Today’s guest post is from Diego De La Garza, Senior Project Manager at Source Once Management Services, LLC, and Source One’s expert on sourcing in Latin America.

In Part I, we noted that efficient migration to low-cost countries has become a necessary, competitive trait because ignoring low-cost country sourcing within the corporate agenda is now a risk in itself. However, low-cost country sourcing has become so intricate that it carries significant risks if improperly managed. We already discussed that risk mitigation must begin with proactive and diligent research on risk potential before setting a comprehensive strategy for the migration process and discussed the quality concern and noted that where there is expertise in a well established industry, quality will generally not be an issue. But this is just one risk area.

As far as other risk areas, geography is a critical component that is ignored more frequently than it is acknowledged when selecting a low-cost location. Geography plays a dual role when managing risk. First, geographical risk can be assessed based on the proneness of one location to experience a natural disaster and its ability to recover. Secondly, geography should be assessed on the location’s accessibility to reach end markets quickly. Logistics and infrastructure play a key role here, but a strategic location is a competitive advantage that will nurture mobility.

Low-cost countries will also have different laws, rules, and regulations that permeate their business culture. Some countries will have strong intellectual property (IP) protection schemes but they may not enforce or penalize infringement. Others won’t have any at all, which in many cases has motivated corporations to exit low-cost locations. IP transgression may have huge repercussions to a company, especially if prosecution in a foreign country is favorable. Corporations must ensure that robust confidentiality agreements, contractual terms and conditions, and enforceable jurisdictions are in place with all entities that are engaged from the beginning.

Financial regulations, taxing structures and commercial activity compile an extensive bundle that may pose both risks and advantages. The best way to capitalize on tax breaks, financial incentives and even logistics benefits is by understanding the trading regulations and agreements low-cost countries have in place and how can they be leveraged advantageously. From subsidies, to temporary-tax-free importations, most low-cost countries today have mechanisms to incentivize investment. It will also be critical to understand which regulations can negatively impact the operation or may affect the Total Cost of doing business. Some good examples of this are anti-dumping laws and penalties that are applied to specific commodities and products, which will vary in time and form constantly.

Political and social instability are stigmas that often become associated with low-cost countries. In many cases this image is misunderstood or exaggerated by the media. The reality is that focused social issues may transcend the commercial barrier when unwarranted fear is passed onto potential investors. Social unrest is unpredictable and can easily scare away opportunities, but in many cases, specific industry sectors may be protected from it and may even be thriving in spite of it. The best way to manage something like this is to understand how the macroeconomic landscape behaves as a whole from the very beginning.

Some companies have shown interest in approaching migration on a “testing the waters” type of approach to mitigate risk, which may entail transitioning only a small portion of their volume to a low-cost country, or running pilots to ensure a safe migration. While this conservative strategy is common and could be effective, is not necessarily the most beneficial. “Testing the waters” may actually be very expensive in the short-term and may not provide the full benefits of a well-run migration strategy; in some cases it may even be considered somewhat “risky” since companies may incur in dead costs, expose competitive strategies and not leverage the full potential of the local network.

Strategic sourcing best practices are a key element on risk mitigation, as many of them include the evaluation of multiple dimensions of the offshoring and migration process. They also help understand suppliers and establish collaborative links with them and other local entities that can help define a clear picture of the local market, the networks and uncover the opportunities that may have not even been considered in the first place.

With all this in mind, low(est) cost should not be considered as the only metric on which to base a migration decision. Finding an ideal low-cost country with low risk will depend on its sustainability potential. In some cases the lowest cost may also come with higher risk, and so a well-balanced strategy that demonstrates long-term value is the best formula to keep both costs and risks down. A balanced combination can only be drawn through leveraging accurate data and expert advice on each of the risks areas of cost migration.

Thanks, Diego.

Twenty anti-trends still remain. As much as we’d like this series to end so that LOLCat can come out of hiding, this insanity has to stop. We have to shine the light on all these half-truths and lies and put an end to them once and for all. We will continue until each one is laid bare in the hopes that the backwater futurists crawl back into the muck from once they sprang and leave us alone to push forward.

So why do so many historians keep pegging e-Procurement System Adoption as a future trend? Besides brain cell inactivity, there are a few reasons, but among the top three are:

• e-Procurement is still “new” in business software terms
  it’s only been around for approximately 15 years, and the sad reality is that, to many of these self-proclaimed futurists who just crawled out of the MRP cave, it’s new to them (so it must be new to you, right?)
• most systems are limited to catalogs or punch-outs
  and users can only buy from a fixed, limited set of products that exist in the organizations catalogs or on sites that support the proper punch out technology
• most systems are limited to a select group of users in the organization
  when they should be in the hands of everyone who needs to make a requisition or purchase on behalf of the organization

e-Procurement is Still “New”

Fifteen (15) years might be new in business terms, but given the rate of change we are all accustomed with as a result of the internet age, it’s not new at all. In fact, it’s ancient! With this metric, you’re still calling on analog cell phones while the rest of the world is on digital smart phones that can call, text, and video conference. Get the picture? (Oh, wait, you don’t have picture capability. Sorry!)

Catalogs or Punch-Outs are the Norm

Catalogs are good, punch-outs are better, but as SI explained in its B2B 3.0 Series way back in 2008, virtual, integrated marketplaces, which were available then, are better still! Read the classic series for more info:

• Introducing B2B 3.0
• Enabling Buyers & Suppliers
• e-Procurement 3.0

Usage is Limited

This is usually because poor processes and policies limited rollout to “key” individuals, but often because people didn’t want to use ugly, clumsy systems that didn’t even accomplish their basic function. The answer is a modern e-Procurement system that is easy to roll-out organization wide, easier to use, and does what it is supposed to do. There might have been only two options 15 years ago. But now you probably have a dozen that would work. So get one!

