Monthly Archives: June 2007

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 …

Living in a Materials World (in Direct Materials Sourcing)

Last Tuesday, I blogged that Aberdeen Took a Tip from Madonna in their latest research study, Direct Materials Sourcing: Living in Materials World, which is due to hit their website in the next couple of days. Before the study, they hypothesized that direct materials sourcing should include the following business processes:

  • Standardized Strategic Sourcing Initiatives Company Wide
  • Cross-Functional Procurement Teams
  • E-Sourcing and E-Procurement Solutions
  • Procurement Involvement in Product Development
  • Leverage of Outsourcing

The study more-or-less confirmed these hypothesis. Specifically:

  • 97% have a formal direct materials sourcing program,
    83% of these programs have been in place for more than five years,
    and 70% more direct materials are strategically sourced
  • they differentiate themselves by their appetite for, and usage of, external support,
  • 70% have a greater likelihood to utilize e-Sourcing,
  • they engage product/design teams sooner in the process, and
  • over 50% more of their direct materials spend is
    sourced using LCCS

Furthermore, Best-in-Class enterprises have:

  • 98% of direct materials spend under management,
  • 28% higher year-over-year cost reductions,
  • 63% greater rates of contract compliance, and are
  • 55% more likely to track implemented savings

This report is one of the best reports I’ve seen out of Aberdeen in a long-time. It not only includes the standard metrics you’ve come to expect from Aberdeen research studies, but also includes metrics for process, organizational structure, knowledge/data management, technology usage, and performance management broken down by laggards, average performers, and best-in-class enterprises.

And it notes that Any collaboration gap that exists between a procurement department and its internal stakeholders is exacerbated by an increasing reliance upon off-shore suppliers who, in addition to offering potentially lower prices, may also require longer lead-times and different risk management strategies, a point I’ve been trying hard to make as of late.

The report also includes the standard Best-in-Class PACE model, details on services utilized by Best-in-Class companies, a couple of compelling case studies, and required-actions for laggards, average, and Best-in-Class performers to advance up the supply chain food chain.

So, how can you achieve Best-in-Class? The statistics above provide some insights. For starters:

  • make sure you have a formal direct materials sourcing program with a pipeline that always exceeds capacity to allow your team to maximize their potential as their capabilities improve
  • use center-led procurement and a cross-functional sourcing team
  • use best-in-class e-Sourcing and e-Procurement solutions
  • collaborate with product design and engineering on NPD from the get-go
  • leverage 3rd party services, outsourcing, and best-cost country sourcing
  • use contract management and track compliance and savings
  • read the report – it is worth it! (And check back – I hope to have some commentary from the report author, Andrew Bartolini, as soon as he has a moment to spare!)

And remember, plans are only good intentions unless they immediately
degenerate into hard work (shown by a high percent of spend under
management) and a focus on bottom line results.

Even Heroin Smugglers Need Freight Optimization

According to a recent article on Yahoo! News, Tajik police have arrested a woman for trying to smuggle heroin in a refrigerator through express delivery firm DHL. Apparently, the DHL office in the Tajik capital Dushanbe grew suspicious after noticing that its transportation cost to Moscow exceeded the actual cost of the fridge by several times. Upon a search, they found 17.4kg of heroin hidden in the innver cover plate.

What was she thinking? Or more importantly, what was she not thinking? “Let’s see … $200 fridge … $500 shipping … makes sense to me!” What isn’t wrong with this picture. First of all, as a consumer, you should never pay more to ship a commodity than you pay to buy it. Secondly, you should never import something you can buy locally. (Who wants to deal with customs and import duties when someone else can do it for you?) Furthermore, if you have approximately 2.2M* worth of heroin, certainly you could afford to buy and ship a small car, which would cost roughly 1% to 2% of the total value and have a shipping fee only one tenth of its value – which would surely not be as suspicious since shipping would be much less than the value and people import cars significantly more often than they import fridges.

So, I guess there are two lessons here:

  • If you’re going to smuggle drugs, make sure you smuggle them in an item where the shipping cost doesn’t (significantly) exceed the item value.
  • If you’re going to buy and ship internationally, make sure you’re not paying too much for freight, or risk getting your shipments stopped and search by ambitious agents looking for the next bust.

* Based on an estimated street value of roughly $125/gram, which appears to be the median value returned from various sources in a Google search on June 1, 2007.

Global Apparel

Apparel recently published an article entitled “Globalization is Getting Us” that had a surprising number of insights on Global Supply Chain Management and best practices given the nature and brevity of the article. In brief:

  • Too many companies are still using FOB as their cost metric!When you go global, you also have to factor in tarrifs, duties, higher shipping costs, travel costs, additional personnel costs, and the costs associated with expediting or acquiring a product locally at the last minute in the case of delayed (or lost) orders.
  • Even those companies that use landed costs are still missing the big picture! When you deal with an off-shore supplier, in order to have an effective relationship, you need to make regular site visits and sometimes even have feet-on-the-ground in the country you’re buying from. These extra salaries, travel costs, and opportunity costs associated with lost time from project managers and executives flying back and forth on a regular basis can really add up!
  • Price doesn’t matter as much as you think if the brand and quality are strong and customers buy.Most of us will pay a few extra percentage points, and sometimes a few dozen extra percentage points if we know the product is a quality, supported product from a reputable company, especially if it employs sustainable best practices. After all, we drink Starbucks.
  • Those who source local can turn on a dime and refocus production if demand unexpectedly spikes for a certain product.American Apparel and Zara can get product out in less than a week. If you’re sourcing from Asia, a month would be incredible turn-around time.
  • It’s easy to customize full-package offerings on-shore. Full-package from offshore can be a lot harder.
  • Not enough American companies are exporting their products. In today’s Global Enconomy, America is second-class – the new class is international.
  • Corporate Sustainability has long-term economic benefits. In addition to the immediate cost-savings from energy-saving efforts, it creates brand loyalty, a foundation for future profits.
  • Smart companies overcome the technology addiction. Technology may be the key to the collaboration, efficiency, and visibility you need in your supply chain – but there is a difference between you driving the technology and the technology driving you. Successful companies identify exactly what they need and what a tool needs to do to be effective – and then find a solution that fits. Not the other way around.