Logistics and Supply Chain World | May 2013 1

LOGISTICS& Supply Chain World

May 2013 | R100/-

Industry InsightsA shift in sourcing strategies

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42 Logistics and Supply Chain World | May 2013

A shift in sourcing strategiesby Mary Siegfried

Industry Insights

Years ago, supply management professionals turned to low-cost countries to manufacture products, establish services operations and source materials in an effort to improve the bottom line for their companies. They found that inexpensive labour in India, China and emerging Asian countries made this new low-cost-country strategy successful despite requiring the management of lengthy, complex supply chains.

Then the world began to change. Energy prices skyrocketed, risks from unforeseen natural disasters and political upheavals soared, and intellectual property protection posed greater challenges than first thought. Suddenly the quest for cheap labour was not always translating into cost savings.

Supply management professionals agree that a low-cost-country sourcing strategy has lost some of its lustre. While low labour costs and prices will always be part of a sourcing strategy, they no longer are the centrepiece. Todays best-practice supply management leaders are developing sourcing strategies built on a foundation of value creation, total cost of ownership (TCO), landed

cost analysis and risk management. Many call it a best-sourcing strategy.

A wake-up call

Low-cost-country sourcing became popular decades ago, but many supply managers found it to be a short-term strategy, says Thomas L. Tanel, C.P.M., president and CEO of CATTAN Services Group, Inc. in College Station, Texas. Now supply management professionals are turning to best sourcing, which Tanel says also is referred to as best-country sourcing or value-country sourcing.

The change came about as supply management organizations began to consider the hidden costs associated with sourcing around the globe. As all the factors that make up a TCO analysis were considered, supply chain leaders received a wake-up call, Tanel notes. Those factors include intellectual property protection, quality, intermodal freight costs, shipping costs, custom and brokerage fees, and inventory investment costs, to name a few.

Best sourcing is an evolving concept without a specific definition because it is multifaceted. However, supply management professionals point to several aspects that comprise best sourcing :

It requires a supply management organization to be responsive and flexible to respond to changes in its supply chain and in the world.

It requires a supply management organization to be a core function in the company.

Its goal is to create value for the company, stepping back from a low-price focus for goods or services.

It is rooted in TCO, landed cost analyses and a robust risk management program.

It is not a one-time event. Its an evolutionary process that currently is taking hold in many organizations and will continue to grow and change in the future.

Logistics and Supply Chain World | May 2013 43

Responsive and flexible

For a best-sourcing strategy to work, a supply management organization needs to be responsive and flexible. When it comes to is constantly reviewing supply strategy because of shifting global dynamics, at a point you need to decide if going to low-cost countries to place your future is the right strategy ? and the answer is no.

This doesnt mean low-cost countries are not part of sourcing strategy; it means that organization are searching the world for the best place to manufacture and source and that means making adjustments to meet the demands of a changing world.

Designing a core function

Best-sourcing practices are driven by top-line revenue growth, bottom-line earnings and a companys short-term and long-term business plans. But before a supply management organization can develop a best-sourcing strategy, it must be viewed as a core function. For best sourcing to work, supply management leaders must assess their own organization, identify spend that is not under procurements control, understand marketing and manufacturing strategies, and then make the argument that supply chain is not merely a support organization.

For procurement and supply chain to be effective, input from cross-functional groups is critical for speed to market, cost control, earnings and top-line growth.

Supply management teams need to meet with cross-functional partners to understand the business requirements, as well as understand supplier objectives before developing and implementing a supply strategy

Seek to understand, focus on process, cost and revenue. Communication is constant and frequent.

Focus on value creation

A key element of best sourcing is creating value for the company. As low-cost-country sourcing comes under

greater scrutiny, supply management professionals began looking at sourcing from a more strategic viewpoint. An organization might have manufacturing operations in Asia because the company needs to be closer to the Asian marketplace. That creates value. There are many ways a best-sourcing strategy creates value, such as shorter lead times and fewer quality problems. For example, having inspectors at your receiving dock doesnt create value, having inspectors at your shipping dock where they can do some good creates value. While many companies considered certain aspects of TCO, often it wasnt until a problem arose that they realized many factors, such as value creation, were being overlooked.

TCO, landed cost analysis

To develop a best-sourcing strategy, supply management professionals say organizations must be able to understand all the costs that make up a product or service. And most admit its not easy to do. It takes time and can be costly itself to really capture all the data that needs to be captured. Some companies dont have the ability to plug in those numbers or the accounting software to evaluate them. Most supply management organizations are aware of the need to evaluate costs such as transportation and customs fees, but other key cost factors can be harder to pin down. However, you need to consider the cost of quality; the cost of servicing warranties; travel involved in the engineering, design and development of a product; the product launch; and the quality challenges throughout. A TCO analysis is important whether operations are domestic or overseas.

An evolving strategy

Best-sourcing decisions, of course, also have to take into consideration risk throughout the supply chain. There are too many hot spots around the world, and it doesnt take much to disrupt your supply chain. Supply management professionals must understand the costs and impacts of risk in their supply chain. It involves sitting down and going through scenarios by questioning, If X happens, what do we do and how can we handle it?

Evaluation of risk in a best-sourcing strategy is proof that its a strategy that is constantly evolving. Global dynamics continue to change and that could change your strategy. A strategy that fits today might not fit two years from now.

About the Author

Mary Siegfried is a senior writer for Inside Supply Management