Category Archives: Global Trade

Is Global Sourcing Still Worth It?

Think about the baseline requirements.

  • Supplier Selection
    • potential supplier identification
    • verification and risk analysis
    • onboarding
  • Purchase Order Generation
    • order creation
    • transmission
    • acknowledgement
  • Route and Carrier Selection
    • potential route identification
    • potential carrier identification for remote trucking, ocean/air freight, local trucking
    • final carrier selection
    • cross-dock identification
    • FTZ identification
    • route selection based on cost and network balance
    • carrier selection
  • Transport Insurance
    • multi-quote obtainment and analysis
    • insurance provider selection
  • (Inventory) Financing
  • Trade Document Creation
    • export document creation
    • (automated) cargo manifests
    • import document creation, inc. security filings
  • Transport & Shipment Tracking
    • loading
    • transit
    • cross-docking
  • Importation
    • holds
    • inspection
    • tariffs
  • Documentation
    • goods receipt
    • invoice acknowledgement
  • Payment, Taxation & Reconciliation
    • payment authorization
    • pre-clearance
    • tax payment
    • supplier payment
    • refund tracking
    • refund collection
    • reconciliation

These are just baseline. Even the most simple global sourcing situation is insanely complicated. On top of this:

  • supplier risk analysis is insanely complicated as you have to consider all the supplier risks and supplier location risks
  • … as well as the raw material risks that affect their ability to acquire the materials and components they need to produce their product
  • carrier risk is also complicated as rapid fuel increases or primary lane closures that cuts off a significant portion of their revenue can take a financially healthy carrier to an almost bankrupt one
  • tariff risk is now a thing as one major country in particular changes tariffs on the whims of its leader; outdoing the chaos Brazil charged when it was changing tariffs weekly
  • insurance risk is real as the increasing risk of natural and man made disasters has resulted in insurance rates going up
  • every year, even though you’re paying more for insurance, more and more exclusions are being added with conflict, war, and piracy on the rise (again)
  • export, manifest, and import documentation, as well as tariff filings, are becoming insanely more complicated by the year … with every country and carrier having different requirements
  • the countries with e-invoice requirements (clearance and post-audit) tend to invent their own, slightly different, requirements and dealing with global invoices from 100 countries requires 100 different rule sets — that’s why there are vendors that just do global e-invoice compliance
  • global e-payments can be complicated as well … not all countries support your favourite e-transfer platform, accept your primary bank’s payment network, or deal with your preferred currency
  • VAT/Taxes can be just as difficult to pay, and ten times more difficult to reclaim

So, if you can get the stuff locally, or next door (i.e. one country over), why should you go global?

Especially when the cost argument doesn’t cut it anymore. Even if the model still comes out making the global source cheaper, the cost of risk, which needs to be taken into account as the potential of any multinational experiencing at least one major disruption a year is approaching 100%, means that the losses in any category will eventually exceed the savings (because the chances of a disruption for any major lane or supplier increase over time — you can’t treat it as an independent event because even coin flips aren’t independent — one is 50/50; but if 9 in a row have been heads, the chance of tails is almost 98%).

In other words, if it’s not necessary, does it still make sense?

Modern Strategies for Supply Chain Finance

The strategies for success haven’t changed much in the past few decades, but for some reason still aren’t in widespread practice. So we’re going to review the best practices from two decades ago and then indicate what else you should be doing.

1. Open Account and Letter of Credit Balancing

It’s critically important to understand your organization’s cost of capital versus your supplier’s cost of capital. Open account terms, for example, may bear lower fees than a letter-of-credit based transaction, but they can also restrict a seller’s access to working capital financing and increase its costs of working capital. The additional cost borne by the supplier for accepting extended payment terms, for example, could be finding their way back into your cost of goods sold.

2. Better Forecast Accuracy

One of the best ways to take cost out of the supply chain is to take unnecessary inventory out of the chain, as this just leads to additional storage, overhead, and financing costs and losses when it has to be cleared at considerable markdowns.

3. Supplier Cost Reduction

Depending on where your primary supply base is located, (up to) half of your suppliers might be struggling to access financing at acceptable terms. It might be their top issue, even above reliability of component and raw material supply! Their cost reduction is your cost reduction and your best chance at good supply chain finance strategies!

Building on these foundations, today you need to be considering:

4. Deep Tier Financing

Making sure your suppliers’ critical suppliers have access to fair and affordable financing so they can manufacture and sell their products affordably to your suppliers’ and not inflate your supplier’s cost which would inflate your cost.

5. Sub-Tier GPO

If you are relying extensively on a few key raw materials or components across your product lines, and if those are in short supply, costly, or volatile, buy the raw materials on behalf of your sub-tier supply base and sell it back at cost.

