Category Archives: Global Trade

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.

Relevant Content is Still a Major Cornerstone of Any Compliance Effort

Not long ago we asked if you, or Ecovadis, could solve the compliance challenge before it cost your organizations tens or hundreds of millions of dollars. The biggest reasons for lack of compliance are still lack of knowledge, policy, visibility, analysis, and procurement technology and the fixes are still knowledge, policy, and appropriate technology.

One of those technologies is a Procurement Marketplace that can steer (or force) buyers to buy the right products from the right (and approved) suppliers (which can be an integrated catalog management solution that takes advantage of your supplier master, community intelligence provided by the vendor, and integrated risk information from third parties).

Another of these technologies is still supply chain visibility technology that lets a company monitor what is going on in the supply chain and evaluate a potential supply base before making a decision.

A third technology, and one we should not forget about, is import/export/trade management software that helps the organization identify the regulations it must comply with, collect the necessary information, produce the required documents, make sure the documents get to the proper authorities complete and on-time, and track all of the associated certifications and insurance certificates that go with the products and the supply base.

A good trade solution will address, at a minimum, import/export requirements, ECCN (Export Control Classification Number), custom security programs, FTA/FTZ/SEZ (Free Trade Agreements/Free Trade Zones/Special Economic Zones), country of origin, DPS (denied party screening), entry visibility, and HS (Harmonized System) codes / HTS (Harmonized Tariff Schedule) codes — and keep up with the never ending onslaught of tariff changes and temporary product bans that are result of the trade war. Essentially it will help a company determine all of the export requirements, all of the import requirements, produce the necessary documentation, and track its product from country of origin to the destination country.

In order for this solution to work, it needs a lot of content. Namely:

  • import/export regulations for all of the countries being sourced from, sourced through, and shipped to
  • US ECCN database
  • requirements for programs such as C-TPAT, PIP, and AEO
  • Free Trade Agreements between all of the relevant countries
  • database of all FTZs / SEZs in the relevant countries
  • HS schedules for all of the relevant countries and mappings
    and/or mappings to from country specific schedules
  • Denied parties lists for the relevant countries
  • Direct feeds to updated denied product lists for real-time updates
  • Direct feeds to updated tariffs for real-time updates
  • Early warning of products under consideration for bans/tariffs and real time flagging

Don’t overlook these last three. They are new and many of the traditional solutions on the market won’t have the capability. When a single ban or tariff spike can lay ruin to your best laid plans, be prepared.