Category Archives: Outsourcing

Best Cost Country Sourcing and the Concept of “Riskturn”

 

Today I’d like to welcome Ashton Udall of Global Sourcing Specialists and the author of the Product Global blog [WayBackMachine].

Low cost country sourcing; high cost country sourcing; near-shore sourcing; home-shoring; off-shoring…keep ’em coming. The manufacturing and distribution industries are just starting to get interesting. It can be tough to keep up. But, you only need keep up with the best concepts out there. And “best cost country sourcing” is one of them. Merging the “best” of risk and return?

Michael Lamoureux of Sourcing Innovation recently wrote a post entitled Best Cost Country Sourcing. His post was based on BrainNet’s white paper, “Best Cost Country Sourcing”, which I have yet to find a working link to. But fear not. Michael has summarized some of the concepts and made noteworthy commentary:

Taken from the white paper:

…cheap labor is better suited to cheap products and cheap services and not necessarily an advantage for the premium products that industrial countries are known for.

It all started with the buzz words “Low Cost Country Sourcing”. This wording, put politely, misses the point by a long shot. Criteria such as quality, logistic risks, intellectual property risks among others, have to be considered and evaluated thoroughly to assure that these measures are successful. Establishing innovations on the supplier side as a competitive advantage and managing your new suppliers actively are only two from many important success factors.

I agree. Generally speaking, you get what you pay for. But you have to take it on a case-by-case basis and think of it in terms of your overall competitive strategy. If time to market is too important, or you need components that are very high quality and technologically sophisticated, or exposure of your IP could sink your whole company, countries further along the development path with higher costs might end up saving you money in the long run.

Two basic concepts found throughout business, risk and return, are critical to the supply chain and sourcing. The problem is, it’s much more fun to speculate about substantial returns and savings, than try to quantify, measure, and assess risk. Thus, risk, and potential sources of risk and their effect on return, often fall off the radar. Perhaps someone should coin the term “riskturn”. Wait…I just did. It follows the whole celebrity gossip magazine promotion of co-identity: two things fused together which we dream will never be broken up again. People-Magazine-reading 14-year-old girls and desperate housewives have their Brad Pitt and Angelina, “Brangelina”, or Ben Affleck and Jennifer Lopez, “Bennifer”. Now CEO’s and sourcing managers will always remember “riskturn” and know that risk and return are a couple made in heaven.

Back to sourcing … Michael astutely notes:

In other words, LCCS alone is not the answer, not a quick fix, and not a saving grace to a flailing company. In order for a company to be assured of value in their global sourcing initiatives, they at least need to progress upward to a BCCS initiative, understand the advantages and disadvantages of each of their options, and understand that such initiatives will take considerable time and effort. It’s not just the flick of a switch.

In my case, Michael is preaching to the gospel. It’s right on and it’s worth promoting this kind of information more. ChinaLawBlog did a post eloquently entitled “China Defeats Vietnam in Sourcing Smackdown” which covered a post I did “Offshore Sourcing: An Ever-Shifting Landscape, Part II”. In my post, I talked about the fact that many fashion apparel manufacturers that moved production to Vietnam to avoid the risky/costly quota situation with China, then had to gather up their threads and needles again and head back to China and other countries when the US government announced that they would be monitoring Vietnam’s fashion industry for possible anti-dumping actions. In the comments section of ChinaLawBlog’s post, he noted that huge multinational corporations which fall into $5 million mistakes in trying to source the lowest costs or be the first to enter developing markets is not a strategy for all to follow. His point being, a smaller company making a $500,000 mistake might be up the Mekong Delta without a paddle, because they just don’t have the deep pockets to absorb those kinds of mistakes from a financial perspective like MNCs do.

Chasing lower costs undoubtedly disrupted supply chains, and perhaps order fulfillment, for these companies when they had to deal with a more unpredictable trade relationship between Vietnam and the U.S. For smaller companies, disruptors like this could be devastating. Best Cost Country Sourcing for smaller companies would involve hedging risk by looking for lower overall costs (rather than lowest hard costs) in a country where things like economics, trade, supply, materials, and other things are more predictable. I believe China retains this position over many other countries for smaller businesses looking to source consumer goods. At the very least, it’s certainly a good place to start for many. In many cases, maybe the best…?

Thanks Ashton!

