Category Archives: Global Trade

Sourcing Success in these Turbulent Times Require Long Term Planning and Cost Concessions

In a McKinsey article a few months back on How medium-size enterprises can better manage sources, McKinsey said that small and medium-size enterprises often struggle to find Procurement cost savings. Yet there are ways to do it while still pursing growth and providing a superior customer experience. The article, which concluded with an action plan for procurement cost savings, recommended:

  • establishing CoE teams
  • improving forecasting
  • expanding (the) use of digital procurement tools
  • gaining greater market intelligence
  • establishing a culture of — and process for — continuous cost improvement
  • incorporating supplier-driven product improvements

which, of course, are all great suggestions, and mostly address four of the five reasons that McKinsey give that prevent companies from reining in spending, which included

  • a lack of spending transparency (which would have to be corrected to improve forecasting)
  • talent gaps (which can be minimized with the right tools, market intelligence, and CoE teams)
  • underused digital tools and automation (which is directly addressed by using more of them)
  • exclusion of procurement and supply chain in business decision (which would hopefully be a byproduct of a corporate culture for continuous cost improvement that only happens when procurement and supply chain is not involved higher up)

but the fifth is largely unaddressed — the myopic focus on the short term which McKinsey claims could be addressed by putting more effort into planning and forecasting. But that doesn’t solve the problem.

Better forecasting will allow for longer contracts to be signed for higher volumes, which can lead to long term strategic supplier relationships, and better planning can allow this to happen, but this does not completely address the need for long term planning.

Supply Chains today are not the supply chains of the last ten to twenty years.

  • rare earths are even rarer
  • many critical raw materials are in increasingly limited or short supply
  • transportation can be unpredictable in availability and cost; even though most of the world declared COVID over in mid-2022, China still had mandatory lockdowns, ocean carriers scrapped many of their ships for insurance (and in some cases, post-panamax ships that had never made a single voyage), airlines furloughed too many pilots who found other jobs or just flat out retired, and the long-haul trucking in North America (the UK, and many first-world countries) has been on a steady decline for over a deacde
  • ESG/GHG/Carbon Requirements are escalating around the globe and you need to be in compliance (both in terms of reporting 1/2/3 and ensuring you don’t exceed any caps)
  • human/labour rights are escalating and you have to be able to trace compliance down to the source in some jurisdictions; you need suppliers who insist on the same visibility that you do
  • diversity is important not just to meet arbitrary requirements for government programs or arbitrary internal goals, but to ensure you have the right insight and expertise to solve all types of problems that might arise

And you can’t effectively address any of these problems unless you think long term AND accept that some of the solutions will cost more up front.

