arduous the efforts are, some risk factors will not be identified easily or early enough. Thorough research and preparedness will always prevail as the first risk mitigation strategy. That said, many risks of low-cost country sourcing today are well-known, and best practices will facilitate managing risk from the initial stages of the migration process.

Typically, low-cost countries are surrounded by some level of both reputation and myth. Getting to know the real landscape is paramount when migrating costs. The first premise that comes to mind is that low-cost is associated with low quality. Generally speaking, this is not true, especially when we understand the strong industries in the markets we pursue. The likelihood is that where there’s expertise and a well-established industry, quality will not be an issue. What we need to determine instead is whether the location in scope has the adequate environment to sustain and develop the industry in the long-term. Beyond generating an understanding on local suppliers, labor rates, and raw materials, corporations must consider multiple areas of risk and audit the local market itself.

This is particularly important because any company migrating a manufacturing process or even a service should determine if the local market itself would be receptive to it and support regional demand. This step would mitigate risk by reducing costs and opening new markets, making the location an efficient link within the supply chain and a source of revenue.

However, quality is just one concern that needs to be considered when outsourcing to a local market. In Part II, we will explore some of the other risks that need to be addressed.

Thanks, Diego.

Economic Damnation 07: The 1%

“The 1%” was coined in 2011 to refer to the US income and wealth inequality where the concentration of wealth among the top 1% is significantly above the national average. On average, the 1% earn well over a million dollars each year (and the bottom 99% all make less than 350K) and control over one third of the country’s wealth, meaning that, on average, their financial influence is 33 times that of an average person. In addition, the roughly 536 Billionaires in the US have a net worth that is over 10,000 times that of the average household net worth in the US (and in a couple of cases, almost 100,000 times).

And the US is not the only country with such a disparate income and net worth inequality. China has 213 Billionaires in US dollars, and the top one percent in China also controls over one third of the country’s wealth. The wealth inequality has widened significantly over the last 20 years.

And similar situations appear to be arising in other developed countries around the world. A recent article in the Guardian called the growing wealth inequality in the UK a ticking time bomb, the Broadbent institute recently published a report that found Canadians vastly underestimate the wealth gap in Canada, and even the Australian Institute is finding that the inequality between those with the most and the least is rising in what was once universally thought of as an egalitarian country.

This is bad, because it’s at the point where a select view individuals can not only single-handedly make life a living hell for a large number of Procurement professionals in a number of disparate companies across the globe (as Extreme Activist Investors, Damnation 64), but can individually cause a number of economic, infrastructural, environmental, regulatory, societal, organizational, and technological headaches all on their own. If a small group of these individuals buys a Fortune 3000 and decides it’s manpower heavy, they can cause 10,000 people to be laid off in a day in a small town and cause a major shift in the local, and even regional, unemployment rate (and the market who can afford the product being built). They can start new airlines to increase competition (and logistics headaches), or buy a competitor just to decrease competition. They can create new sustainability initiatives overnight, or turn the fracking dial up to 11! They can fund entire lobby groups to get their standards and requirements in place. They can single-handedly make your supply chains safer or lobby against worker’s rights to keep costs down. They can replace your entire Sales and Marketing teams overnight. And they can dictate your ERP for years to come.

The reality is that, in today’s world, Money Talks, and when you can buy and sell 99% of the world’s companies with your pocket change, their money talks the loudest. It’s another damnation we’d rather not know exists, but it does, so we need to be as prepared as we can (and always expect that even the best laid plans can be set awry by the whims of one wealthy individual).

Hi-ho. Hi-ho. It’s Off PO We Go!

Or do we?

A few years ago Jason the prophet Busch wrote a post over on Spend Matters that asked “can (and should) we eliminate purchase orders (POs) entirely”? In the post he quoted Tom Linton, CPO & Supply Chain Officer at Flextronics, who suggested that we eliminate POs entirely as a result of his mandate to eliminate work before you automate, automate work before you move it and always make sure you improve outcomes in any given scenario.

Mr. Linton is entirely right — there’s no point in automating unnecessary work. And in many circumstances Purchase Orders are entirely unnecessary. If the contract specifies a delivery schedule with approved rates, then there is no need for a Purchase Order since it would just be replicating what’s in the contract. Similarly if it’s for services and approved projects, resources, and rate-tables are defined against a project schedule (unless overtime exceeds the maximum overage allowed).

In this situation, you can just conduct the 3-way match against the goods receipt and the contract when the invoice comes in and you are still certain that you have payed the right price for the right good from the right supplier at the right time.

But what about the situation where there is no (master) contract? What then? You just match the invoice to the goods receipt? I hope not! In this situation you can verify you are paying for the right goods from the right supplier at the right time — but not the right amount. You need to verify that the price is right (because, as the line goes, it can all be yours if the price is right). So in in this case you need something. A requisition? Nope – that’s not sent to the supplier, that’s sent to your supervisor/manager for approval. A one time contract for a single purchase? Isn’t that just a purchase order?

The purchase order can’t be eliminated, because proper purchasing procedure dictates that all purchases should be for approved products from approved suppliers at approved prices and such approvals should be documented in some form — be it a contract schedule or rate card, purchase order, catalog, or approved rate range for a T&E expense — and there are some instances where the only viable option will be a purchase order.

But an effort to eliminate as many purchase orders as possible will be a good and productive one because, like invoices, each and every purchase order comes with a processing overhead cost that adds up and costs the organization significantly over time.

In Commemoration of the One Hundred and Thirtieth Anniversary

A wandering minstrel I –
A thing of shreds and patches
Of ballads, songs, and snatches
And dreamy lullaby
And dreamy lullaby

My catalogue is long,
Through every passion ranging,
And to your humours changing
I tune my supple song!
I tune my supple song!

Are you in sentimental mood?
I’ll sigh with you,
Oh, sorrow!
On market’s coldness do you brood?
I’ll do so, too
Oh, sorrow, sorrow!
I’ll charm your willing ears
With songs of buyers’ fears,
While sympathetic tears
My cheeks bedew!
Oh, sorrow, sorrow!

But if patriotic sentiment is wanted,
I’ve patriotic ballads cut and dried;
For where’er our buyer’s banner may be planted,
All other local banners are defied!

Our warriors, in serried ranks assembled,
Never quail – or they conceal it if they do
And I shouldn’t be surprised if nations trembled
Before the mighty troops, the troops of …