The Intricacies of Global Retail Sourcing
Written By: Predrag Jakovljevic
Published On: June 28 2006
Dealing with Conflicting Objectives
A few major (and often conflicting) objectives have been driving retailers to turn to information technology (IT) to streamline their sourcing and logistics processes. One objective is the pursuit of lower prices, which often involves excessively extended supply chains to remote, lower cost regions. The other is the quest to shorten cycle times, which is essential—but so is having quality control to ensure that companies get their merchandise on time and according to the exact specifications. 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 problems after the fact, when the goods arrive. Therefore, although some vendor relationships are smooth and run on "automatic pilot" (for example, companies might simply casually monitor purveyors of office supplies for best prices and basic service requirements), a much deeper and more involved relationship is essential for strategic vendors such as retail goods suppliers, who must deliver to specifications, on time, and at the right cost. These vendors might be evaluated on many key performance indicators (KPIs) in a holistic scorecard-based fashion, such as on-time delivery, quality, innovation (organizational health and technology), responsiveness and customer service, security, social compliance, and so on.
Part Two of the series The Gain and Pain of Global Retail Sourcing.
Certainly, even without IT deployment, retailers must become more agile, efficient, and timely with product development, planning, procurement, manufacturing, and execution (logistics and transportation) if they are to maximize benefits from their private-label strategy and opportunistic buying. While technology plays a major role, organizations must better coordinate activities and bridge handoffs among product design, sourcing, and logistics groups to shorten lead times and ensure that "hot item" goods are on the shelf exactly when the customer wants them. Still, global sourcing is substantially more complex than domestic sourcing, and should not be attempted without adequate technological support and business process controls. Executive global sourcing mandates that are not supported with such tools to execute typically either fail or do not meet expectations. For further discussion, see The Gain and Pain of Global Retail Sourcing.
The ideal situation would be for a retailer to establish a collaborative trade platform that offers the tools, content, community, and business infrastructure to support global commerce communities and a transparent trade process. Yet, many realities typically entail the politicization of global sourcing by polarized functional and infrastructure camps inside the organization, which hampers the ability of the organization to produce necessary strategic changes. There is also little opportunity to train buyers, partners, and suppliers across an extended supply chain within such infrastructures. Ironically, control over the extended supply chain should be driven by the common need to impact delivery before the production begins, since on the tactical level, a lack of visibility results in costs becoming multiple times higher to fix problems onshore (when the goods have already arrived) than offshore.
Even mere paperwork can reportedly account for up to 7 percent of the total cost of international trade, since retailers spend most of their time on activities such as coordination of document changes with their suppliers (such as specification changes, work in progress [WIP] activities, delivery date revisions, shipping and labeling revisions, and so forth), with delays or lengthy lead times as a result. Further, intensifying global security concerns mean that much more information is required by governments (other than merely applying the customary harmonized tariff schedule [HTS] codes and checking whether something is produced from an endangered species, for example), 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 US Customs and Border Protection (CBP) security requirements has added a new level of complexity to apparel importing, whereas the risks of failure to comply are quite a bit higher nowadays.
Particularly with the elimination of trading quotas and the decreased 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 policies require importers to classify the ingredients of all foreign-sourced goods (by country of origin, for example), for each material. Many retail importers have been striving lately 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 into "tier 3" status in the US Customs-Trade Partnership Against Terrorism (C-TPAT) program, which would then exempt them from non-random customs security inspections, and ensure greater speed-to-market. For more on this topic, see Dealing with Global Trade Management Complexity.
Owing to many companies' tardiness with respect to IT, communication has been cumbersome and costly, since people often need to access several systems to obtain product lifecycle information, or to complete an order. Some research suggests that almost two thirds of systems and solutions that are employed as parts of strategic sourcing initiatives are manual, or conducted via fax or e-mail. Most issues are still addressed by a flurry of faxes, phone calls, or (more contemporary) e-mails, many reaching non-essential staff whose well-intended gestures of help often only add confusion. It is not atypical for a buyer to access several such systems and maintain even a dozen spreadsheets as part of the buying and sourcing process. Since colored Post-it notes and spreadsheets buried in silos only hinder overall visibility, almost every organization should be striving to put an end to redundant data entry, and move away from multiple sourcing documents, in order to manage commitments correctly. In other words, the aim should be to curb the traditional practices of firefighting in favor of productive planning and collaboration with customers. Thus, sooner rather than later, retailers must take steps to reconcile these disparate solutions so as to improve their reaction time and gain maximum leverage from their sourcing activities.
The Intricacies of Global Sourcing for Retailers
Apparently, based on the discussion so far, outsourcing to geographically remote countries has introduced many additional difficulties. For one, the search for and identification of qualified sources for goods and services absorbs up to a precious half of the entire sourcing cycle, whereas up to 80 percent of the cost of product is built into the design and development phase when sourcing occurs, which requires a close cooperative relationship. Given the benefits of Web conferencing, retailers find it ever more expensive and time-consuming to travel long distances to development centers, since the costs of doing so may even negate the initial potential benefits of outsourcing. It is particularly costly and time-consuming to set up an international sourcing office, and it even then takes a few months at least to get new suppliers on board and running effectively. Additionally, increasing fuel prices and (fears of) outbreaks of diseases like SARS or bird flu can contribute to reduced executive travel and increased reliance on Web-based collaboration (although the benefits of in-person meetings cannot be completely replaced in some cases).
But then, communication problems, caused by fundamentally different time zones, working days, 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 another hurdle to success, and even slight misunderstandings or miscommunication can prove quite costly. Lack of skills availability and consistency, along with differing quality standards, can also present problems with far- or near-shore sourcing. Since cultural differences are generally less pronounced with near-shore locations (and owing to the real concerns of political instability and currency fluctuation in some geographic regions), US retailers might still prefer to deal with the "south (or even north) of the border" options. On the other hand, alignment with EU laws can be complex, and EU laws favor dealing with EU and soon-to-be EU countries.
This could be particularly crucial and complex for companies that offer their sourcing services to other independent retailers and that must comply with those retailers' unique billing and documentation requirements, as well as with internal invoicing and vendor payment policies for goods bought on their own behalf. Again, an astute sourcing 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 the packing list, advance ship notice (ASN), the bill of lading (BOL), 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 aforementioned stringent global trading security standards and for clearing customs without delay. This synchronization in the supply chain would be a major performance enhancement for speeding up the product-to-market time. For more information, see Globalization Has a Profound Impact on the Supply Chain and Supporting Information Technology.