Global sourcing has become a way of life for most global organizations, but the complexities of such sourcing add many dimensions to the strategic sourcing equation. The alignment of customer demand, business objectives, and supply requirements provides the foundation. Once you mix in global suppliers, inventory and supply chain requirements, a multidimensional sourcing environment starts to form. Global sourcing readiness includes understanding and dealing with the additional risks of cultural differences, currency, time zones, connectivity, distance, logistics constraints, language, and political instability.
An Operation's Differentiator
Global sourcing strategies are a key differentiator for the most successful demand-driven global value chain organizations. Improved profit margins, greater working capital, and reduction and containment of the costs of goods and services are the key financial considerations that are influenced by supply management organizations. Initiatives driven by the chief procurement officer, the chief supply chain officer or an equivalent vice president of procurement have recognized that best-in-class global sourcing is a strategic advantage driving business transformation and meeting critical elements of business success.
AMR Research finds that companies that have invested in global sourcing did so to improve operational performance and align with the CEO's objectives. Improving operational performance is vital for organizations striving to grow top-line revenue and reduce overall costs. This demands that CEOs and their organizations execute in the present and innovate for the future. Doing so means the chief procurement officer's initiatives must become imperatives. The four CPO imperatives identified by AMR Research are:
• ensure reliable supply
• mitigate risk
• improve working capital
• reduce and contain the costs of goods and services
To ensure reliable supply, it is key that there be collaboration with suppliers, regardless of where they are located, to find the best product and cost that is mutually beneficial and extends forward and backwards in a value chain, and that meets the customer demands. This requires organizational focus and commitment from the entire enterprise and all the functions. This focus and commitment creates significant competitive advantage for the supplier in exchange for the supplier's organization creating significant competitive advantage for their customer and enterprise. It is a collaborative effort to meet the aligned business objectives and customer requirements.
Mitigating risk with third-party assessments, analytic tools, supplier performance measurement and dashboards with predictive functionality is a necessary component in a global market. Companies that enable technology, coupled with international procurement organizations (IPO) or an outsourced service for "the feet on the ground at the supplier's manufacturing site" are those that gain the most in global sourcing. Not only can they meet their business objectives but they also mitigate risk with localized resources that work closely with their suppliers, developing efficient processes and meeting the market needs.
Working capital improvements may or may not appear in a global sourcing strategy. Organizations with local suppliers typically have lower inventory levels based on the close proximity of the supplying organization. Companies with near or far shore suppliers may have slightly elevated inventories that is a risk trade-off for lower costs. Add to this equation the payment cycle time, dynamic discounting and third-party financing, and a company can make a significant contribution to working capital with the right financial equation.
The last imperative, cost containment and reduction, is one of the most critical elements for the consideration of global sourcing. Companies with locations in low-cost countries or within these regions may move to preferred suppliers with lower labor costs in low-cost countries. Still others that have one or two main sites in higher priced areas of the globe may consider near or far shore sources to lower their overall total incoming costs.
The reality is all four imperatives are driving global sourcing strategies and initiatives. And the companies that have the most successful global sourcing programs have tied these imperatives to the success of their programs. The successes have allowed the companies to experience higher growth, a greater return on their assets and lower overall costs.
Strategy-a Key to Success
The key to a successful global sourcing program is strategy. Alignment with the company's overall growth and market strategy and its supply chain requirements will quickly lead to an aligned strategy for sourcing of supply. The best companies actually identify the requirements, review the current and potential supply partners and then put a plan in place to explore the various options. The critical strategy requirements to consider are the supply plan, ongoing supplier development, and continuous program expectation reviews.
Options in the supply plan may include local, near and far shore suppliers. With each supplier, a review is conducted of capabilities, performance, and total cost along with scenario modeling for risk mitigation. Each of these components has a full set of requirements that need to be considered:
Capabilities: The supplier must have the right equipment, facility, personnel, materials and available capacity to meet the needs of the program(s).
Performance: The right product with the right quality is delivered at the right time.
Total Cost: All elements of costs are considered in the equation to vet out excess supply costs.
Scenario modeling: The analyzing of current and future industry and economic dynamics for risk mitigation and the implementation of flexible contracts.
Consider the case of a $5bn maternity clothing retailer, creating a sourcing strategy based on trimesters. This retailer described how it needs to market to a woman through two seasons with very different products: the first three months, when a woman's body shape changes only moderately, and the last six months of pregnancy, when a woman goes through major body changes necessitating new apparel.
In an ever-changing fashion world, the sourcing process needed to be agile and low-cost, but also highly efficient. And for items that are staples to a woman, such as the basic black sweater and slacks, the repeatability factor could be advantageous. So the maternity apparel company sourced the latest-fashion, trendy items locally in the United States at a higher price to test the market. Once an item started to gain traction, the company sourced the product in Mexico or near shore, which still allowed some control, but at slightly lower costs. Finally, when and if the item became a staple, it was sourced in a lower-cost country at a greater distance, thus providing the lowest cost and greatest margin. This demand-driven strategy provided the company with significantly improved profit margins, more control over end products, and an agile supply network. This multiple sourcing channel strategy ensured reliable supply, mitigated supplier location risk, improved working capital and lowered and contained costs.
The location of the supplier is not critical to the success of supplier development as long as an organization has a local team near the supplier. Many multinational companies have regional international procurement offices to assist in the selection and execution of the supply plan. While both elements are critical to success, the execution of the required supply plan requires feet on the ground at the supplier's site. Companies that have a local IPO or a service partner working on their behalf as their supplier liaison are more efficient in their processes and have fewer supply disruptions than those without localized supply management expertise.
