Category Archives: Market Intelligence

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!

‘Tis the season … to bring an end to seasonality! (And JIT!)

Consumer shopping may be seasonal, but supply chains no longer support seasonality. The pandemic finally broke over-stretched supply chains, they haven’t fully recovered, and, as per this recent article over on Capgemini, we are still in a situation where 42% of CPR [Consumer Products and Retail] (also known as CPG, Consumer Purchased Goods) organizations expect stockouts or product shortages, 38% expect late deliveries, and 35% foresee labour shortages.

Marketers might like seasonality, as it makes them absolutely necessary, and sales people might like seasonality, because it gives them a reason to push sales (and possibly close a sale in a given time period), but human seasonality is limited to SAD (seasonal affective disorder). Just because consumers want to buy 5 times as many units of a product in December as they do the rest of the year doesn’t mean that humans in September can make 5 times as many units. If a plant normally runs 8 hours a day, the most a plant can theoretically run is 24 hours a day and the most it can do is triple its output. But that assumes it has enough, trained, seasonal, workforce. That’s not likely. Maybe it can split the skilled workforce in half, force half to take the second shift, and have each regular worker supervise one seasonal worker in an effort to double output. But a seasonal worker is not going to be as efficient as a regular worker, and, in the end, maybe output will increase by two thirds. Not much better than if they could just convince their entire workforce to work 12 hour shifts for the month and increase output by about 40% (you’re not getting the theoretical 50% as the workforce will be tired somewhere beyond the 8 to 10 hour mark).

Furthermore, you not only need to have five times the amount of product produced, you also need it transported to you — from half a world away. Seasonal capacity, especially in the late summer/early fall (to get goods to North America in time for the holiday season), has always been limited and with the scuttling of many cargo ships during the pandemic (including some ships that never made a single voyage) due to lack of cargo (because China shut a [port] city down), seasonal capacity is even less than it was. So how do you get the goods during the season, which is what you have been doing/attempting to do since the 80s thanks to the Big X and Mid-Sized consultancies advising you to switch to just in time (and push the inventory cost onto the manufacturer/supplier)? The short answer is, you roll the bones and hope for the best (because JIT now stands for just in trouble). And that’s not a good answer.

If you have “seasonal” demand because either

  • your business model is selling seasonal items or
  • you allowed marketing and sales to take what should be a product always in demand and make it seasonal

Then you have to start managing your own inventory close to the point of sale/last-mile distribution (if you do a lot of on-line business) and start building it up months in advance, based upon normal (non-OT production) and optimal distribution volumes. Yes, inventory is expensive, but what you don’t get is that

  • you’re paying for it anyway (because the supplier is charging you their overhead)
  • you’re losing a lot of sales, and profit, when you stock out
  • a few months of inventory is not that expensive and it’s only expensive if you overstock and then have to discount/fire sale

In other words, do proper data driven forecasting, ensure marketing and sales manage demand by driving people to the products that you have enough of that optimize your profit, right size your “local” warehouses, pick the cheapest locales for a region (your main warehouse doesn’t have to be in the city or even the primary business park, can be in a tier 3 business park a half hour out – that’s not going to add much to delivery cost), and start integrating core product management functions back into your business. Even if you sell seasonal, eliminating seasonality from your management model will decrease overall cost (no more shipping at peak rates in peak seasons or paying overtime overhead), decrease stock outs, and increase profit. Just do it.

An Absolutely Fabulous Article by Cory Doctorow on the (Gen) AI Bubble …

and how it’s going to pop like every other tech bubble since the first dot com bust!

What Kind of Bubble is AI?
  by Cory Doctorow

Cory doesn’t say it, but he makes it pretty clear that when the bubble pops, like every tech bubble that has come before, there may not be much less to salvage when it does (especially since no one is thinking about what happens when it does pop).

So I’ll clarify:

A lot of people are going to lose a lot of money

(and while stupid investors hyping this bandwagon heading for a cliff probably deserve to lose every penny, all of the pensioners in the pension funds they scammed don’t; so if you run a pension fund, please pull out of ridiculously overvalued Gen AI NOW!)

