* Stage 3: Moving from PPV- to TCO-based Metrics (7 percent of Fortune 500 firms in 2003)
Growing sophistication in global sourcing sees firms moving their focus, and compensation plans, from purchase price variance (PPV) to TCO. Firms at this level are aggressively seeking global sources for a large range of commodities and exploring emerging sources beyond hot low-cost countries. Having reaped the low-hanging fruit of offshore supply sources, firms are now looking for the next 10 percent of savings they can realize through true supply network and TCO optimization. At this point, elaborate spreadsheets are breaking under the weight of these increased expectations.
* Stage 4: Evolving to a Tax Efficient Supply Chain (Less than 3 percent of Fortune 500 firms in 2003)
Firms at this level are seeking to expand their global sourcing expertise to accurately model their entire supply chain costs. Executive management is driving the design of a tax efficient supply chain to use as a competitive advantage in their industry. Companies at this stage are designing world products to support a "source anywhere/build anywhere" strategy. Internal processes depend on a team of mathematicians and information technology (IT) Top Guns that are either seeking or building TCO-based supply chain optimization platforms.
The Many Facets of Global Sourcing
Like most factors in the current global market, low-cost country sources constantly evolve. China, currently the low-cost country favorite for many items, is rapidly increasing its ability to produce higher-quality goods. As the suppliers find local markets for these higher-end goods, they will be less willing to focus on low-revenue goods and dedicate their resources to higher-profit, higher-quality products. To do this, China will need to attract or train more expensive labor and invest in more sophisticated equipment, raising their cost structure accordingly. This will provide an opportunity for a new low-cost supplier to emerge, say in Indonesia or Kazakhstan or Kenya.
In terms of power, nations have always wielded trade as a political instrument. Now more than ever, global trade is emerging as a potent political weapon. Nations that control global trade or use it to their advantage will gain power. Countries have developed mechanisms to rapidly reward allies with lower duties. Conversely, they punish non-allies with increased tariffs or other trade barriers. In the more extreme cases, countries have adroitly positioned their cases so effectively with the World Trade Organization (WTO) as to gain WTO approval of retaliatory tariffs. A recent example of this phenomenon occurred with the European Union's (EU's) successful request to assess retaliatory tariffs against the United States to balance what was perceived to be an unfair advantage in the U.S. Foreign Sales Corp. (FSC) export subsidy. These geo-political cases can happen very quickly. Nations and trade oversight organizations streamline mechanisms for implementing retaliatory tariffs, as illustrated by the ease of implementation, and then rescinding, of the U.S. Steel tariffs last year.
Globalization — defined by the World Bank as the increasing worldwide integration of markets for goods, services and capital — attracted special attention in the late 1990s. Firms developing world products that can be built and sold anywhere demonstrate this accelerated global integration. The subsequent demand volatility of supplying global markets from a continuously evolving supply base creates unforeseen stresses on still maturing global supply chains. This volatility undermines the ability of supply chain professionals to depend on traditional cost models to handle their constantly evolving material flows, simply because so many new, often unknown, factors come into play.
Bid analysis, another key component of global sourcing, requires significant sophistication when evaluating cross-border supply sources. The cost determination intricacy expands exponentially when a global sourcing equation includes Incoterms. For example, while FOB may be commonly accepted for domestic transactions, international transactions have a more technical interpretation of FOB as the seller delivers when the goods pass the ship's rail at the named port of shipment, so FOB must include a named port of shipment: i.e. FOB Busan, Korea.
Limits of In-house Global Sourcing Toolsets