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No One Said Sourcing Overseas Would Be Easy

Written By: Predrag Jakovljevic
Published On: August 17 2007

For all the reasons detailed in The Anatomy of Retail Sourcing Processes, the issue of how to achieve more transparent and cohesive sourcing processes has become a frontline concern for many retailers, driven by boardroom directives to boost margins through the direct sourcing of lower priced international products.

For more information and background, please see The Blessing and Curse of Global Sourcing and Supplier Management, Distinctions and Benefits of Strategic Sourcing, The Promise (and Complexities) of Private Labels, and The Anatomy of Retail Sourcing Processes.

The sad fact is that few information technology (IT) systems fully support the complexities and unique requirements of global trade. Many outmoded sourcing programs (some of which are part of traditional enterprise resource planning [ERP] and accounting systems) have not been designed to factor in currency fluctuations, customs duties, or additional bank processing fees. This has resulted in much of the accounting for these items still being performed manually. It is no wonder that, within only a few years of deployment, less than 15 percent of available software functionality is customarily being used (see Application Erosion: Eating Away at Your Hard Earned Value).

While outmaneuvering the global competition requires that companies be well prepared to source anywhere and sell anywhere in addition to having an understanding of the global supplier market trends, buyers require much more intuitive tools to solicit quotes from trusted suppliers, analyze and compare responses, and ultimately manage critical path items, such as testing and sampling. In other words, to rapidly respond to customers' demands, companies must have the ability to seek out the most appropriate global suppliers and factories, and then get these facilities up and running on the retailer network of systems as soon as possible. In terms of major “ifs, ands, or buts,” according to the Retail Systems Alert Group's (RSAG) benchmark study from November 2006—see The Promise (and Complexities) of Private Labels—the following top sourcing challenges remain:

  • finding and keeping dependable partners;
  • unpredictable lead times and delivery windows;
  • geographically dispersed supply chains slowing down reaction times;
  • potential profit not always realized;
  • vulnerability to shocks within supply chains;
  • counterfeiters and diverters diluting the brand equity;
  • cultural and language barriers;
  • increased working capital for imported goods;
  • fair labor practices in sourcing countries; and
  • political instability in sourcing regions.

Outsourcing to geographically remote countries has introduced many additional difficulties for retailers. Even with the benefit of Web conferencing, retailers find it ever more expensive and time-consuming to travel the long distances to outpost research and development (R&D) centers, since the costs of doing so may negate the initial potential benefits of outsourcing. It is particularly costly and time-consuming to set up an international sourcing office, as it takes at least a few months to get new suppliers on board and the office running effectively. Additionally, increasing fuel prices and fear of disease outbreaks like severe acute respiratory syndrome (SARS) or bird flu can contribute to reduced executive travel and more reliance on Web-based collaboration (although the benefits of the rapport established in person-to-person meetings cannot be replaced in some cases).

Delays and other problems in communication caused by different time zones, workdays, and holidays can further reduce supply network visibility and the closeness of the working relationship, thus seriously obstructing an effective, demand-driven approach (see Demand-driven Versus Traditional Materials Requirement Planning). Cultural and language differences are other hurdles to outsourcing successfully, and even slight misunderstandings or miscommunications can prove quite costly.

Skills availability and consistency as well as differing standards in quality can also present problems with far- or near-shore sourcing. Since cultural differences are generally less pronounced with near-shore locations, and because of the real concern over political instability and currency fluctuations in some geographic regions, US retailers might still prefer to deal with “south (or even north) of the border” options. In addition, alignment with the European Union (EU) laws can be complex, and EU law favors dealing with EU and soon-to-be EU countries.

The 2007 APICS program Certified Supply Chain Professional (CSCP) Learning System, Module 2: Building Competitive Operations, Planning, and Logistics summarizes well why a company should thoroughly consider the advantages and risks of product assembly in another country. On the plus side, potential benefits include lower labor rates (depending on the country); lower material costs; lower benefits costs in countries with national health care; favorable duty rates (especially if materials are domestic); lower taxes; and smaller capital investment (if assets are transferred to the foreign country).

On the minus side, however, a company may encounter a multitude of potential problems. These challenges include possible costs and disruptions caused by time zone differences (there is up to a fifteen-hour difference between the US and Asia); higher transport costs and longer lead times; higher relationship management costs for communications, travel, etc.; possible political risks in unstable, unfriendly countries; costs of hedging currency exchange risks; costs of maintaining environmentally responsible forward and reverse logistics chains; environmental costs for mitigating air, water, and noise pollution and for preventing the spread of disease-harboring species; higher costs of increased safety stock; costs of holding inventory in warehouses or in the pipeline; shrinking inventory due to theft, damage, spoilage, etc.; increased costs of insurance against damage, theft, spoilage, etc.; and so on. For more information, see Understanding the True Cost of Sourcing.

How to Reconcile These Conflicting Objectives?