A lot of people are going to lose their jobs

(and it’s going to be more devastating to the tech sector than the Silicon Valley Bank failure this year combined with the recession forecast that resulted in over 250K IT jobs being slashed in the USA alone)

A lot of hardware is going to suddenly go idle

and smaller cloud providers are going to go under when the big name cloud providers all of a sudden drop their prices to the floor just to keep the revenue coming in (resulting in the monopolies of Amazon, Google, and Microsoft controlling most of the servers outside of China and Russia)

The problem is, as Cory clearly lays out, when you take one step back and look at the ridiculous hype from a business/revenue lens, all of the big, exciting use cases for AI are either

a) low dollar [and low-stakes and fault-tolerant] (helping us cheat on our [home]work or generating stock-art for bottom feeders [who won’t pay an artist and don’t mind ripping off the IP from thousands of artists]) or

b) high-dollar but high-stakes and fault-intolerant (self driving cars, radiological cancer detection, worker screening and hiring, etc.)

and when you consider the data center costs of these super-sized models (as these data centers consume MORE energy than a small town), low-dollar AI applications won’t pay the bills and high-dollar AI applications cost MORE to deploy than to just do it the traditional way with an educated and capable human!

E.g. self-driving cars don’t work (and “Cruise” needs to employ 1.5 times as many supervisors as a taxi service would employ drivers to keep their cars, which still hit and critically injure people, relatively safe)

E.g. radiological cancer detection requires a human expert to spend the usual amount of time in diagnosis before consulting the AI, and then, if the AI doesn’t agree, spend that much time again

Not that we’re not stopping you from jumping on the (Gen-)AI bandwagon or selling that silicon snake oil that Open AI and Microsoft AI are selling. We’re just not joining you on the (Gen-)AI bandwagon as the steering algorithm is defective and it’s heading straight for a very high cliff at a very high speed …

Merry Christmas!

What Impact Will Power Politics Have on the Sustainable Acquisition of Raw Materials?

the doctor doesn’t know, but it’s a question we need to ask, and answer, before politicians run away with an agenda that maximizes their bank account while simultaneously maximizing economic and environmental damage.

In September, JPMorgan Chase CEO Jamie Dimon stated that geopolitics is the world’s biggest risk and, more specifically, that we have dealt with inflation before, we dealt with deficits before, we have dealt with recessions before, and we haven’t really seen something like this pretty much since World War II. And while he didn’t mention power politics in particular, we’ve seen a lot of first world countries elect leaders with protectionist/centrist viewpoints, a directorial demeanor, and anti- free-trade stances.

Due to a loss of jobs, a loss of manufacturing, and a lack of reliability of supply, we’ve seen a lot of pushback on China (which is a major global source of many raw materials, and rare-earths in particular) while India is gaining ground in the BRICS (thanks to the anti-Russian Sentiment among those Pro-Ukraine and the instability of the Brazilian economy along with the China pushback), the United States implementing Buy American policies, the EU taxing anything they are sanctioning or trying to enforce “Buy EU” policies on, and the UK making decisions since (and including) Brexit that no one understands.

Now, we should all be buying local to the extent possible (which might be the local farm, the state farm, or the farm one country south if ours is too cold to grow the produce we need; and, similarly, a factory in the country or a neighbouring one), when it comes to certain raw materials, especially rare earths and metals for which we do not have (more sustainable) alternatives, one doesn’t always have a choice. And the reality is that, for a given country, only one country will have the most sustainable source of rare earth and/or metal supply when you take into account the mining operation, the processing operation, and global shipping. And if protectionist/centrist/trade policies prevent purchasing from that country, and the next two or three most sustainable (and/or most economical if your company is in/selling primarily to a developing country and you can only afford so many sources), the alternatives are not good.

So while it’s hard to quantify what the current era or power politics will have on the sustainable acquisition of raw materials and (precious) metals, it’s a question your organization needs to answer if you rely on such, and take steps to inform your local lobbying organizations to make sure that critical, sustainable, sources of supply are not blocked until alternatives are developed (especially if your organization needs to hit carbon [reduction] targets).