6. 0 Days DPO

Pay cash-strapped suppliers who would have to borrow at loan shark rates of interest immediately. It’s that simple. You’re paying for their overhead, so if your cost of finance is 1/5 or 1/10 of their’s, then, even if you risk borrowing occasionally, it just makes good financial sense.

7. Inventory Financing

Either enable your supplier to get financing based on their inventory materials and components and the goods they are going to produce, or create your own inventory financing solution for them.

The reality is that the standard techniques of JIT (and forcing suppliers to sit on inventory), increasing DPOs to the maximum legally allowed, and pretending EPD is a substitute for financing is NOT financing, only hurst the supplier, and only hurts you.

Seven Sourcing Strategies for Today’s Turbulent Times Part 2

4. Coopetition Collectives and Frenemy Facilitation

If your volumes are low or if the supplier needs more business to ensure long-term stability, then you might need to work with your competitors to form specialized captive GPOs for key common materials and components where you all need to ensure that the supply continues to flow.

But you might need to go one step further — if your peers are smaller and less financially stable then you, you may need to invest in some of your (potential) indirect competitors who require the same materials and components from the same suppliers you need your materials and components from. You may need to identify organizational needs you can buy from them to ensure their stability. For example, as an automotive company, if you only made sedans, you could invest in competitors that only made trucks and vans by buying their products for your local delivery fleets. It’s all about strengthening your strategic supply base.

5. Real-Time Product Design Substitution

It’s no longer enough to just identify substitute products when your primary source goes offline, but to have alternate product designs that can be made with different components and materials to satisfy a significant portion of your client’s needs if one of your critical suppliers becomes unavailable. In electronics, the ability to substitute different off-the-shelf chips and boards is key, especially if they are of different form factors. In control systems, different power systems, converters, and control software. Etc. If your clients just have a need to fulfill, multiple options should be available.

6. Supply Chain Enabled Sourcing

Building on supply chain aware supplier splits, carriageway carrier consolidation, and real-time product design substitution. it becomes clear that the next generation sourcing needed for today’s turbulent times is supply-chain enabled sourcing. There’s a reason that Bob Ferrari and I claimed that standard sourcing solutions don’t work for direct, and that’s because they don’t. In direct supply chains, sourcing needs to be integrated, or at least tightly orchestrated, with supply chain and logistics solutions to be successful. Otherwise, you’re not optimizing to reality, and your best laid plans will be a total work of fiction.

7. Busch-Lamoureux Exact Purchasing

We all know the Kraljic Matrix, along with every other quadrant-based sourcing methodology is broken, but no one tells you the reason why — which is risk, complexity, and impact are all fully independent dimensions that need to be measured on completely different axes and no matter how hard you try to compress them into 2-dimensions, it will never be accurate.

But in Busch-Lamoureux Exact Purchasing, we treat them as three separate dimensions and break your sourcing categories down into a pocket cube (with 8 octants). This allows us to define appropriate methodologies and technologies to accurately address each category with confidence. Something no other methodology gives you!

Seven Sourcing Strategies for Today’s Turbulent Times Part 1

1. Sales Visibility, Sliced and Diced

For years you were told that spend visibility was the key to success. For many years I echoed that claim, because it was the truth — success required understanding your spend — who was spending with whom, where, for what, and why. The ability to slice and dice not just by category and product and supplier but location, customer base, etc. was key to understanding where your opportunities were, what volumes you should be ordering, what suppliers you should be considering, where you should have contracts, and where you shouldn’t.

But that was in the age of globalization when global trade was steady, conflicts were low, maritime channels were open, and tariffs were low and stable. Today, many countries are returning to isolationism and/or off-limits due to sanctions, conflicts are many, maritime channels are constantly restricted or closed (Panama Canal has restricted throughput during droughts and the Red Sea and the Strait of Hormuz are regularly restricted or closed due to Middle East conflicts), and one country in particular keeps changing tariffs on a leader’s whims.

Not only is supply assurance the name of the game, but supply assurance in the product lines that will sell. With costs constantly on the rise (since inflation has returned as well), you need to be focussed on your top selling product lines, and how to ensure those don’t get interrupted. This will require diving into your sales data to see what is really selling, what is trending upwards, where the product is needed, and how best to allocate your orders and shipments to serve the customers. (Then, once you have figured out what you need and how to ensure supply, you can focus on spend.)

2. Supply Chain Aware Supplier Splits

You’ve been told for decades that you need to dual-source to mitigate risk in case of disaster or unexpected supply chain disruption, and while chances are you still aren’t doing it in some key categories, dual sourcing is not enough. Two suppliers in the same region, or that depend on the same supply base is not effective dual sourcing since a single event could take them both out of the picture. You need your decisions to be geologically and supply-chain aware.