A $7bn high-tech company had approximately 80 supplier development engineers in the U.S. The engineers worked closely with suppliers in China though racking up many air miles. When the company reviewed its supplier development costs it found they were higher than expected. A closer examination revealed that although the suppliers were ramping up to the expected volume requirements, there were still many issues that needed to be addressed. With unaddressed issues, product quality and timeliness problems started to occur, driving warranty claims to higher than expected levels.
The company took a step back and realized the issues couldn't be addressed without more localized resources, so a change was made in the supplier development organization. The 80 or so U.S. engineers were reassigned to other projects, while the same quantity of supplier development engineers were hired in China near the suppliers' facilities. This change not only reduced air travel and labor costs in supplier development, but also reduced overall warranty claims by 2 percent. This supplier development alignment strategy assisted the company in overall cost reductions and margin improvements.
Sourcing Program Reviews
An effective global sourcing strategy is a plan, executed with successful results. And success means a continuous review for refinement of the expectations vs. the results. The most successful program reviews include sales, marketing, operations, product management, engineering, quality and sourcing. The review process consists of these areas:
• Performance to plan
• Total cost of ownership for each "shoring" segment
• Successes, near misses and misses
• Identified gaps
• Improvement plans for gaps and misses
• Definition of success
• Contingency plans for risk mitigation
And while some companies stop here, a European-based telecom company has taken its sourcing program review one step further, including its suppliers as part of the team. This collaborative review process has brought more information to the team, including a supplier road map for further development across current and future products, further cost reductions based on supplier innovation and collaboration, and it reduced a supplier's obsolescence risk within the telecom's supply base. This unique alignment strategy has enabled the telecom company to exceed its strategic sourcing plan expectations and to quickly react and proactively mitigate price, performance and brand risk.
Low-Cost Country Sourcing
Companies participating in global sourcing initiatives did so to reduce overall costs of goods and services. Companies participating in low-cost country sourcing initiatives-whether for products or services-can save 35 percent to 50 percent on goods and services combined. In the case of China, the lower costs come from the lower costs of labor, capital investment, and material. But caution and due diligence are required. Companies that do not factor in the risks of increased inventory levels, substandard products, and increased transportation and transactions costs can lose more than they save.
An agile low-cost country sourcing (LCCS) initiative starts with an all-encompassing strategy. It's vital to every facet of a successful LCCS initiative, with an analysis of all possible risks factored into the decision-making process.
The risks to be considered should include the following:
• Commodity cost volatility
• Disruption of supply
• IP/counterfeit issues and brand protection
• Long lead times and product availability
• Logistics constraints and global trade issues
• Quality and traceability, as well as product safety
• Future changes in regulatory, tax, or import laws
• Status quo (which means lack of ongoing continuous improvement and innovation)
Given these potential risks, what cost elements should be included in the formula? They vary depending on sourced product structure and cost models. However, the costs to consider in the total cost comparison for LCCS are, but not limited to, the following:
• Capital investment and tooling
• Manufacturing quality and rejects
• Shipment (ocean/ground versus air)
• Handling costs
• Export control
• Inventory carrying
• Port of entry
• Local employees
• Supplier audits
• Supplier training
• Software to support collaboration
While the importance of these elements varies based on sourced location and final ship point, all of them contribute to the total cost equation. An Accenture study found that companies that analyzed every element of cost in their overall formulas saved 10 percent to 20 percent on average. AMR Research's own work has found that many high-tech companies are now mapping their cost models through their entire ecosystems (point of demand/customer through to tier-3 suppliers). This way the costs to deliver are calculated and used to profitably respond to demand.
But the real value is when companies take it a step further and view the total cost to serve, creating even more profitability for the entire ecosystem. While it is necessary to map the costs to deliver, the cost-to-serve model includes the entire ecosystem: from concept, to product, to business or consumer consumption. In addition to the costs of days on hand on the factory floor prior to integration or the costs of inventory, shelf space and total time to consumer purchase are the next requirements to meet a full cost-to-serve model.
Remember, LCCS initiatives have many facets, and missing one element can mean the difference between profit and loss. For instance, a high-tech company sourced all its component parts to China, but when an unexpected surge in demand surfaced, the normal three-week ocean transit time was too long and the product had to be air shipped. This eroded all profit. And extra inventory had to be added into the model during the shift to a low-cost-country region, also reducing the overall profit.
The Future Tool Kit
A recent AMR Research webcast found that 38 percent of companies did not have e-sourcing technologies and of those that did, 27 percent utilized e-sourcing technology but could not leverage it effectively across their organization. E-sourcing technology assists in the work flow processes of request for information/proposal/quotes, optimization of bids and plans, and--if it is a full suite--it can track the sourcing plans into contract execution and performance. E-sourcing technology is an enabler of global sourcing.
However, global sourcing demands a holistic strategy tied to a value-driven, cost-to-serve model coupled with analytics to support fact-based decision making. The current technology, service providers, and business process outsourcing companies can assist, to an extent, in the analysis, planning, and execution of global sourcing strategies. But how does that translate into a tool kit for success?
Leaders are looking toward an end-to-end work flow and event-driven process across sourcing, engineering, risk management, and supply network platforms to support these efforts. Being able to access predefined, real-time analytics, optimize the data inputs, select preferred scenarios, and show the total cost and risk models based on all the elements is still pie in the sky for most organizations. It becomes a true modeling platform, performing current and what-if or future projection based on known or projected change elements.
The Bottom Line
Complexity in our ever changing round but very flat world is not something new to sourcing organizations. But with each global sourcing strategy are the multi-dimensional elements of demand-driven responsiveness, risk mitigation, right shoring trade-offs and overall cost and working capital considerations. Understanding the entire equation and dimensions is critical to global sourcing success.
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