Total cost of ownership in Global sourcing

Total cost of ownership (TCO) is often underestimated or poorly analysed in global sourcing. Some reasons for this include lack of time, lack of a comprehensive framework, following strategic directive to global source,  lack of data for understanding the total cost. In this blog the focus is on the lack of a comprehensive overview for understanding the different cost elements involved in global sourcing. Adaptation of the famous and the much adapted total cost of ownership by Prof.Lisa Ellram is contextualized for global sourcing. Three broad elements of TCO has been (1) Pre transaction elements (2) Transaction elements (3) Post transaction elements. Pre transaction costs and post transaction costs are generally poorly considered. Most of the transaction costs are considered well in the TCO in actual practice. The below picture captures the TCO in global sourcing context.

Total cost of Ownership in global sourcing

The detailed article could be downloaded from Here

Product characteristics influencing logistics of global sourcing

Global sourcing is an indispensable element in a globalising world. Product characteristics have a great influence on the ability to source globally. However a wholesome approach to understanding the product characteristics impact on global sourcing remains limited and is often neglected during product choice choice decisions for global sourcing. Based on the research work with engineering industries done by Linkoping University - Sweden, we have made an attempt to deduce the product characteristics influencing global sourcing. Underestimation of the characteristics reduces the cost saving potential in global sourcing. The picture below represents different product characteristics influencing logistics of global sourcing. Explanation of some product related factors follow. 

Value Density (Monetary value/Cubic feet) - The landed cost of the product can be higher by anywhere between 5% to 45% than the product purchase price at the low cost destination. Hence increasing the value density greatly reduced hidden and miscellaneous landed cost elements. For instance the value density of electronic goods per cubic feet is much more higher than value density of commodity cotton per cubic feet. 

Degree of standardisation to customer - Companies competing on customer responsiveness by increasing the customisation have to understand that global sourcing is a time consuming process. Hence it is wise to source produces with high responsiveness and quick delivery locally to ensure fast customisation and reduce lost opportunity cost. 

Standardisation of product/process - Increased standardisation enhances global supplier communication and also reduces impact of slow learning cost. For instance availability of clear and established technical drawings for engineering products increases the easiness of communication when compared to technical specifications under development. 

Demand stability - Stable and predictable demand is most preferred but unlikely to happen. Considering the longer pipeline inventories in global sourcing demand stability and understanding of demand pattern plays a crucial role in responsiveness and obsolete inventory. 

Each factors also have an interrelational influence. Decision making models like AHP serves as a suitable method for consensus decision making.   

The detailed article could be downloaded from Here

Logistics of LCC Sourcing

Increasing globalisation creates new possibilities for sourcing from low cost countries (LCC), but also comes with a range of logistics challenges and issues to be dealt with. The purpose of this paper is to investigate how logistics and its impacts are considered in LCC sourcing decisions. An exploratory multiple case study of industrial product companies engaged in distant LCC sourcing serves as an empirical base. Findings reveal that firms do not explicitly take logistics into account during LCC sourcing decisions. Even if logistics is considered, it is generally in a reactive way and takes a transactional cost focus. Instead, we propose a framework to proactively consider logistics factors in the early stages of LCC sourcing. This is done through identifying product and supplier related logistics factors and their impact on pre-transaction, transaction and post-transaction elements in the Total Cost of Ownership model.

The detailed article could be downloaded from Here

Moving out of Supply Chain after economic crisis

Purchasers and supply chain executives caution - during economy rebound

With the economic rebound expected to happen soon in the international market place, there are several aspects purchasing and supply chain executives need to take care of

Understand & ensure that the supplier is well informed – Recession has hit every on in the chain (Since its supply chains competing against each other and not companies). So it is important to ensure that the supplier is informed of the rebound and make a personal visit. This visit can ensure the availability of capacity, employee skills and a reaudit of the capability of the suppliers to bounce back. This is also a time for the OEM’s or supply chain captains to understand and listen to the problems of the suppliers. Its also worthy to ask how the supplier has survived the recession, to understand the resilience of the supplier.

