By Andrew K. Reese
Sam Datta has some advice for mid-market companies looking to source goods in the Asia-Pacific market: Know your foreign suppliers' supply chains.
Datta is senior manager for business advisory services and Southeast region sourcing and procurement practice leader at business advisory firm Grant Thornton. His 18 years of industry experience include positions in manufacturing and distribution, including in the chief financial officer's chair.
In his current position on the consultancy side, Datta spends a good deal of time advising midsize firms on how to engage with global suppliers in the Asia-Pacific region. He says that while the region offers opportunities for mid-market companies to source low-cost goods and find new customers, Asia-Pac also is fraught with risks that may present greater danger for midsize companies than for the Fortune 500.
One problem that many midsize enterprises face, Datta says, is that they frequently do not have the human resources to devote to doing all the due diligence and other legwork necessary for "world-class" global sourcing. For this reason, these companies may have to rely on a local agent to facilitate relationships with suppliers in the region. Going through an agent can have many benefits, including providing access to local cultural and political expertise, and accelerating the process of identifying and qualifying suppliers. But using an agent does not alleviate a company of the ultimate responsibility for the business practices of its suppliers, and the potential damage to a company's reputation among consumers can be significant in cases, for example, where goods are found to have been produced by child labor or in sweatshop conditions.
Li & Fung Limited, Hong Kong's largest trading company and a partner to many of the largest consumer products companies sourcing in Asia, has attacked this problem by establishing its own compliance program. The company also trains its sourcing teams to raise awareness of compliance requirements, performs supplier audits and inspections, and provides vendor education. Datta notes, however, that supply chains within Asia are becoming increasingly complex, complicating buyers' efforts to understand the true origin of goods sourced in the region. "You might be buying a product from a factory in China, but some of the components might come from Taiwan," Datta says. "If you don't understand that supplier's supply chain, you're open to significant risk."
Supplier-related risks go beyond concerns about responsible sourcing and could include potential disruptions due to political unrest, adverse weather or geological events, or any number of other reasons. Moreover, suppliers based in Asia-Pac oftentimes themselves are pursuing the same cost efficiencies that attract global companies to the region. These suppliers may find it beneficial to pick up their operations in one country and move elsewhere when economic conditions so dictate. According to Datta, for example, many suppliers of castings in China moved their businesses to India over the past few years in search of better operating conditions, including laxer environmental laws and better access to power and utilities. Once India began tightening regulations governing the emissions of plants producing castings in that country, the suppliers started looking elsewhere to re-establish their operations in a more favorable — and less regulated — environment. Each time a supplier undertakes that kind of move, its customers must reorient their sourcing strategies to identify new sources of supply or adapt to doing business in the supplier's new home country. "You have to keep track of the supply base," Datta says, and again, mid-market companies may be challenged to stay abreast of the trends that drive such decisions within their suppliers.