The five phases of global sourcing that, if followed, allow an organization to implement a successful global sourcing strategy in the short-, medium- and long-term.
In today's world, customers have come to expect higher-quality goods but at lower costs year-in and year-out. If retailers are to meet these expectations, they must secure good quality and reliable sources of supply at competitive prices. As a result, the value proposition for global sourcing has never been stronger.
Leading analysts agree that such strategic sourcing offers the greatest opportunity for cutting procurement costs. For early adopters, the benefits can be very lucrative: Reports at a minimum of prices 10 percent to 50 percent lower than domestic sources are not uncommon. Obviously there are added costs involved in building a global supply chain, but these are a fraction of the savings that can be gained by moving to low-cost economies. Global sourcing is thus highly attractive to CEOs and chief financial officers (CFOs) as it allows companies to improve their financial position through cost savings that contribute directly to the bottom line.
A secondary, but equally important, benefit of global sourcing is that it helps to beat the competition. The ability to source a great range of products from a wealth of suppliers significantly increases the product portfolio offering and can even allow a company to change the entire dynamic of an industry. One example of this is the DVD player. Holiday 2003 in the United States will forever be remembered in the consumer electronics industry as the time when a clutch of very major retailers marketed DVD players for $19.99 to $29.99. Consumers bought the players faster than anyone expected, and the rapid commoditization of electronics was born.
Global trade is expanding at an ever-increasing rate with no real end in sight. According to the US Department of Commerce, the United States imported $1.25 trillion worth of goods in 2003. Confirmation also comes from the Aberdeen Group, which published a study suggesting that respondent companies would increase their imports of goods and services by 27 percent by 2008: Wal-Mart alone is estimated to have imported $18 billion worth of goods from China in 2004, up from $15 billion in 2003.
Just as strategic sourcing by Best Buy, Wal-Mart and a few other big-box retailers changed the consumer electronics industry forever, no industry is immune to this phenomenon. It is only a matter of time before global sourcing impacts all industries, and the supply chain will never be quite the same again.
The Five Phases of Global Sourcing
The objective of this article is to introduce the five phases of the global sourcing process and to provide some basic pointers.
The five phases are:
- Strategy and assessment
These straightforward steps can allow an organization to implement a successful global sourcing strategy in the short-, medium- and long-term.
Global sourcing does not happen overnight, and there are many ways, as discussed in the following sections, to develop a global sourcing strategy.
Global sourcing remains broad and complex, with many different vendors bringing different strengths to the table. Whatever route you take, it is important to appreciate that without evaluating your options, without developing a plan and without working through that plan your global sourcing project will be wrought with unexpected issues and unacceptable risks.
Phase 1 Strategy and Assessment
The size of a company, its operation and future goals dictate the true needs of its global sourcing strategy. Here, strategy is defined as a detailed plan for achieving success in global sourcing or the skill of planning for such a situation.
From the outset, a company needs to define why it wants to adopt global sourcing. If the company's primary objective is to reduce costs, a very different approach will be needed than if the aim is to improve speed of delivery of product to market. If cutting costs is the only factor, don't waste time, effort and energy in defining a lengthy global sourcing strategy; look no further than reverse auctions or request for quotes (RFQs). However, if the main goal is differentiation from the competition, consolidation of supply sources, or the increase of the product portfolio offering to customers, then it is important to take global sourcing seriously and plan accordingly. Whatever the identified objectives, they will define strategy.
Global sourcing is a volatile and forever-changing environment. Process and change management are critical and should not be underestimated. It is very important, once there is senior management buy-in, to win the support of engineering, quality, marketing, human resources, finance or any other functions that may be involved or impacted. It is also imperative that the defined strategy is a flexible one and that contingency plans are put in place to cope with anomalies or failures in performance.
Companies must also be aware of and be sure to comply with specific legislation such as the U.S. Customs & Border Protection (CBP), Customs Trade Partnership Against Terrorism (C-TPAT) and the Fair Labor Standards Act (FLSA), all of which may impact strategy.
Once the global sourcing strategy has been comprehensively defined it is important to scope the resources needed: positive, proactive and structured planning will be key to success. Launching into a sourcing endeavour without proper assessment can potentially bring a company to its knees. It is vital to evaluate your company's readiness to adopt the new strategy. If there is significant unforeseen resistance from employees, existing suppliers or customers, then any global sourcing strategy implementation will be an uphill struggle. The necessary process and change management should not be underestimated.
