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Logistics and Supply Chain World | May 2013

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LOGISTICS
& Supply Chain World
May 2013 | R100/-
Industry
Insights
A shift in sourcing
strategies
In Depth
Enterprise commerce
flow: The key to
omni-channel
retailing
SCM
Special
Supply chain in
modern era
Team
Thoughts
Sustainability in
manufacturing
Special
Feature
Why supply chain
should operate as a
shared service
Subhasis Ghosh
Director APM Terminals
Inland Services, South Asia
& MD, APM Terminals
India Pvt. Ltd.
A Practitioners
Guide to Demand
Planning
Leadership Series
42
Logistics and Supply Chain World | May 2013
A shift in sourcing strategies
by Mary Siegfried
Industry Insights
Y
ears 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