The benefits of private label merchandise can be so large that they become crucial to retailers' strategies—to the extent that ignoring global sourcing is no longer an option for most. The issues discussed above could be particularly critical and even more complex for companies that offer their sourcing services to other independent retailers. They must also comply with those retailers' unique billing and documentation requirements as well as internal invoicing and vendor payment for goods bought on their own behalf.

Again, an astute sourcing product lifecycle management (PLM) and finance management package should be able to enumerate all the elements (line items) of an original order and, in turn, trigger the generation of other documents, such as the letter of credit (L/C), the packing list, the advance shipping notice (ASN), the bill of lading (B/L), the commercial invoice, and the service invoice. These documents—and the detailed information regarding carriers, shippers, country of origin, export country, import country, and final destination—are essential for meeting the ever more stringent global trading security standards and for clearing customs without delay. This synchronization of all participants within the supply chain would be a major performance enhancement to speed up the product-to-market time. For more information, see Globalization Has a Profound Impact on the Supply Chain and Supporting Information Technology.

A number of major, and often conflicting, objectives discussed thus far have been driving retailers to turn to IT solutions to streamline their sourcing and logistics processes. One key objective is the pursuit of lower prices, which often involves extended supply chains to remote, lower cost regions. On the other hand is the contradictory quest to shorten cycle times, which is essential, but so is having quality control that ensures companies receive their merchandise on time and according to exact specifications.

Until fairly recently, the Internet has been neither reliable nor ubiquitous enough to support such broad supply networks and resolution of these networks' issues. Lately though, the Internet has reached a much higher level of security, bandwidth, and connectivity, which coincides with emerging applications designed to run over the Internet and offer near real-time data and events for managing and analyzing the variables of global sourcing. For instance, Web-based supply chain visibility tools have reportedly helped many companies improve their production lead times, better manage their inventory movements, and track the production and delivery of products in near real time. Moreover, Web-based sourcing tools can help these organizations identify suppliers, negotiate contracts, ship manifests, streamline sourcing through event management, collaborate and plan with their trading partners, and ultimately increase their on-time deliveries.

Some importers might have both “big ticket,” expensive items along with high volumes of low-cost accessories sourced directly from Asia. Such a situation requires an integrated approach within the supply chain and more accurate visibility. Again, collaboration among suppliers, logistics providers, buyers, and product managers is critical throughout the entire product life cycle. An astute sourcing software suite should enable product managers and buyers to quickly develop comprehensive requests for quotes (RFQs) for their global sourcing efforts.

Such a solution should also be able to normalize disparate currencies, languages, and lead times, and automatically calculate the estimated landed costs for a clear understanding and comparison of all offers submitted by competing suppliers. For these suppliers, which are located around the globe, the suite should seamlessly unite and coordinate such details as product specifications, RFQs, quality control, packing lists, and all the invoices and customs paperwork, thus eliminating redundant data entry errors and speeding up production. Such a solution should also enable buyers and trading partners to more quickly collaborate on accommodating change orders in an effort to respond to any fluctuations in market conditions.

With suppliers on the other side of the globe, it can be hard to check to see how things are going, and one typically finds out about a problem after the fact—more specifically, when the goods arrive. Therefore, taking the above analysis of strategic sourcing, although some vendor relationships can be smooth and run on “automatic pilot” (meaning companies might occasionally monitor purveyors of office supplies for best prices and basic service requirements), a much deeper and more involved relationship is essential for strategic vendors—that is, retail goods suppliers that must deliver to specifications, on time, and at the right cost. These vendors can be evaluated on many key performance indicators (KPIs) in a holistic scorecard-based fashion. Some of these KPIs can be on-time delivery, quality, innovation (organization health and technology), responsiveness and customer service, security, social compliance, etc.

A class of vendors, including Eqos, TradeStone, i2, MatrixOne (now part of Dassault Systemes), New Generation Computing (NGC), and TXT e-Solutions, to name only some, attempt to holistically combine sourcing, PLM, and supplier management processes throughout all the following steps:

  1. Concept—studying the fashion influences and trend boards
  2. Specifications—design and technical information, with suppliers' approval as a matter of course
  3. Selection—identifying the right product at the right price from the right supplier, entailing the issue of RFQs, response analysis, supplier creation and selection, and product or prototype testing
  4. Buy—managing the purchase order (PO) process, entailing product creation, PO creation, and product sample testing
  5. Produce—monitoring production and quality, including making and inspecting the product batches
  6. Move—tracking shipping progress within the supply chain
  7. Sell and service—monitoring and managing the product's life cycle, which entails product availability and quality

Quintessential is the underlying and omnipresent “quality, risk management, and compliance” process, which entails recruiting, managing, and monitoring suppliers as well as controlling quality and tracking compliance.

Quality Assurance Never Stops

Contrary to the harsh realities of retailers today (where processes remain heavily “silo'ed,” with no automated workflow management), the software providers listed above recommend that at least the initial sourcing stages (from concept to buy) be automated and monitored. The potential benefits can be substantial for retailers that work collaboratively with key suppliers to enhance cross-company product development processes in addition to adopting joint innovative packaging and marketing strategies. As competition becomes stronger and the pace of product introduction continues to grow, the effective scaling of product development and life cycle activities is mandatory. From facilitating collaboration with key suppliers to reducing miscommunications and errors in the early stages of a product life cycle, integrating "pre-SKU" (stock-keeping unit) with "post-SKU" information is critical.