Go till the tier 2 – Though most companies try to manage only the tier 1 companies, it is important to reuderstand the tier 2 companies of the supply chain. This ensures that the supplies are being streamlined and also that the tier 2 is able to ramp up production.

Check for new opportunities – Rebounce is a good time to check the existing structure of the supply chain. Check for new opportunities with existing suppliers and also check for new suppliers for old activities. New opportunities might open up because of technological changes, new cost reduction opportunities, change in supplier role and availability of new and better suppliers.

International purchasing and environmental sustainability - Can they co exist ?

After the Copenhagen climate change conference there has been an increasing interest in purchasing, logistics and supply chain professionals about how they can contribute towards making the world a better place. This is evident in the increase in the number of articles from supply chain magazines on environmental sustainability. Some people perceive international purchasing bestowed with poor environmental sustainability. However I choose to argue the opposite with the following reasons.

Multinationals have raised the need for addressing sustainability globally - With the increasing number of multinationals in developing countries, there is an increasing need to ensure that their suppliers are environmentally sustainable to be as suppliers to them. Hence multinationals have served as a major driver in creating awareness and systems for environmental sustainability. We know from the climate change that sustainability needs to be addressed as a global phenomenon and not as a local/regional phenomenon.

Intermodal transport is a great need - Russia has recently inaugurated a gas pipeline of more than 2250 km from Russia in to East Asia. This event will invoke discussion about the trans-siberian railway network which is supposed to connect China and Europe. With this network inline it would perhaps be less carbon intensive to transport goods from China in to Northern Europe when compared to truck transportation from southern Europe. Hence with such infrastructural and governmental level involvement it is possible to make international purchasing co exist.

Planning for sustainability - Products that are based on platform design, where there is a large amount of standardization and modularization involved could result in better predictability of demand, reduce variation, reduce obsolescence risk and also increase the scale of sourcing volumes. This could be coupled with postponement of manufacturing to nearby customer locations. Such logistics strategies increase environmental sustainability but still make it viable for international purchasing.

Cross functional integration - International supply locations act as good sources of sustainable designs and hence act as good reason to source from them. In order to adopt these good practices from international locations there is a need for good cross functional integration in the company. This aids better understanding of internal requirement and also external opportunities/ideas.

Supply chain quality - Going beyond functional silos

Large amount of energy and efforts have gone to develop frameworks for quality management in companies. TQM, TPM, ISO certification, Lean practices, six sigma quality are some exemplars of such frameworks focused on developing quality. However there are certain fundamental questions that are unanswered by these questions.

- When some companies are having more than 50% of their value addition from their supply base, is having these quality management focussed on internal company sufficient?

- At best what is visible when it comes to external supply quality management is objective performance monitoring - Can all quality parameters be objective in its nature and controlled by just measuring quality of supplies?

- Most of the internal quality management focusses on continuous improvement and companies have asked their suppliers for Kaizen, lean and other practices to harness the benefits of continuous improvement - But is continuous improvement preferred over rapid improvement considering rapid product changes, increasing need for radical innovation?

- Supply chain has focussed so much on the process way of managing things, How much is quality managed from a process perspective?

- Should quality be the issue of the quality department or be integral in the supply chain - if integral how do we implement and measure them?

- How should proactive thinking be integrated in the supply chain quality management?

Differentiating disturbances and disruptions in supply chain

When we talk about risk management in supply chains there are two typical parameters used in risk evaluation. They are severity of impact and the probability of occurrence (refer figure). This method of looking at risk has its roots in FMEA, where severity of the impact, frequency of occurrence and ability to detect are used as methods to assess risks.

It is interesting to differentiate between disturbances and disruptions. This helps to choose what type of strategies needs to be considered for different types of risks. Disturbances are high probability and low impact kind of events that needs to be constantly looked after. An example for this is the operational disturbances that companies need to handle constantly in supply chains. Disruptions are events that have low probability o occurrence but they have a high degree of impact in the supply chain. An example of this could be related to how the supply chains were affected during 9/11 attacks, Tsunami etc.., where these events do not occur on a daily basis, but when they occur there is a big impact on the supply chains.