Companies increasingly are opting to reduce product costs through low-cost country sourcing or contract manufacturing, but unless done with care, much of the anticipated benefit from this shift can be eaten up by unanticipated supply chain costs.
"In the last couple of years we have seen a lot of executives put out rather arbitrary mandates to increase low-cost country sourcing by a substantial percentage," says Beth Enslow, vice president of enterprise research at Aberdeen Group, Boston, and author of several reports on this subject, including Grappling with Globalization: A Blueprint for Global Trade Management. "These companies are finding that their expected savings from shifting sourcing to countries like China don't always materialize because of higher logistics costs or customer service issues that lead to more chargebacks," she says. "The net-net is a far lower benefit than had been anticipated."
This development is reflected in results of a survey conducted by Aberdeen last year of more than 340 companies. In this survey, which is the basis of the above-mentioned report, respondents said that their biggest challenge in managing cross-border activity was "to keep the supply chain moving without exploding the sourcing savings or sales opportunity that enticed them to go global in the first place."
Unanticipated supply chain costs that can play havoc with the best-laid sourcing plans include emergency expediting, an inability to use primary (low cost) transportation carriers because of capacity constraints, miscalculated duties, customs fines, product rework costs, demurrage charges and customer chargebacks due to late or incomplete orders.
In addition, global supply chain disruptions have a direct impact on cash flow and working capital management. "What we are really talking about in international trade is working capital in motion," says Bernie Hart, vice president of global trade management services at JPMorgan Chase Vastera, New York. "When you think about it from that aspect, any interruption in the supply chain-whether due to a physical reason or because of compliance or financial issues-has a direct impact on the bottom line. It's your working capital that has been stopped."
The greater length and uncertainty inherent in global supply chains also contribute to longer cash-to-cash cycle times, increased safety stock, greater invoice reconciliation costs and potential Sarbanes-Oxley and business continuity risks, according to the Aberdeen report.
Sarbanes-Oxley compliance as well as compliance with government initiatives aimed at security are significant factors driving heightened concerns over global trade management. "If you come under audit by the government, one of the first things they want to see is what processes and procedures are in place to ensure that your supply chain is safe and secure," says Hart. "Businesses are now being expected to put controls in place to make sure that, if there is a failure or compromise in the supply chain, they have the ability to see that and to take corrective action and report as necessary."
Trend lines indicate that all of these issues will only increase. The companies in Aberdeen's survey source 21 percent of their total spend from low-cost countries today, but they plan to up that to 39 percent within three years.
As more companies begin sourcing in low-cost countries, the competitive advantage diminishes, notes Enslow. "This means that how a company manages its global trade becomes become more important," she says. "We are seeing companies focus on two areas: one, better understanding the cost structure of going international and, two, getting better at managing those cost structures and tradeoffs so they can run a lower-cost, more reliable supply chain."
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