  • In mid November, the trading price for Neodymium (a rare-earth that is critical for the creation of strong permanent magnets, which makes it possible to miniaturize many electronic devices, including the [smart]phone you might be reading this on) was over $87,000 USD/mt. In comparison, hot roll steel was around $850 USD/mt. In other words, Neodymium was 100 times more expensive than steel. And while you can still buy steel for about the same price you could 10 years ago (it was around $900 USD/mt), Neodynmium is almost $20,000 more (as it was around $69,000 USD/mt in November 2013). It’s not the only rare earth to increase about 26% in 10 years, with further increases on the horizon. You need to have a strategy to minimize your need (which could include product redesigns that use more sustainable alternatives or recycling strategies that use recovered materials from older phone models). And when it comes to recycled materials, due to a historical lack of recycling efforts, or research into technologies to make recycling efficient and cost effective, recycled materials are almost always more expensive at first. Always. But as adoption increases, plants, technologies, and processes get more efficient, and the cost goes down (while, at the same time, raw material prices for materials in limited supply continue to go up). In other words, if you want to mitigate the ever-increasing costs for rare earths and other materials that are in limited supply, you have to incorporate the use of recycled materials, and maybe even invest in your own plants (and recycle your own phones you buy back because it’s cheaper just to buy them back and extract the rare earths yourself than buy the recycled rare earths from someone else).
  • Global trade is costly and unpredictable. Supply assurance is finally dictating near-sourcing and home-sourcing (which SI has been advocating for almost fifteen years, as inevitable disaster was the logical conclusion of outsourcing everything to China as eventually a pandemic, global spat, natural disaster, or other event would send shockwaves through the world when it severely disrupted the trade routes [because even though the chances of a pandemic, natural disaster on the scale of Krakatoa or the Valdivia earthquake, or another catastrophic event is minimal in any given year, over the course of a century, it becomes very likely]), and that is going to require re-investing in those Mexican factories (that worked just fine, by the way) you shut down twenty years ago, training appropriately skilled workers in low cost North American (or Eastern Europe) locales, and paying a bit more per unit (and even transportation until the carriers rebuild those routes). But in the long term, as global transportation costs continue to rise, and the local-ish resources get much more efficient (using the best technology we have to offer), your costs, and transportation risks, will go down while your competitor costs continue to go up.
  • if you don’t insist, and ensure, up front that your suppliers can report the data you need, how will you get it; chances are those suppliers need help and modern systems, which temporarily increase their operational costs as they install, integrate, and learn the systems; not more than a few cents here and there per unit, but a noticeable blip on the overall costs none-the-less
  • if you want suppliers that monitor their supply chain and insist on no slave/forced/child labour, appropriately treated and well paid labour, and, better yet, a community focus throughout the supply chain (so that the humans who mine the materials, harvest the food stuffs, weave the silk, or otherwise do the foundational work have a reasonable quality of life, health, and safety), you’re going to have to put the effort in to find them and the extra money to support them in their humanitarian efforts; since most of these workers in remote low-cost locales are paid pennies on your dollar, it’s another blip on the total cost to ensure they are paid every penny they deserve, but it’s still a blip; but you can’t afford not to do it if your jurisdiction has laws making you responsible for slave labour that later gets discovered in your supply chain
  • and while diversity shouldn’t cost more, since it’s the same number of employees, the reality is that the supply base embracing it could be a minority, and if these minority suppliers suddenly become in demand, market dynamics may kick in and they may charge a premium that your competitor will pay; but, as new challenges continue to arise, you will need the diversity to solve them; so, another blip in the cost you need to absorb

In other words, you need the long term focus to guarantee success, and you need to understand that, up front, it may cost a bit more. However, done right, your costs will decrease over time while your competitors’ costs skyrocket. So if you truly want success, in any high dollar, strategic, or emerging category, plan for the long term. And you will truly succeed.

Global Sourcing Agencies — Are They The Hidden Evil of the Outsourcing World?

Note the Sourcing Innovation Editorial Disclaimers and note this is a very opinionated rant!  Your mileage will vary!  (And not about any firm in particular.)

We all like to blame the Big X (and the larger Mid-Sized consultancies) for the outsourcing revolution that put the whole world in sh!t when the pandemic started (because they spent three decades convincing every CEO and their favourite corporate lap-dog they would get immediate savings [which was true] by outsourcing everything possible to China, a country that then proceeded to do mandatory city-wide lockdowns for three years every time a single COVID case was confirmed). Not only did sudden unavailability in a single geographic source break many supply chains, but the three decades of unnecessary outsourcing also significantly contributed to GHGs and hastened our trajectory to a global 2C temperature increase as transportation GHG emissions have approximately doubled over the last 30 years (and are now responsible for about 30% of global emissions, especially since just 15 older ships contribute more GHG emissions annually than 50 Million cars).

But it’s not just the Big X and Mid-Sized pushing us towards “low cost countries” on the other side of the world (where they have to help with the introductions, organizational transition management, on-site audits, etc. etc. etc. to pocket 33% of those ephemeral savings as consulting fees), it’s Global Sourcing Agencies that are adopting their fee models, tactics, and strategies to help you find the right “partners” with their “in-country” consultants who can help you on the ground, except at slightly lower costs and with slightly more focussed industry expertise.