Thus, owing to the integration with core systems for product data management (PDM) and purchasing, from the initial sourcing process steps, a one-time data entry with all pertinent information must be held in a single repository and shared with users and other stakeholders as appropriate. As for quality and risk management, supplier assessment should be managed from the earliest stages throughout the entire product life cycle. This data repository, which must be held centrally, should enable suppliers to maintain their own pertinent information (as it changes, and of course, only data that is permitted by the retailer), while automated creation of a supplier record in core business systems once that supplier has been approved should be possible.

Then, as the process extends into the produce phase, it should be led by the order management process tracking and workflow management (to control the order definition, acknowledgement, and acceptance) while the supplier performance KPIs continue to be monitored through the inspection and audit process. Control and monitoring do not stop there given the extension of tracking and workflow to manage logistics processes via integration with 3rd party logistics (3PL) providers. Ongoing assessment of supplier performance continues at the dock side (for example, ensuring that all is in accordance with the Intergovernmental Organization for International Carriage by Rail [OTIF] metrics and recommendations). Last but not least, during the sell and service phase, one should monitor the performance of in-store products. This review process is driven by KPI tracking and monitoring; performance of individual products are tracked, and KPIs are shared with suppliers as appropriate.

Most retailers are consistently striving to improve the performance of each and every supplier, while the market leaders are effectively building and managing supplier relationships and looking for ways to improve the performance of their overall global supplier network. The emergence of industry standards, more effective KPI programs, and analytic tools is enabling companies to benchmark individual suppliers against other in-network partners as well as suppliers outside the retailer's network. As the cliché goes, “change is the only constant,” but one can never underestimate the need to plan for change, from incidental and inevitable changes to significant business changes, such as executive moves, organizational restructuring, or shifts in the competitive or regulatory environment. Trading partners must also plan for the positive changes that need to occur within the alliance, since a supplier relationship can succeed only if continuous, incremental improvements are systematically built in.

The information shared between partners should enable them to work more efficiently with one another. To that end, apparel retailers find themselves in an especially dynamic environment in which suppliers appear and disappear with astonishing frequency, and in which key designers and purchasers often jump from one company to another. Their response has to therefore be multi-pronged, starting with finding ways to shift supply channels quickly when one supplier goes under. However, garment retailers must also continually look for ways to help each important supplier succeed as well as be careful to strengthen relationships with the individuals within the vendor companies, not just with the companies themselves.

For example, garment retailers must recognize that its buyers will not be the only employees directly affected by each relationship it establishes with a remote fashion manufacturer. Its marketing decision makers will want to raise issues about responsiveness and timing, whereas regional managers will want to know how flexible the supplier can be in responding to differences in local trends. The IT departments will need to design methods for real-time sharing of information at all points in the supply chain, from placing POs to tracking store deliveries and transfers of discounted goods. Other issues, such as quality control and shipping and delivery logistics, need to be considered. In each case, the people most directly responsible—and those most directly affected—need to be brought into the process as early as possible.

Even mere paperwork can account for up to 7 percent of the total cost of international trade. Retailers spend most of their time on such activities as coordination of document changes with their suppliers (for example, specification changes, work in progress [WIP] activities, delivery date revisions, shipping and labeling revisions, etc.), with delays or lengthy lead times as a result. Further, intensifying global security concerns mean that much more information is required by governments (as opposed to merely applying customary harmonized tariff schedule [HTS] codes and checking whether something has, for example, been made from an endangered species of animals), and component tracking has become essential to conducting business across borders.

With shipment security under increased scrutiny since 9/11, retail importers have had to adapt to a changed world of customs compliance, since ensuring that shipments comply with the US Customs & Border Protection (CBP) security requirements has added a new level of complexity to apparel importing, and the risks of failure to comply are much higher today.

Particularly with the elimination of trading quotas and less need to closely track data for quota limitations purposes, the focus for US Customs and importers has turned largely to security compliance. For instance, post-9/11 US Customs require importers to classify the ingredients of all foreign-sourced goods, such as by country of origin for each material. Many retail importers have lately been striving for a zero-tolerance standard in their security and social compliance efforts rather than on the traditional standard of reasonable care applicable to customs and trade compliance. Some are hoping to achieve best practices that would promote them to the Tier 3 status of the voluntary Customs-Trade Partnership Against Terrorism (C-TPAT) program, which would then exempt them from nonrandom Customs security inspections and ensure greater speed-to-market. For more on the topic, see Dealing with Global Trade Management Complexity.

This is part five of the series The Blessing and Curse of Global Sourcing and Supplier Management. Coming in part six (the last of this series)—a deeper look into the highly competitive vertical market of fashion retailers.

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