The result of a company that moves into global sourcing without a pre-defined objective will very likely be confusion. Consider, for example, a company that decides to snap up spot purchases as and when it comes across low-cost products. For customers the result is store shelves stocked with a bewildering assortment of goods that are not necessarily what those shoppers expected to find. The company also risks cannibalizing sales of any full-price branded goods it has on offer and may devalue its own brand image by selling items that may be lower in price but are also of a lesser quality. It is pointless to source a product that sells well only to find that over-all sales of that category have been adversely affected.
- What is your primary objective in global sourcing?
- What are your goals and time scales?
- Have you assessed the true readiness of your company to implement a global sourcing strategy?
- Will you license brands or develop your own private-label brands?
- Will you contract an agent, or will you open your own sourcing office?
- Have you considered your social responsibilities?
- Have you identified which work will be handled by which organization?
- What are the logistics issues involved, and can your existing distribution network support the volatility and added supplies that are inevitable in a global sourcing start-up?
- What level of knowledge transfer will be needed with your new trading partners, and do you have the skills to achieve this?
- Have you assessed the risks of moving to a global sourcing strategy, and can you eliminate or reduce this risk?
Phase 2 Start-up
Once the global sourcing strategy has been defined, assessed and accepted it is time to put it into practice. During this start-up phase organised and controlled growth are essential and it is important to adopt a strategy that:
- covers both near- and mid-term plans,
- leverages existing supplier relationships,
- allows process and change management to be handled in a structured way, and
- gently eases the business into the new global sourcing strategy so that benefits can be appreciated from an early stage.
The critical function at this start-up phase is related to taking the proposed stock item from the drawing board to point of consumption in your organization.
Resourcing is paramount to success: Any company looking to succeed in the global marketplace must regard human resources as an incredibly valuable asset. It is important to resource both corporate home-based and overseas sourcing office teams with appropriate skill sets. Local staff can make a significant contribution to the entire enterprise by providing cultural understanding and knowledge of local supply markets. These will be the people responsible for purchasing and moving the sourced products. However, recruitment can be a lengthy and difficult process, as fluent English-speaking staff is hard to find. Even harder to recruit are very senior individuals who are much in demand from other companies. In addition, the complexities related to training staff in a new culture must be addressed.
- Are suppliers and supporting business units involved at the proper time and given the right responsibilities and decision authority?
- Are there adequate communications in place between your organization and your proposed suppliers? Or is vital time lost as the corporate and sourcing offices are open in different time zones? Asia can be 6 to 8 hours ahead of European time zones and 12 to 17 hours ahead of North American; in addition the public Internet infrastructure in Asia can be unreliable at the best of times.
- Is the total landed cost (TLC) of the sourced products well understood? TLC needs to include manufacturing costs, transportation costs, inventory costs, cross-border taxes, tariffs and duty, as well as an element for supply and operational performance, and supply and operational risks.
- Are you buying from reputable organizations? In 2004, an anti-dumping ruling was made against several Asian television manufacturers. Although it is highly unlikely that a company would make the mistake of buying from one of these manufacturers today, how can you be sure?
Phase 3 Formalization
As experience during the start-up phase demonstrates, expanded global scope will all too often overwhelm traditional data collection and analytical tools even if they have worked well in the past. Although spreadsheets are the analytical platform of choice for many corporations, the numerous variables that accompany global sourcing decisions demand a different approach. The selection of a robust and scalable global sourcing solution not only enables greater flexibility today, but also allows dynamic evaluation of sourcing options in the future.
Key prerequisites of a global sourcing solution include that:
- it must be proven, used by similar sized organizations for similar operations;
- it must be flexible to cope with the volatile and changing global sourcing marketplace and processes; and
- since global sourcing is characterized by uncertainty and fluid processes, the solution must be capable of evolving as the business itself evolves.
Such a system also has benefits for all stake holders in the project:
- The management team will receive meaningful, up-to-date reports, which will help them to analyze the benefits and pitfalls of global sourcing, based on one version of the truth. This will help them to make further decisions on certain aspects of the global sourcing process, (such as product testing, packaging, design, setting up audits), based on real-time information.
- The workload for the corporate and sourcing office teams is eased, errors are reduced and duplication of effort eliminated.
- What anomalies have challenged the use of your current data and communication systems?
- What reports would assist managers in making strategic global sourcing decisions?
- Can you identify the aspects of your global sourcing strategy that could be outsourced or insourced during the formalization phase?