And that works great if you’re only sourcing for one regional market, both are in friendly / pseudo-safe countries that aren’t too far away, and shipping lanes are relatively secure — but if you are sourcing for multiple geologically distinct and separate regions (which can be half a world away), the home countries are not friendly, and shipping lanes are a geopolitical spat away from being shut down, that’s a supply chain shutdown waiting to happen.

If you are a global multi-national selling in multiple, geologically distinct regions (North America, Latin America, UK, Europe, Middle East, Asia, Australia, etc.), you need to be building a multi-supplier global supply base where you have a primary supplier close to each location in a friendly, or at least, safe country and a backup supplier not too far away, which can be the primary supplier for another region. You might need half a dozen to a dozen suppliers for some products / categories to ensure supply assurance.

3. Carriageway Carrier Consolidation

Just like you will need multiple suppliers, you will need multiple carriers — at least one per region, and two if your shipments are large or the reliability of any single carrier (due to financial situation, fleet size, etc.) is questionable. You’ll have to group your lanes by regional transit and select the appropriate carrier for each just like you’ll have to select the right supplier for each region.

An Updated Checklist for Major International Procurements

Twenty years ago we presented a slightly modified version of a great checklist by Mr Paul Emanuelli who presented key concepts for major procurements in the age of globalization and a movement by the mid-market to take advantage of the global sourcing opportunities big enterprise had been taking advantage of since the 80s. It wasn’t complete, but it was complete enough for an average organization and a great start.

But that was the age of globalization. Opening borders. Minimal conflicts. Reasonable levels of natural disasters. Efforts to ensure major maritime routes were not blocked by any disagreements or conflicts were made. Piracy was an issue, but alternate routes and good (military) security minimized impacts.

Now we’re in the age of isolationism. Borders are closing. Sanctions are restricting others. Conflicts and wars are breaking out with regional impacts. Major maritime routes are being blocked as a result of conflict, including the Red Sea and the Strait of Hormuz, putting trillions of dollars of trade at risk. Natural disasters, including droughts, are also limiting trade routes, including restricted passage through the Panama Canal due to water shortages. The rules have changed, and your Procurement (knowledge) needs to keep up.

This means two things:

1. Your Team Needs to Expand

When once upon a time you may have been able to get away with:

  • procurement lead
  • finance lead
  • legal counsel lead

Now you also need, at a minimum:

  • logistics lead
  • domain lead
  • (geopolitical) risk lead
  • compliance lead

These stakeholders will need to provide the following insight between them:

  • procurement: handles the details of the buy — cost vs expected return
  • logistics: handles the global supply chain – carriers, modes, import/export requirements, etc.
  • finance: handles the international economics — currency exchange, projections, international banking arrangements, tariff management and (VAT) reclamation
  • legal counsel: appropriate international legal frameworks, supplier home country law, local laws
  • domain lead: realistic supplier and product assessment vs. supplier claims
  • compliance lead: handles international compliance regulations — source country, intermediate transportation hubs, and local companies with respect to finished goods, raw materials, transport, and entities
  • (geopolitical) risk lead: keeps a handle on the international geopolitical conditions relative to the source country, destination country, and any intermediate countries the goods would have to pass through — and if they are likely to lead to sanctions, border closings, conflicts, wars or other situations that could prevent or significantly hinder trade

In other words, the analysis of a potential buy has become significantly more involved than it was 20 years ago, because it’s not just the buy, it’s the likelihood of supply assurance and affordability when exchange rates can fluctuate significantly almost over night or fuel, and thus carrier costs, can double or triple with almost no warning.

Once you’ve selected the team, you need to determine the extent of the project. Is it a sourcing project or a mega project. If you’re simply replacing a source of supply, and using a supplier in a region you’re already doing business in, it’s a project. If you’re looking for a source of supply for a new product or material, trying to enter a new country, and/or looking somewhere you don’t have a logistics network, it’s a mega-project. Just like a major technological project / system replacement, underestimating the effort involved is a recipe for disaster. Especially if the effort is not put in up front before a contract is signed and an issue crops up later.

This means that before the contract is signed, the following sub-projects need to be completed:

  • detailed product requirements assessment
  • detailed proposed supplier and product assessment
  • detailed proposed logistics / supply chain network
  • detailed legal frameworks review
  • detailed compliance and risk review
  • detailed business plan

Only then, can you move forward to:

  • contract framework
  • negotiations
  • final contract

International procurements are not as easy, or predictable, as they were 20 years ago. Now they’re mega-projects which require mega-effort to get right.