Global Sourcing: Challenges and Constraints

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Global Sourcing
Challenges and Constraints
Giovanni Atti
Past President ADACI Member of Board
e Chairman of the Education Committee
of the International Federation
of Purchasing Supply Management
Procurement Supply Chain
Directorate AgustaWestland Buenos
Aires October 5th
2007
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In the last five years Global
Sourcing policies have entered in the
Buyers strategic agenda and many
professionals have launched global
sourcing campaigns to reduce costs Global
sourcing it is not an option it
implies adequate skills and
organisation, risk management and top
management support
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if the overall company culture is
mainly focused on domestic supplies
and does not enjoy flexibility,
supply chain collaboration, long term
vision, capability to face
uncertainties and to evaluate potential risks
global sourcing initiatives
could fail
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Whithin a global environment, where
most products are made almost everywhere,
the competitive edge belongs to
companies that ? are properly organised
(lean operations) ? enjoy low labour rates
? manage big quantities
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Average hourly rates in China 0,59
2000 0,69 2001 0,80 2002 0,92
2003 1,03 2004 1,12
2005 labour cost is rising and labour intensive
organisations move to less developed provinces
or to Vietnam/Bangladesh Economist 10.2006
2006 Renminbi devaluated by 6
Productivity increased by 15-20 Financial
Times 8.3.2007
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Except for niche markets, survival depends
on the capability to reduce
costs USA experts say if you cannot reduce
them by 25-30 it is better you close
down Taking into account the difficulty to
reduce fixed costs lowering sales prices by
25-30 means to reduce the overall
product cost by 35-50
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• To do it, companies have to recover efficiency
  and effectiveness through
• ? lean management approaches
• ? global sourcing initiatives
• ? outsourcing plans of goods services in low-
  cost countries

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• Global Sourcing includes
• Spot Buy directly or through dealers/tradings
  
• It does not imply changes in the supply
  chain
• ? Repetitive Purchase of standard goods
  
• IPR owned by supplier
• re-engineering of the supply chain

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• Global Sourcing includes
• ? Repetitive Purchase of customised goods
• IPR owned by buyer raw mat
  finished components bought by supplier re-engine
  ering of supply chain
• ? Outsourcing of Manufacturing Processes
• PR owned by buyer raw mat. /
  finished components bought by supplier re-engine
  ering of operations and supply chain
• Four buying processes with growing
  difficulties

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Global Sourcing a medium-long term company
decision ? to generate a second source or
to outsource non core processes/services
? based upon adequate market analysis
business plan ? shared and continuously
supported by Top Management
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? implying supply management and supplier
development capabilities in countries with
different laws, culture and practices ?
subject to risks independent variables
unstable performances interpretation
of requirements different applicable
standards ? subject to learning curves and
high initial costs ? ROI in medium-long term
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Benefits of global sourcing / outsourcing ?
can reduce costs by 25- 60 ? fosters
competitiveness ? can avoid new investments
? makes the company lean, international and
more focused on market trends ? creates
a second source (additional capacity)
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Benefits of global sourcing /
outsourcing ? Favours penetration of local
markets McKinsey 87 of offshore investments
made to penetrate local markets
? Meets offset / industrial compensation
reqts.
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• It can also allow
• access to new technologies
• ? transformation of fixed into variables costs
• ? access to skills not available on domestic
  market
• ? higher flexibility and reduced time-to-market

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• Barriers / Problems to consider
• ? Diverse political and industrial
  environment
• Diverse business practices
• Culture/ language / law differences
• People concern
• Volatile exchange rates
• Logistic support
• Qualitative and JIT sourcing requirements

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1. Diverse political and industrial
environment ? political interference
(China), ? bureaucracy (India ) ? managers
take tactical decisions, strategy made by
politicians (China)
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1. Diverse political and industrial
environment ? State Owned Enterprises
insufficiently customer oriented
(China) ? logistic Infrastructure
inefficient e fragmented ? frequent energy
black-out (China 14 summer 2005 - India
6-12 every month - World Bank 2005)

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India Trucks 80 has more
than 5 years, UK 48
Singapore 47 50-80 are overloaded (EU
0-5) Average speed on motorways 45km/h
Trains dangerously overloaded Airports
Ports old, crowded, and poorly connected

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China sourcing of std products relatively
easy selection of most reliable supplier very
difficult ? too many players in most
industrial sectors ? professional directories do
not exist ? information through official
channels scarcely reliable ? confusion between
manufacturers and dealers ? 50 of enterprises
cannot export directly
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• Diverse Business Practices (mainly China)
• ? poor planning, budgeting, monitoring and
  reporting
• capabilities
• ? capable to reproduce, but need a coach telling
  them how to work
• ? unstable quality performances
• ? scarce knowledge of cost analysis they
  accept target prices but often ask for price
  increases after delivery of initial production