And the truth of the situation is that if you can’t produce the products (assemblies, components, parts) you need at home, you need to outsource. But the reality is that, today, you should be outsourcing as close to “home” (where “home” is the market you’re sourcing for, so if you’re a true global multi-national, sourcing near the US for the American market, in/near Europe for the European Market, in/near Australia and New Zealand for the Australasia market, and so on). You’re not sourcing from Russia for Argentina or China for the US. It makes no sense (and, at the end of the day, when you compound the disruption costs on top of the outsourced management and super high logistics costs, costs too many extra cents).

And chances are, now that you are trying to move to a closer to “home” market, you have no clue what suppliers are there, what their real production capabilities are, how well they have served other customers in your industry, how easy they are to work with, what your chances of (eventually) becoming a customer of choice really are, and how much help you can get on the ground if you need it. So you need a Global Sourcing Agency to help you, just like you will often need a Big Consulting Agency to help you with Procurement Transformation. But in this situation, it is many times more critical you choose the right one. If you choose a Global Sourcing Agency that specializes in China manufacturers when you are trying to pull out of China sourcing for your North American Market (and thus need deep insight into the Mexican and Brazilian manufacturing market), you’re not going to get many (if any) good options and end up being convinced that, for worse or for even worse, you need to stay in China.

So where’s all this coming from? What appears to be sponsored business spam. For example, the Business NewsWire and the Big News Network are pushing an unattributed* article titled The Role of Global Sourcing Agencies in Business across any business press release site that will accept it.  In our opinion, it’s a thinly veiled attempt to ensure that, with the current (long overdue) focus on “near-sourcing” (which you should have been doing since the initial rise of Mexican outsourcing half a century ago as a response to the introduction of Maquiladoras in the 1960s), that you stay in China (which is, of course, likely the LAST thing you should do unless you are also selling that product to China or nearby [Austral]Asia).

It’s yet another article making generalized good points about how Global Sourcing Agencies can help in theory, but whether they achieve that in practice depends on whether they have the right people, the right relationships, and the right technology — in the region you need them to be in. (Which, and we can not say this enough, is often NOT China!)

Now, if you are a global firm that sells to EurAsia or Austalasia, please use these firms that specialize in china.  You don’t want to be sourcing from South America or Africa for something you can build in Asia!   And if you want to re-shore from China to South America for your American market, find a firm that specializes in South America.

Just like every Big X has their areas of specialty (see when should you use a Big X), every Global Sourcing Agency has theirs.  Use them wisely.   While the right partner can help you reap long term rewards, the wrong partner will lead you deep into the dark woods of fabled nightmares from which you will never emerge again. (And, just like when you select the wrong Big X, it will be your fault.  If you select a Global Sourcing Agency that specializes in China, they will reasonably expect you want China.  Again, if that’s the case, great.  If not … )

 

* We’re glad the article it’s unattributed. We don’t want to single out any company in particular here. It’s the entire outsourcing business model we’re questioning!  We hope it evolves into a model that helps you outsource to near-source countries!  After all, just like America should not be buying something in China it could make in America to sell in America, America should not be buying something in America to sell in China it can make in China!  Sourcing needs to be re-shored to the nearest available source to minimize transport needs, costs, and delivery times.  Not one focus on whatever country looks to be the cheapest or best in the short term!

2030 is too late for Center-Led Procurement!

Especially since 2020 was too late! And organizations should have been there by then since center-led procurement was being discussed as the next generation model in the mid-2000s and, more importantly, as the futurists were predicting that the future of work, and companies, was remote and distributed last decade, every company should be “center-led” by now.

(Note that we mean “center-led” and not “centralized” where one central office handles all major procurement projects globally. We mean center-led where a centralized function determines the best procurement path for each category — which could be centralized, distributed, multi-level, or mixed — and provides guidance to all of the global teams and makes sure they build the right procurement — and supply chain — models up front.)

In fact, by now, all organizations should be working off of a virtual center-led model where the “center” is the Procurement A-Team, where the members could literally be spread out over the 6 continents to “locally” absorb the situations in each geography before making decisions and to always have someone available to answer questions on not just a follow-the-sun but follow-the-local-business hours model.

