Category Archives: Global Trade

Another Reason to Source Close to Home

According to this recent article over in eyefortransport, “maritime privacy costs [the] global community up to $12 Billion a year” (with excess insurance costs alone eating up to $3.2 Billion). In addition, at the end of 2010, around 500 seafarers from more than eighteen countries were being held hostage by pirates, despite the fact that over 238 Million in ransom (including a ransom of 9.5 Million for a South Korean oil tanker) was paid to Somali pirates last year. Ouch!

Furthermore, despite the facts that navy presence (from more than thirty countries) has reduced the rate of successful hijackings, pirates have doubled the number of attacks and expanded their range. In addition, even though merchant seafarers deserve our protection, 85% of pirates pursued and captured end up being released because the countries who catch them don’t have the jurisdiction to prosecute. And over 2600 seafarers have been held hostage in the last three years alone. The 19th century belonged to the mafia. The 20th century belonged to the mob. Looks like the 21st century belongs to the new pirates. Is the risk to life really worth sourcing lead point toys and melamine milk from global destinations?

Low Cost Country Sourcing Is Not a Magic Bullet

As per this recent article in CPO Agenda from the Boston Consulting Group on how you “reap what you sow in low cost countries”, not all industries are gaining the full benefits of sourcing from best-cost countries. Sectors with highly complex products or stringent safety requirements … are finding that most suppliers in developing economies fall far short of the quality standards and process excellence of suppliers in the developed world –and that the risks of using sub-standard inputs far outweigh any potential cost savings. More importantly, a problem with just one of a product’s parts or ingredients can lead to recalls, PR nightmares, and brand erosion –all of which extract an extremely high cost that significantly exceeds any savings the organization had hoped to extract.

However, if the right choice is made, which must take into account manufacturing flexibility and economic density (which Dick Locke elaborated on in his posts last week), and the right amount of effort is put into making low-cost country sourcing work, significant and measurable benefits can be realised. But it will take more than a few RFXs and a site visit or two to make things work, because an organization can’t just transfer home-country quality systems and processes to offshore production facilities as low-cost country suppliers often have different capabilities (and equipment). Everything will have to be customized (or redone) end-to-end to get good results. That’s why most attempts have failed (and why most companies with plants in low-cost countries still source raw materials and components from foreign suppliers, because they haven’t figured out how to get quality from local suppliers).

So, assuming the organization has chosen the right low-cost country and right supplier(s), how does it go about extracting quality and reliability? It starts with an appropriately devised supplier development program that will increase the capability and reliability of its suppliers. According to the Boston Consulting Group, such a program must:

  • Target a Small Number of Suppliers
    as the organization won’t have the resources to support a large supply base
  • Focus on What Matters Most
    as there will be a lot of problems — perhaps an overwhelming number — but not all will be critical
  • Align the Organization
    because supplier development must live within Supply Management, not Quality Control, as only Supply Management can take the business away if suppliers don’t shape up
  • Choose the Right Development Approach
    according to the supplier’s level of motivation, capability, and cultural style; the organization may be able to get away with a “check-in” approach, may need to escalate to a “SWAT team” approach, or may need to put a dedicated team on site (see the”reap what you sow in low cost countries” article on the CPO Agenda for details)
  • Engage and Motivate Target Suppliers
    and align penalties and incentives
  • Have a RoadMap
    and make sure the approach to implementation is defined, disciplined, and followed
  • Measure and Track Results
    because follow-through over the long term is critical

These are all good tidbits of advice, but the most important thing is to make the necessary resource commitments to a long-term supplier development effort because, despite what the article may imply when it says that an organization can see measurable benefits in as little as six months, it will generally take an average organization years to realize the desired benefits.

Economic Density and Flexibility are Critical to Your Supply Chain, Part II

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

In yesterday’s post I discussed how I’d just read the umpteenth recent article saying that buying from China is on its way out and that, like all of its predecessors, the article had a grain of truth but suffered badly by being far too general. The reality is that China was never the right place for some purchases and will be the right place for others for a long time to come.

In order to understand what purchases from China make sense, and what purchases don’t, one needs a framework. The framework I use is based on forecastability, which divides products into functional and innovative products, and economic density. Given these two dimensions, one can derive the following two by two matrix.

Functional Products Innovative Products
High Economic Density 1 2
Low Economic Density 3 4

As indicated in yesterday’s post, the best country and logistics selection strategy depends on which quadrant one finds oneself in.

In quadrant 1, you could afford air transport but you won’t often need it. You should plan around surface transport and expect to occasionally have to use some emergency air freight. Here you should go for the world’s best suppliers. “Best” means lowest total landed cost, among other criteria such as quality and environmental aspects.