- How can you best ensure two-way communication between the organization and the sourcing office or your suppliers?
Phase 4 Scaling
Once the global sourcing strategy is well established and the necessary mechanisms are in place to make it all happen, it is time to ramp up operations and reap even greater benefits. One obvious route is to extended activities to other countries or continents. This option is further explored in the next phase expansion. Here we examine other routes to scaling.
A first step is to extend the proven global sourcing solution to more suppliers, giving them greater visibility of their role and reinforcing the trading relationship to increase their commitment and cooperation to your strategy. It is also a good idea to leverage any particular successes with certain buyers, categories of product or suppliers. You may decide to:
- increase the volume of products you buy from these suppliers;
- buy new products from them for existing customers; or
- break into new markets with new or existing products, using these reliable suppliers.
It may be appropriate to set up strategic alliances with companies, similar to your own, in order to source greater volumes of products or indeed different products. Strategic alliances can bring greater buying power with shared costs and reduced risk.
Before embarking on further growth and scaling it is imperative to consider the expected productivity and profitability gains of any new systems or resources. Growth can also be stifled by lack of critical tools at the right time.
- Can you identify routes to scale your global sourcing efforts in a way that complies with your original objectives?
- Can you evaluate the performance of your current suppliers easily and accurately?
- Do you have true visibility of the lifecycles of your products on a global scale? Are you able to track orders and the necessary logistics to deliver these to your customers?
- Have you the tools and resources needed to accommodate scaling plans?
- Can you identify any bottlenecks in the current global sourcing solution or processes that should really be outsourced or, conversely, insourced?
- Where is your staff wasting time and effort
Phase 5 Expansion
There are many regions in the world suitable for global sourcing. It is a dynamic marketplace, and being tied to one region could ultimately be detrimental to operations. The most obvious way to expand is to source from other countries or continents. Today the potential marketplace stretches from Asia and the Middle East to a myriad of countries all with differing trade relations with the United States.
Areas that are hot today include China, South America and Eastern Europe. It is generally accepted that these areas will remain good sources for the next 10 to 15 years. China is the fastest growing exporter in the world ranked second only to Canada for exports to the United States. But, beware: When evaluating other countries it is essential to consider geopolitical issues, currency fluctuations and economic growth potential. There is a great variation in infrastructure, local laws, customs and attitudes toward business from country to country. Each country has its own set of business practices; cultural issues; legal requirements; and political, environmental and infrastructure risks. These must be understood and handled successfully. Additionally, wide regional variety exists, even within countries.
Research is key to your success and staying close to your global sourcing objective is imperative. All organizations should establish a savings threshold, balancing cost advantage with risk; below that threshold, the incremental risk and complexity that newly sourced products will introduce into the supply chain is not worth the cash saved.
It is also important to regularly evaluate your global sourcing strategy, processes and systems. Maintaining a coordinated strategy and a consistent approach is wise, but we live in an ever-changing world: customers change, product demand changes and competition changes.
For global sourcing, there is no debate: To remain competitive and in some cases to survive all companies should seriously consider the option. Regardless of where the company is in its life cycle, sourcing overseas should not be disregarded as too difficult, expensive or time-consuming. Indeed, as overseas suppliers have become more sophisticated improving capabilities and quality the road to global sourcing has been smoothed. At the same time, global logistics and telecommunications infrastructures continue to improve to support this ever-increasing trade in both products and services around the world.
Developing a global sourcing strategy and building the relationships and project infrastructure to support it will bring enhanced capabilities, streamlined projects and greater control of your organization's destiny.
A well-defined global sourcing strategy could be the key to your organization's future survival.
Helping to deliver these benefits are modern global sourcing solutions, whose key requisites include:
- Flexibility built with change in mind;
- Proven used by best-of-breed companies;
- Customized to address the needs of the organization;
- Scalable one that will evolve as your business evolves;
- Easy and quick to implement; and
- Capable of delivering a rapid return on investment.
About the Author: Jeremy Sacker is the former director of Operations, Global Sourcing and Private Label for Best Buy's Global Sourcing start up. In his 18 months as Operations director, Sacker was responsible for the day-to-day operations, as well as establishing processes and supporting systems for the extremely high growth area. Currently, he is the vice president for North American Operations for Eqos Limited, an independent software company with expertise in the supplier management arena and particularly in the field of global sourcing. Send your comments about this article to [email protected].