And while virtual / remote / distributed work still seems to be an entirely new thing that most companies didn’t think of before the pandemic and that most companies are trying to eliminate entirely now that the pandemic has been declared over (even though the next pandemic is just around the corner and, yet again, no one is prepared for it), those of us in IT and Supply Chain have been doing it for two decades (and the doctor has been primarily been working remote for the past 19 years — the tech has been there, and has worked, for two decades … and now that high speed is in just about every urban area globally, there’s no reason a hybrid/virtual model cannot work and work well).

The reality is that the pandemic not only brought global supply chains crashing down but brought to light the high risk embedded in them a few of us saw a decade ago, which went beyond the obvious risks of “all your eggs in one basket” (even though Don Quixote was published in 1605) and “The Bermuda Triangle“*1, but also included the risks of relatively centralized procurement where one team in one part of the globe made the all-our-eggs-in-the-China-basket and managed the relationship with one team at one factory in another part of the globe; so if either team got completely locked down with little remote/virtual support (and we saw some countries limit people to 1KM from their homes and China lock down entire cities and not even let people leave their apartments), the entire chain was shut down even beyond the worst case that some of us were envisioning a decade ago (and made our definitions of bad — which was factory goes out of business, shipping lane closes, or ship sinks — look good by comparison because, at least then, you could still go to work and travel to find a new factory, organize a new lane, or spin up the factory 24/7 until you remade the order).

However, with virtual center-led, you not only have a team that knows how to work distributed and remote, and who knows how to use that setup to better mitigate operational risks, but who also has a risk-mitigation mindset that any supply base should also be distributed and different locations remote from each other (two factories in the same town is not risk-mitigation; an earthquake destroys the roads, the entire town gets quarantined, or political borders shut and its effectively one cut-off source of supply) and will help the different parts of the organization design more risk-adverse, or at least risk-aware, supply chains — tapping into local expertise in each part of the world to make the best decision and allowing the organization to move management of the chain around as needed and local teams (because you’re not sourcing your Canadian snow-plow and igloo building services from India, for example) to always have remote access to guidance and best practices in snow-removal services RFP construction (and know how from Norway and Japan).

In other words, center-led procurement (of which you can find a lot of guidance on in the archives here and over on Spend Matters, especially since, now retired, Peter Smith of Spend Matters UK was a guru on this as well as sustainability) of the virtual kind is what you need to be doing now if you want to last until 2030.

 

*1 which, while statistically no more dangerous than any other part of the oceans, exemplifies the fact that even the biggest ships, with an entire year of your inventory on board, can sink, especially when oceanographers have finally realized [even though mathematicians working with wave models understood this concept decades ago] that rogue waves are not a once a in decade occurrence, but a DAILY occurrence on this planet, it’s just that the ocean is so big that the fraction ever covered by ships is so microscopic that the chances of any ship encountering a rogue wave are infinitesimal on a ship-by-ship basis)

Sustainable Supply Chains Sacrifice China! (Most of the Time.)

Where your supply chain is concerned, China has just demonstrated what SI has known for over a decade — it is the enemy. (This isn’t the only situation where China or the CCP is the enemy, but those are different rants. Note that we do NOT equate China or CCP with Chinese people. Most Chinese are NOT the enemy of your supply chain or democracy just like most Americans are NOT the enemy of intelligence and common sense.)

Long time readers will know that in the naughts, SI spent a lot of bandwidth telling your deaf ears that you should be investing heavily in nearshoring and home country sourcing because of the dangers of outsourcing in general, and, the dangers of oversourcing to a specific country, like China, in particular — which have finally become very apparent. It’s too bad it took a freakin’ pandemic to make clear how dangerous it is to outsource so many critical products and JIT materials to a country halfway around the globe, especially when such sourcing in bulk across the industry leads to the lack of capacity close to home due to factory closures and talent evaporation.

There’s a reason the doctor told you two weeks ago to remember the 80’s (and the early 80s in particular) … and that’s because that’s the last time most multi-national corporations in the Americas got outsourcing right … when they were near-sourcing to Mexico (who should build the wall just to keep Trump out, but that’s yet another rant for another day).