And this is why the discussion of fake “future trends” should stop once and for all!
Even LOLCats in their ninth life have been driven to drink from the discussion of 26 “future trends” so old that they remember them from their first life! They don’t even care that we’ve finally progressed to trends recent enough to be relevant!

Wow. One week and fifteen (15) “future” trends later we’re finally getting to trends that are recent enough to be classified as “we should be mastering this” as opposed to “we should have mastered this (a) decade(s) ago”. You’d think this was good news, but considering that it’s going to be eleven (11) more trends and three (3) more days before we get to a “future” trend that’s actually recent enough to classify as “like new remanufactured shoes”, it’s not. It’s sad and almost pathetic when you think about it.

So here we go again. Or should the doctor say here I go again because, like David Coverdale, it seems, from the doctor‘s point of view, that here I go again on my own, going down the only road, and, like a drifter, apparently walking it alone. You see, instead of taking the easy way and walking the well-trodden, down-beaten path, the doctor is opting to forge a new road to see what lies on the other side of the unexplored territory, because tried-and-true doesn’t mean best-for-you.

(the doctor knows it’s harsh, but the reality is just because you’ve been doing it that way for thirty years doesn’t mean you’ve been doing it right. And if you’ve been preaching the same end-game for thirty years in the consulting world, you definitely aren’t doing it right. The world evolves and your playbook should evolve with it.)

But maybe we should get back at it as we still have a long ways to go, but before we continue, let us reiterate that these posts are categorized as rant for a reason. Just like the doctor has no restraint when it comes to rubbish, he has literally no patience for puff-pieces, which he has recently read a lot of while researching this series. As a result, the doctor is letting loose and not pulling any punches. So if you have a habit of reading, sharing, or promoting these pieces, unless you’re still up for a rumble, you might want to go hop over to Spend Matters for a few more days (and come back Thursday when we get to trends meaningful enough to at least be mentioned). The fact of the matter is that the doctor is going to continue to call a duck a duck, a spade a spade, and a poser a poser. the doctor will continue to do his very best to continue keep the language Safe for Work, but the bile will bleed through where it is well deserved, and we have to cover a couple of very hot topics that make the doctor go cuckoo for cocoa puffs. You have been warned repeatedly. You continue to read at your own discretion.

18. Improved Supply Management Skill Set & Skill Specialization

The need for improved skill sets and improved skill set specialization has been around at least since the invention of the hammer, but has probably been around longer than that. After all, the early hunters had to learn to use their spears. Every time technology or business processes have progressed, new skills were required to appropriately use the new technology or business processes. And every time new processes or technology were introduced in Supply Management, new skills and skill set specialization were required. This is really, really, really old news but has been promoted to the ongoing blues category only because, last decade, progress came fast and furious and, for the most part, the professional associations, training companies, and big consulting co’s just didn’t keep up (or come anywhere close to keeping up) — so how could you? The ISM only upgraded to the CPSM in 2008 — almost five years after Next Level Purchasing introduced the SPSM! (Hmmm … wonder where the ISM got that idea, eh?) Plus, the later half of this decade could see a few more innovations that rock the Supply Management world, decimators* permitting.)

17. Talent

Due to the steady increase in the size of the skill set required to excel in Supply Management, we’re at the point where, as SI has been stating for years, you have to be a jack of all trades and master of one. There’s a reason the traditional saying is “jack of all trades and master of none” because it’s hard to do everything and yet be good at anything. But that is what’s required to excel at Supply Management. You have to be good at dozens of different things, and good enough to combine them more effectively than your peers from the perspective of designing and managing global supply chains. This is going to be an issue for decades to come. It’s not only going to be a constant challenge to find appropriate talent, but to design and deliver training programs that elevate that talent to the top of their game and keep them there.

16. Stronger Supplier Relationships

Now that we’ve went from buying pre-manufactured third party products to outsourced manufacturing to outsourced product design, we need much stronger supplier relationships than we used to require. And when you add the constantly increasing risk of supply chain disruption, dwindling raw material supplies, and ever decreasing product life cycles, the importance of strong supplier relationships is skyrocketing. But this has been the situation since the outsourcing craze began in the 1980s. Nothing new here, except the strength of the relationship, and the frequency of interaction, has to keep increasing, and even more visibility is required.

That’s 3 more down and only 15 to go. And, most importantly, only 3 more days until we get to remanufactured shoes! We might just make it!

^* The innovations will happen. Some are already in progress. It all comes down to two things. One: whether there are any VCs forward thinking enough to invest, as true innovation takes years, not quarters, and the short-term thinking of Wall Street has conditioned us that it’s all about next quarter, not next year, or, more importantly, next decade (and this has resulted in the end of long term strategic plans and put a big damper on ground-breaking innovation). Two: whether the patent trolls will let it happen. There are a number of 800 lb gorillas that haven’t invented anything in almost a decade and their only chance at maintaining superiority in the space will depend on squashing the competition and putting them out of business. In order to support this anti-progress strategy, these companies have built up war chests of patents (which, even if garbage, can be used to get multi-year injunctions until the case is decided) and big bank accounts (to buy, and subsequently bury, the willing).