P.S. I expect the comments to start rolling in from Mr. Locke any minute now …

Best Cost Country Sourcing

BrainNet recently released a mini white-paper on “Best Cost Country Sourcing The Evolution of Low Cost Country Sourcing” that had an interesting take on Low Cost Country Sourcing. According to the author, cheap labor is better suited to cheap products and cheap services and not necessarily an advantage for the premium products that industrial countries are known for. Personally, as I succinctly stated in a comment over on Supply Excellence, I believe the answer is Home Cost Country Sourcing. Finding a way to to get the best value from a total value management perspective (where total cost of ownership is taken into account alongside quality value metrics such as on-time delivery, reliability, etc.) while sourcing from suppliers in your own country. But I digress.

I particularly agree with the seventh and ninth paragraphs (the third paragraph on the second page and the second paragraph on the third page):

Decision makers often decide too easily that new markets such as India and China are going to be the ultimate attractive sales markets and that a local production plant is the best approach to capture the labor cost advantage there quickly. buying power is still limited in these regions but will definitely increase over time, so it is a “no brainer” that everyone can agree to quickly. The CPO is happy too because every product produced and sold is declared as low cost country volume. In other words, nothing has changed fundamentally in the organization but the so-called shifted purchasing volume has increased. Curiously, even the raw material and components may be sourced from high cost countries and assembled abroad. The right terminology for this approach would be “High Cost Country Sourcing” instead of “Low Cost Country Sourcing”.

It all started with the buzz words “Low Cost Country Sourcing”. This wording, put politely, misses the point by a long shot. Criteria such as quality, logistic risks, intellectual property risks among others, have to be considered and evaluated thoroughly to assure that these measures are successful. Establishing innovations on the supplier side as a competitive advantage and managing your new suppliers actively are only two from many important success factors.

In other words, LCCS alone is not the answer, not a quick fix, and not a saving grace to a flailing company. In order for a company to be assured of value in their global sourcing initiatives, they at least need to progress upward to a BCCS initiative, understand the advantages and disadvantages of each of their options, and understand that such initiatives will take considerable time and effort. It’s not just the flick of a switch.

The Consultant Corral

In “Perfect Partners”, over on SupplyManagement.com, we are told that a recent poll indicated that 57% of purchasers questioned believe consultants offer value for money. (Or, in other words, only 43% believe that brilliant bloggers like myself and Jason Busch are full of it. But that’s another post.)

The point of the article is that purchasing will increasingly need to rely on the knowledge and credibility of consultants so that it can continue to raise its game. Furthermore, if they are to maximize the return on their investment (in consultants), these purchasers and purchasing organization must make an effort to manage the relationship properly.

Consultants are valuable because some have skills you will never have, others are good at getting quick wins on the board, and yet others can bring benchmarking capabilities to your organization. They also bring a third party perspective that can be invaluable in helping you understand where you are doing well – and where you are not.

Despite the statistic above, I was pleased to see that the article noted that most purchasers agree that the cause of many complaints about consultants comes down to the client, not the consultant. It’s true that our profession, like any sales-based profession, is going to have a few snake-oil salesmen promising a tremendous return tomorrow for a big investment today. But for the most part, most sourcing and procurement consultants are honest, hard-working men and women with one goal – to get you results. We want to make a good living at it, but we want to see that you get a return.

As the article points out, too few clients properly consider their reasons for employing consultants. If you do not have clearly defined goals, how can you expect specific results? Do you want to transform your skill set, implement a new technology, or drive savings? Each goal requires a different focus and is associated with a different result. Without a clearly defined goal, a consultant will focus on the area she thinks she can make the largest impact and add the most value. But if you had a goal in mind, and did not clearly communicate it, this may not be what you wanted.

It also notes that you should involve consultants in the requirements phase of a project. Getting their insight and input will help you determine if they are the right consultants for you. Most consultants and consulting firms will not mind devoting some time up front on a large project to make sure the project is right – and right for them.

Another good point brought up is that sometimes you don’t need a consultant – sometimes you need a managed services provider. If you just do not have the resources in house to do well on a category, consider outsourcing that category, and others that you are unable to handle well, to a third party with the skills and resources to do it right and drive efficiencies and cost reductions you would not see otherwise.

Regardless of which path you choose, it all comes down to capability. The right consultant will have the capabilities you need. Get to know the consultant before both parties agree to a long term engagement. And if you find the right one, do whatever you can to keep him or her happy.

Procurement Outsourcing V.V: Provade, Take II

During my most recent Silicon Valley foray, I had a chance to catch up with Provade (acquired by Smart ERP Solutions) again and talk about how they seamlessly enable services procurement for companies with and without a PeopleSoft stack. If you remember, one of the three points I covered in my last post was how they built their solution on a PeopleTools foundation on the Oracle Stack. This is a tremendous advantage for customers with existing Oracle or PeopleSoft implementations since they can tie their solution in directly to your systems with almost no effort and set-up the bi-directional data flows in record time.