Let’s face it, some stuff just shouldn’t be sourced from home. Stuff that’s not critical, stuff that’s very expensive to make at home (but easily trucked across a single border) for various reasons (which can go beyond labour to energy costs if there are no affordable renewable sources nearby, transportation costs for raw or unprocessed materials are ridiculous otherwise, etc.), or stuff where most of the raw materials or necessary environmental conditions (for growing, mining, etc.) are just not present at, or near, home.

But when you consider a typical organization, how much stuff really falls into this category? First of all, you have to exclude any product for (re)sale that’s a primary profit line. Then you need to exclude any raw material or component critical to production unless you just can’t get it nearby. Then any product necessary for security or safety. And so on. At the end of the day, you don’t have much left, and if you’re doing the analysis right, you’re going to be left with:

  • raw materials and products just not available nearby (because you need certain growing conditions, large deposits of a mineral only found in certain geographies, etc.)
  • processed materials or chemicals where the raw materials are very expensive or dangerous to transport
  • products unique to a culture or region
  • novelty or other items not critical to your business

which (before the short-sighted wall-street loving common sense hating clueless and unskilled consultants of the late 80’s and early 90’s, like Steve Castle, put everything into the outsourcing bandwagon and blinged it out beyond belief) were the only products a company would outsource halfway around the world and still the only products a company should be sourcing from halfway around the world. Everything else should be near-sourced, and if really critical or the cost differential is small, home-sourced.

This also means that just shifting everything to another country in the BRIC, and India (which is ruled by a more open, transparent, and dependable democracy) in particular, is also NOT the answer. (They may not be the enemy, but they are still NOT the answer.)

So, unless you want your Supply Chain to completely collapse after the next global disaster, go back to basics, remember the smart outsourcing decision from the 80s, reopen those Mexican factories, and start near-sourcing again. And then, where you can, bring it back (close to) home.

Supply Chains in 2020 …

… are going to be hard to predict, and more complex than even the true experts are predicting. Why?

1. Tariffs, Trade Wars, and Escalating Tensions

Once upon a time, tariffs were well understood, changed rarely, and could be easily calculated into total cost of ownership equations. This allowed an organization to make long term sourcing decisions with a solid understanding of long term costs. But with trade wars on the rise, tensions escalating, and tariffs being introduced and increased on an almost daily basis … no sourcing decision is safe beyond the minute it is made.

The situation is not going to get any better, and, in fact, might get worse. As a result, the ability to track not only costs, but tariffs, tensions, and risks thereof is going to get more complex than even the average expert expects.

2. Carrier Complexity

Carriers continue to come and go at the regional and local level (as a result of recently introduced or increased insurance requirements in some countries), ocean carrier availability depends on overall demand, suitability depends on costs which depend on availability and unpredictable energy costs, and air carrier availability depends on plane availability (which is affected when planes get grounded), weather and the non-occurrence of natural disasters (such as volcanic eruptions and hurricanes and severe thunderstorms that ground airplanes), and, of course pilot availability (impacted by strikes).

Then we have the risks of war closing off routes and even downing commercial planes. The risks of regulation limiting driver, pilot, conductor, and captain availability and/or putting carriers out-of-business. And of course the risks of escalating high-tech theft, including theft from moving vehicles.

3. Automation and AI

Automation is taking humans out of the equation, and AI is threatening to take even more out. This isn’t a good thing. Automation can streamline tactical processing and information gathering and processing, but not strategic decision making. And despite what some enthusiasts may claim, AI does not improve the situation … in fact, it makes it worse.

You see, with so many unknown variables across such a broad spectrum, no AI solution can even know all of the data to monitor, yet alone interpret it all properly when there is no foundation to measure against with so many new situations cropping up daily. AI will work the 90% to 95% of the time that the statistics says it will, but will fail in the remaining situations, and fail miserably. All of the savings or efficiencies the solutions will deliver across the first 19 solutions will be undone, and then some, in the 20th situation when the solution goes unchecked.

Even without getting into specifics, supply chain complexity will be a challenge in 2020. And, if things get worse, it could be a nightmare. We hope you’re ready.