In quadrant 2, you must to use air freight for flexibility. Again, you should look for the world’s best suppliers. As long as there is a big international airport near you and the supplier, no place in the world is more than a day or two from your operation. “Best” still includes landed cost and the other criteria but now includes supplier flexibility.

In quadrant 3, you can’t afford air freight, so goods will move by ocean or some other surface method. You should look for the lowest landed cost suppliers but will probably find that freight costs will constrain your decision to relatively nearby suppliers.

In quadrant 4, you should stay close to home. You can’t afford air freight and you lose too much flexibility using ocean freight. These are the products that never should have been purchased from China in the first place. They include fashion goods and goods with a high degree of seasonality such as Christmas gifts. “Close to home” may not mean in your own country, of course. For example, the entire country of Mexico is closer to Chicago than San Francisco is. This is where the “nearshoring” makes sense.

Finally, what will not leave China soon? For one thing, electronic assembly work will be there a long time. The quest for best suppliers has led to a concentration that only China has and perhaps only India can equal. Foxconn alone has more than a million employees in China. To put that in perspective, the CIA World Factbook says that Vietnam has a labor force of 48 million people. Of that, 15% work in “industry.” That’s about 7.5 million industrial employees. Just to resource to Vietnam Foxconn would require employing 13% of Vietnam’s current industrial labor force. That’s not going to happen anytime soon.

Thanks, Dick.

Does Tata Have a Rival in Ford?

When Tata introduced the Nano back in 2009, it caused a global sensation with its attempt to create a new market for low-cost automobiles among a population that, up until recently, could only afford motorcycles. It’s been slow to take off, with a one-month sales record of slightly over 9,000 units, and a low of 589 units last November, but it now has about 70,000 Nanos on the road in India, which isn’t bad.

On the other hand, the Ford Figo, which was introduced last March, and which is already the 5th best selling car in India (behind three Maruti Suzuki models and one Hyundai), has already sold more than 60,000 units (OneIndia.in) within 10 months of launch and is being prepared for export to 48 countries (rushlane.com), including South Africa and Nepal.

Seems the Figo is poised to overtake the Nano, selling almost as many cars in less than half the time. Is this the beginning of a new era for Ford? The car might cost about 2.5 times that of the Nano, but it is comparable in cost to the Indica, its Tata equivalent, and doing much better. What do you think? Will India go cheap, or save for a better car? And if they save, and Ford grows, will Ford India become a top global exporter of low cost cars with the Figo? And what will that do to global automotive supply chains?

Economic Density and Flexibility are Critical to Your Supply Chain, Part I

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

I’ve just read the umpteenth recent article saying that buying from China is on its way out. All the articles I’ve read have a grain of truth in them but suffer badly by being far too general. As I see it, China was never the right place for some purchases and will be the right place for others for a long time to come.

The articles need a framework to differentiate between types of purchases. Here’s mine.

I divide purchased goods two ways. The first way is by forecastability. Here I use the terminology originated by Marshall Fisher in his classic analysis “What is the right supply chain for your product?” (HBR) He divides the products your company sells into two categories. One category he calls “functional” products. Those are easily forecastable and change relatively little from year to year. He uses bleach as an example. The second category he calls “innovative” products. Those are new products being brought to market. There is no competition (a good thing for sellers) but they are essentially unforecastable … a bad thing for buyers trying to support that product. Examples are fashion goods, some innovative cars and newer computers.

His point is that buyers need different supplier selection criteria for the different categories. For innovative products, he believes flexibility is more important than cost. If you can’t ramp up quickly you lose highly profitable sales. If you can’t ramp down quickly you write off a lot of inventory. And, you can’t afford a long transit time.

The second way I divide purchased goods is by what I call “economic density.” Simply put, what is the value of the purchased goods per kilogram? You can afford to fly high economic density goods but low density goods have to move by surface transport, usually ocean. One thing to keep in mind here is that there is a concept called “dimensional weight” where the freight costs of some goods is based on their physical volume, not weight. That’s the reason why laptop computers move by air from China to the US but desktops are usually assembled in North America.

Putting those two methods of division together gets the consultant’s favorite graphic: a two by two matrix. The best country and logistics selection strategy depends on which quadrant you are in.

Functional Products Innovative Products
High Economic Density 1 2
Low Economic Density 3 4

Each quadrant requires a different strategy if an organization is to extract maximum value from its supply chain. Tomorrow’s post will discuss each quadrant in detail.

Thanks, Dick.