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? no measurement of performances ? basic
principle of international commerce pacta sunt
servanda not always respected The buying
company needs specialists - trained for the
purpose, - capable to listen, understand and
accept the partners organisation -
capable to work with local management and
to promote supplier improvement plans
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3. Cultural Differences China ?
Organisation, procedures and working methods mean
beaurocracy and management constraints ?
They never say no and tend to skip questions
they do not want to answer ?
Customer loyalty does not exist, they favour who
pays more
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4. Different language and laws ? Very
few people speak English (China) ?
Professional interpreters not always available
They do not translate nasty comments/remarks
(China) ? Check appropriate intepretation of
drawings, technical specifications and
contractual clauses technical
documentation not immediately understandable to
people not familiar with Standard of reference
can be different
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? risks associated to the existence of unknown
compulsory laws that prevail over any
agreement Suggested clause subject to the
provisions of the termination Clause ., the
Supplier confirm that each article of the
Agreement per se, and the entire Agreement as
a whole, do not infringe any imperative or
mandatory national, regional or local law and/or
administrative norm existing in his Country,
and undertakes to keep the Buyer informed about
the entry into force of laws and/or norms that
impact the terms of the Agreement. Should any
new law and/or norm limit or impact the
execution of the Agreement or impose the Buyer
additional costs, the latter could decide to
terminate the same, as per the provisions of
Clause
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Governing Law and Jurisdiction neutral
country Limited down payments possibly
covered by international
bank guarantee Transport costs quoted aside
(they could double the cost of
material bought)
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• Exchange rates fluctuation / inflation
• ? Avoid use of local currency and national
  price indicators
• 6. Supply Chain Constraints
• ? In some regions it is difficult to find raw
  materials dealers and/or MRO suppliers
• ? Supply of spares, customer support and repair
  activities could represent a problem

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7. Qualitative and JIT Constraints ? Total
Quality Management approach almost unknown ?
Quality Requirements often under-evaluated ?
Buyer or service provider appointed by buyer,
should make the acceptance test before
shipment ? Return of material rejected often
very difficult (bureaucracy,
import licences, etc.)
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Global Sourcing Direct relationship without
intermediaries more difficult but more
profitable, Taking into account risks and
selection, qualification and learning costs,
relationship must be based on big quantities and
span in medium-long term Implies progressive
implementation, constant monitoring and supplier
improvement plans
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Outsourcing offshore ? strategic decision
that changes structure and organisation of
the supply chain ? process that provides
opportunities and enhance competitiveness ?
a source of problems and possible failure
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? a tool of creative destruction - savings
obtained used to reduce selling price and fund
RD - lower selling prices increase market
demand - RD generates new advanced products
(competitive edge) - when old products
replaced by new ones outsourcing no more
necessary (outsourcing destruction of old
organisation progressively replaced by a
new one)
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Diana Farrel, Head of McKinsey Global
institute Saving obtainable with the
outsourcing 30-70 Textile industry
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Outsourcing of complex supplies (high
value) Where the share outsourced exceeds
50-60 of the need, it could be useful to
establish a joint-venture (capital shared
initiative) the costs of such operation are
relatively low at the beginning of the
relationship and raise in parallel with the
learning and integration process Potential
strategy of our competitors acquisition of our
best partner (anticipate competitors move!)
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• Global Sourcing / Outsourcing Process
• Preparation of Sourcing / Outsourcing Plan
• Contract Arrangement
• Implementation Contract Management
• 4. Supplier Development Continuous
  Improvement Plans

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• 1. Sourcing Plan Preparation
• a. Which are the commodities to start with?
• Not many ( 1- 2 )
• Where volumes and local capability exist
• b. Sourcing activity
• Market intelligenge to find potential
  opportunities

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c. Sourcing Plan Analysis of Costs
vs. Benefits Risk Analysis (assessment,
evaluation, mitigation) Planning
Approval 2. Contract Arrangement
Definition of Procurement Spec. Statement of
Work RFQ, negotiation Contract
preparation and signature
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3. Implementation Contract
Management Appointment of Programme
Managers Progressive implementation of
activities (SOW) Contract Management (
monitoring, reporting,
measurement of performances,
change and rejection management, etc.) 4.
Supplier Development Continuous Improvement
Plans To increase efficiency, effectiveness of
relationship To promote product innovation
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Key Points to consider for Outsourcing
Plans a. Do the parts/processes to be
outsourced contain New company proprietary
technologies? Technologies existing in public
domain? Core competencies (fresh
solutions) kept inside, not recent findings
can be transferred to partners Even if
covered by confidentiality agreements risk
of disclosure exists! Task of buying company
is to innovate, not to protect obsolete
solutions!
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b. Technical configuration frozen?
if not, do not outsource! c.
A few months delay is within the norm!
Do not outsource parts whose delivery
date is mandatory! Second source is
always recommended If you delocate
single source, double the inventory and
carefully monitor major vendor
activities
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d. Real saving always lower than
expectations e. Benefits of Partnerships
strongly reduced after 8-12 year
time of collaboration
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Outsourcing Risks / Obstacles
Research CAPS ATKEARNEY 2004 loss of
control 72 protection of intellectual
property 68 company policy/philosophy 53
inadequate business case 42 dependency on
supplier (concern) 38 labor/community
reaction (concern) 36 loss of critical
capability 32