However, their solution is also a tremendous advantage for customers without (extensive) Oracle or PeopleSoft implementations – espcially those with large, involved services spend, especially in the legal, financial, contract labour, and marketing categories. They have done a significant amount of work extending their Java/J2EE technology stack to be SOA (Service Oriented Architecture) compatible. This allows them to easily integrate with other systems and enabled them to support rapidly configurable punchouts so that you can tie into your suppliers existing systems. Furthermore, it also allows them to develop Web 2.0 interfaces that are significantly easier to use than traditional PeopleSoft or Oracle (forms-based) interfaces – so current users can expect usability of the platform to only increase as time goes on.

I had a great conversation with these guys because my experience has been that:

  • there is not a lot of recognition for the importance of services spend management, which can consume up to 70% of spend in some verticals (financial, healthcare, etc.)
  • most solution providers are not offering specific solutions (with the notable exception of Servigistics (acquired by PTC) whose service parts, service price, and workforce management solutions I recently discussed, but they have a different spin)
  • most solution providers are not offering an on-demand solution with a low initial implementation cost

Furthermore, they understand that certain types of services are very complex and your offering, especially on the supplier side, needs to be customized if you want suppliers to rapidly adopt the system. One example, and one of their current strengths, is legal services. Law firms don’t bill for “services” or “tasks”, but “matters”. Most services are not fixed quote, but line item services where every line item is at a different rate (para-legal, associate, partner, fixed expense, variable expense, etc.). And they’re not always the most technical of people. (Even the majority of firms that are LEDES capable would rather log into a simple user-friendly web-based system to create a bill.)

In summary, I think they are on the ball with respect to some of the major services procurement challenges in some under-serviced verticals and that their current solution is a good solution for many firms with the challenges they are tackling. I look forward to talking with them again and diving into their process model and technology architecture in a later post.

Clarity with Claro

When I was in Chicago, I had the chance to sit down with Bart Richards, a Principle of The Claro Group (now part of Stout), and talk about their consulting practice and their sourcing practice in particular. Although the Claro group is relatively new, being in existence for less than two years, it’s team, made up of a large number of ex-Arthur Anderson and Bearing Point consultants, has been in the business for a long time and have saved $2.2 Billion dollars in sourcing and procurement spend (on roughly $17 Billion in spend), which is nothing to scoff at. (They’ve also recovered over $4 billion in insurance settlements, but that’s not the focus of this post, or blog.) They’ve also serviced over 100 organizations to date and delivered tangible bottom-line results at each.

Before I get into their sourcing practice, I would like to note that The Claro Group is an interesting firm with three primary areas of practice: Sourcing and Procurement, Healthcare, and Insurance Management Services – making them a prime consideration for large hospitals, GPOs, and other HealthCare Providers as they can help these organizations across the board. This is a very interesting position considering the relative lack of vendors and consultants in the sourcing and procurement space with this focus. Besides VendorMate (acquired by GHX, acquired by Thoma Bravo) and CombineNet (acquired by Jaggaer), I have not yet identified any other solution providers with such a strong understanding of the space. (So, if you know of, or work for, any other providers with a strong sourcing or procurement capability in the healthcare space, please feel free to reach out using the contact information in the FAQ.)

Back to their sourcing practice. I could bore you with details on their methodology, practice, etc., but this time I’d like to stick to my impression of Bart. All I can say is that if all of their consultants are like him, then they truly are client focused and willing to do whatever it takes to help you save money and improve productivity. Although they do use vendor tools to help them, they don’t insist upon or sell any specific vendor tools and instead focus on the analysis, processes, and methodologies that they believe, based upon their extensive experience (with each team member having an average of 12 or more years of experience in sourcing and procurement), will lead to tangible, measurable, and meaningful value to clients. And in this regards, the numbers don’t lie. They’ve saved, on average 12.5%, across all of the projects they worked on, which is quite significant, especially considering this is the most you can hope to save, on average, if you implement advanced sourcing methodologies in house (as per Aberdeen’s recent “Advanced Sourcing and Negotiation Benchmark Report”).

Their process is a simple and to-the-point three-phased approach that they use to rapidly identify opportunities. They start with an assessment where they review your process, organization, technology, and historical data to determine your opportunities, estimate the required effort, and compose a timeline. They then execute the recommendations that result from the first phase by revising organizational and process design, implementing new technology, and managing the change to capture the identified savings opportunities. Finally, they measure the impact, report on compliance, and implement Supplier Relationship Management. Simple, but effective.