And if you don’t think this is an important topic, then why did Dr. Naoise McDonagh, a Lecturer at Edith Cowan University and a former Board Member of the Australian Institute of International Affairs, recently publish an article in the interpreter (published by the Lowy Institute) on why Australia must play the geoeconomics game, or risk being side-lined.

Dr. McDonagh believes that acts such as the US’ IRA (Inflation Reduction Act) or the EU’s Critical Raw Materials Regulation, designed to drive growth in a particular industry (and, in particular, North American or EU-based EV supply chains) will act as a vast black hole sucking global capital from other destinations operating on purely comparative advantage terms which includes Australia.

Dr. McDonagh argues that these acts, and similar measures being implemented globally, are part of a geopolitical transition that is creating a two-level world economy: a standard economy with normal market access and a de-risked economy with restricted access for actors of concern. And since the types of restricted access we are seeing typically revolve around rare earths and metals, this means that we need to ask the question we asked in the title: What Impact Will Power Politics Have on the Sustainable Acquisition of Raw Materials?

the doctor doesn’t think the answer is obvious, and definitely doesn’t agree that Dr. McDonagh’s insistence that the answer for Austrailia is the 10-year Australian Renewable Industry Package because the doctor believes the question is more nuanced than anyone currently understands. However, the doctor does agree with Dr. McDonagh’s reading of the situation and that power politics is quickly becoming one of the most significant risks to your supply chain, which is even more unpredictable than strikes and natural disasters.

If you have a partial answer, comment on LinkedIn. We need them before bad decisions are made for us.

The One Sign You Don’t Have a Highly Functional Procurement Department

Recently, on Linked In, Anders Lillevik, who (once) tried to buy and drowned in paperwork (which is why he decided he needed to find a Focal Point), decided to post what he thought were the six signs your procurement efforts aren’t delivering the impact they should. In his view, they were:

  1. No spend visibility
  2. Unhappy customers
  3. Backlogs and delays
  4. Poor supplier relationships
  5. Reliance on manual processes
  6. Department is seen as tactical, not strategic

… which were signs that your Procurement department is not delivering, but not the one sign you have to look for to determine whether or not you have a highly functional Procurement department, since these are all symptoms of a single root cause. In fact, if you wanted to go down this route, instead of identifying the core problem, you could also add the following to Anders’ list:

  1. Spend is spiralling out of control while the
  2. Company is having to fire-sale / toss out expired products and outdated inventory on a quarterly basis and
  3. Your brand is in the toilet thanks to excessive carbon, poor working conditions / human slavery, and excessive waste (and wasteful practices) in the supply chain.
  4. Every department head is screaming “The Sky is Falling!”, “The Sky is Falling!”.

… as these are also signs that your procurement efforts aren’t delivering the efforts. But if you want to know whether or not you have a highly functional Procurement department, all you have to really do is answer this one question:

Do you have a strong CPO providing quarterly metrics charting success improvements over time?

Now we know this is a bit of a cheat, as it’s actually two parts, as just thinking you have a strong CPO is not enough, you need the metric-based reporting to verify, but that’s it. If you have a Strong CPO leading a procurement team charting key metrics across all relevant areas, key categories and initiatives get managed, and, eventually, improved. Moreover, you will find that:

  1. you have great spend visibility across all Spend Under Management (SUM) which will increase over time
  2. you have happier customers as your quality, reliability, and predictability improve in key areas and remain consistent in others
  3. backlogs reduce over time along with unexpected supply chain delays
  4. supplier relationships, at least for key products and services, improve
  5. process automation is employed where appropriate
  6. the department starts to assist other departments with strategy, and begins its journey from tactical to strategic
  7. spend increases are at least contained to inflation
  8. inventory management (and inventory loss) improves
  9. improved supplier vetting and risk analysis weeds out any suppliers known to be exceptionally polluting, use sub-tier suppliers that turn a blind eye to working conditions or slave labour, or be completely indifferent to CSR activities
  10. the department heads stop screaming “The Sky is Falling!” and instead scream “Why Is Everything So Bl00dy Expensive!” (even though Procurement consistently meets or beats market prices)

Not perfect, but all signs that your procurement efforts are delivering the impact they should, or at least getting there.