Supply Chain

Suppliers, Suppliers Everywhere

Leveraging suppliers globally creates significant opportunities to reduce cost, but it’s not without significant risk.
Shawn CasemoreNovember 21, 2011

Virtually all organizations today are managing a global supply chain, whether they realize it or not. In consideration of this, there are several risks that must be managed and mitigated to minimize exposure and ensure success. The following are among the most common.

1. Price (mis)perception
There is often a belief that purchasing products or services at a reduced transactional cost yields significant savings. Outsourcing call-center services to a country with lower wage rates, for example, may seem like a logical decision if you are simply focused on the savings produced through reduced wages. However, the risk of poor results can increase dramatically. Several years ago, Dell admitted publicly that its efforts to outsource call centers to India failed dramatically, after receiving copious complaints from customers with regard to lack of service quality.

2. Time sensitivity
Managing a global supply chain for time-sensitive materials or services necessitates a strategy for dealing with the potential delays and unforeseen events that can, and likely will, occur. Boeing’s new Dreamliner 787 has been the best-selling aircraft of its time, with more than 800 orders before the plane ever flew in late 2009. Unfortunately for many customers, Boeing has only recently begun to fill orders, many of which were expected to be filled in 2007. The significant delays have been attributed in part to new processes related to integrating a global supply chain for much of the 787’s component manufacturing. Despite this costly and somewhat tarnishing impact, Boeing is committed to building on its model for future airline development and launch.

3. Intellectual property
Utilizing suppliers globally can create tremendous risks relative to the loss of intellectual and proprietary property. With the popularity of the iPhone, Apple is continually warding off less-expensive knockoffs, many of which mysteriously have similar technology to the iPhone. The 200 Fashion Mobile Phone, PG220, is the latest competition, selling for just $99 and presenting a significant risk of revenue loss for Apple if its popularity increases.

The benefits of sourcing globally do outweigh the possible risks, however, and many of the world’s most successful organizations have been able to manage those risks.

The following three procedures should be integrated into a global sourcing strategy to reduce risk and reap the desired rewards.

1. Qualify your suppliers in person.
Before determining the potential savings in sourcing globally, it is key to properly qualify sources. Supply arrangements should not be managed through e-mail but should consist of qualification efforts that include visiting the supplier site. I have several clients who purchase materials from Italy. Initially, they were reluctant to invest in visiting the supplier to qualify their facility and products, and to solidify a relationship. If the supply and value of the product or service are significant, or if the failure of such could have a detrimental impact on business operations, then a trip is a relatively minor investment.

2. Scope out the total cost, not just the savings.
Stop focusing on the potential savings derived from a reduced transactional price and start considering the total investment. Moving goods across continents involves numerous costs, many of which are hidden or not considered. In October a cargo ship named Rena hit a reef off the coast of New Zealand, where it still resides today. Nearly 1,200 containers were on board, with 55 still missing after falling into the ocean. For the containers that make it ashore, it is likely that the goods contained within will be damaged, and very few will have been fully insured.

Before you embark on pursuing what appear to be lower-cost alternatives, ensure that all additional costs have been identified and considered. For example, shipping goods internationally often includes security fees, border fees, and additional processing charges, depending on the country of origin and destination.

3. Plan for disaster, but don’t create it.
Delivery delays are not unusual when it comes to shipping products globally, and the first solution many organizations implement is to increase inventories throughout the supply chain. This is a short-term and costly solution that is likely to consume much of the intended savings. Creating contingency plans that can be enabled quickly in the event of a delay is critical to ensuring continuity of supply. I worked with an organization that sold garments and had outsourced much of its raw-material processing and production to other countries. Through many trials and tribulations, it developed contingency plans that included the standardization of garments, as well as retaining a small production facility within North America. On several occasions, the organization has initiated its contingency plans to meet peaks in customer demand without placing undue (and often highly expensive) pressure on its global supply chain.

Fortunately, managing a global supply chain is not like reading tarot cards. Predicting success is the result of understanding the risks and managing them. Invest the time and funds into understanding your supply chain and the rewards you reap will provide the competitive advantage you seek.

Shawn Casemore is the president of Casemore & Co., a consulting firm specializing in supply-chain management.