By Andrew K. Reese
Western companies have been establishing international purchasing offices (IPOs) in Asia and elsewhere for a number of years, seeking to maximize savings opportunities by eliminating middlemen standing between them and their low-cost-country suppliers, among other potential benefits. But setting up shop in a foreign market takes more than a lease agreement on office space in Shenzhen or New Delhi and a GSM cell phone with an international calling plan. It also takes a new set of global skills, particularly for sourcing and procurement executives used to operating in the domestic market. If you're considering heading up a new IPO, it's worth asking first whether you have the skills you need to make the office a success.
In their survey of the literature on IPOs, Italian academics Guido Nassimbeni and Marco Sartor, writing in the July 2006 issue of Production Planning & Control, point to several benefits to be had from establishing an international purchasing office beyond simple purchase price reductions, including better quality control, risk reduction and the ability to address supplier-related issues more quickly. However, they also point to several frequently cited challenges in creating an IPO, including difficulties in staffing the office and cultural problems. The personnel challenge is noteworthy in hot emerging markets like India and China, where the best qualified local talent is frequently in high demand, and where turnover rates are significantly higher than in the West. "When you see attrition rates in the high double digits, a lot of Western companies get very alarmed," says Ravi Kumaraswami, vice president and managing director for Asia Pacific with spend management solution provider Ariba. "These companies get frustrated because they train people and then, within a year or two, those people leave."
Given this challenge, it would seem important for the head of an IPO to have experience recruiting and retaining high-level talent. And yet too frequently Western procurement executives bound for the East don't bring this sort of experience with them to their new jobs, according to Chris Foulkes, co-founder and chief product officer with Eqos, a provider of solutions for global sourcing and supplier management. "The people who end up in these roles are ultimately buyers," says Foulkes. "They very rarely have a background in corporate organizational method or management method. They're there because they're good at buying."
The lesson: Check your curriculum vitae to make sure that you have the necessary experience managing a dynamic, growing organization, and check your people skills to ensure that you have the relationship- and team-building experience required to keep your best staff focused on meeting the company's objectives and not on searching for their next job.
Managing local staff naturally requires a degree of cultural sensitivity, too. Local personnel might speak perfect English, and Berlitz might have given you an introduction to their language, but you must be fluent in the local staff's culture as well so that you understand how and why they make decisions that affect the business. For example, in a May 2007 report from Ernst & Young called "Investing in China: Working with Headquarters," author Jim Ruderman, with the Economist Intelligence Unit, notes that Western executives are frequently surprised to find that local Chinese staff seem to be renegotiating previously agreed-upon issues — not uncommon in China, but a point of frustration for managers new to the Chinese business environment. Anticipating these sorts of cultural quirks can help prevent a creeping atmosphere of distrust between local staff and expatriate executives.
Cultural sensitivity extends to relations with the very suppliers that your company is looking to work with in the local market. Kumaraswami, a former senior manager at Accenture India, urges procurement executives to avoid treating the supplier engagement process in Asia the same as they would for vendors back home. For instance, he echoes other industry watchers in suggesting that developing vendors in Asia requires more face-time than in the West. "Doing business in Asia has a lot to do with relationships," he says. "When you meet with the supplier and put a face to a name, it gives everyone a far greater comfort level."
The lesson: Sure you can speak their language, but can you see the world through their eyes? Operating seamlessly in a foreign environment requires the flexibility to adapt to new cultural norms — those that don't conflict with non-negotiable ethical standards, of course. At the same time, you must be able to be a flag-bearer for your own company's culture where appropriate.
Relationship-building with suppliers serves several purposes, Kumaraswami adds. First, it's part of the supplier development process, handholding that helps the vendor understand and meet your company's quality, performance and ethical standards. It also can provide you with a level of comfort about the supplier in a region still plagued by the so-called "third shift" problem — where a supplier runs the production line "after hours" to make goods that the supplier sells on its own — and where recent quality issues have sparked large product recalls.
In addition, engaging more directly with senior management at the supplier can help them to understand your company's long-term objectives in the market, making them more willing to take a strategic view of their relationship with your company. This is particularly important when a company is in the initial stages of establishing its presence in a developing market and is pursuing relationships with the top-tier suppliers in that market, Kumaraswami says. "When you're doing low-cost-country sourcing and you're meeting with the best suppliers who are already doing business with a number of Western companies, they have limited capacity and limited capability to ramp up," he explains. "So you need to ‘sell' why doing business with your company is more beneficial, and why they should make additional capital expenditure decisions to make sure that they grab this particular business."
The lesson: Make sure you have the background in supplier development necessary to turn new vendors into reliable partners, and brush up on your marketing skills to ensure that you can sell the benefits of working with your company to the top-ranked suppliers.
For executives looking to make a name for themselves by forging trails to new, lower-cost supply bases overseas, perhaps the most important quality is simply wanderlust or restlessness. The fact is, says Eqos' Chris Foulkes, that the enterprises with the most advanced low-cost-country sourcing programs already are looking further afield than the current markets in China and India. "Senior managers at the companies with more mature sourcing organizations are actually scouring the world for the next places to be sourcing from," Foulkes says. That could be farther inland in China, in other areas of the Far East or Latin America, or even in Africa — although infrastructure issues in many of these virgin lands remain a formidable hurdle. Either way, Foulkes says, "If you're sourcing just in Hong Kong, you're probably competing with everybody else."
The lesson: If you're contemplating going overseas, you've probably already been bitten by the expatriate bug. Just remember to keep the suitcase at the ready and your passport handy so that you can be first on the ground in the next low-cost El Dorado.