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

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.

Product characteristics affecting sustainablility

Much has been written and researched about the need for infusing sustainability in procurement , logistics and supply chain process. There is a common understanding and agreement about the increasing importance of sustainability for companies. However challenges like economic viability of being sustainable and availability of hands on tools for creating sustainability in organisational and functional processes remain.

This is an attempt to create tool for purchasing managers to identify sustainability based on the product characteristics. It includes characteristics like obsolocene risk and demand volatility which increases supply chain wastage, ease of disassembly/salvage, value density, packagability and product nature in terms of hazardous nature of product. The picture does not consider social and economic aspects of sustainability which needs to be infused in further development.

Sustainability & Innovations

When most of the developed countries are struggling for innovation

s to improve sustainability in operations, the developing countries - Fun pix

Calculate the carbon emission/person in this picture and compare it to the western world

Talking about reuse and Innovations for reuse

Value density of transportation

Environmentally friendly cars with zero emission

Environmental concerns in developing countries

The debates about how the developing economies of China and India are contributing to the increasing environmental concerns is never ending. However in this blog the intention is to put forward a few aspects in favor of the developing countries which I have seen as much more not evident.

@ the cost of economic development - India and China are possibly the two largest economies with a large capacity in recent times to purchase more automotive, expand their industries and "catch up" with missed boat of industrial revolution and economic development (Which the western economies have taken successfully taken - resulting in existing environmental concerns). Though the western world is fighting the issues of environmental sustainability, developing countries are fighting other priorities (Reducing hunger & poverty, wealth redistribution through employment creation). With increased pressure on just setting measures for developing countries to reduce environmental impacts western countries and international bodies should think about how to reduce environmental impacts without sacrificing economic growth. So the question for developing countries is not How to reduce environmental impact? but how to reduce environmental impact without sacrificing economic growth?

Screwed measures - One of the measure used on a global scale to measure environmental impact is the amount of carbon produced by each country. Even though China and USA comes at the top, there seems to be something fishy with the measure. Instead of the C02 emissions per country what would be an appropriate measure is the CO2 emissions per capita (meaning CO2 emitted per person in each country) in which developed countries would be having a higher environmental impact than developing countries.

Produced locally and consumed locally - In all the developed countries food comes from around the world for catering to the need for variety to customers. Its not uncommon to see in retail stores of Europe the Kiwi fruits from New Zealand, Meat from Australia, Grapes and other tropical from Peru/South America. The food miles travelled by these products are far higher than the food miles in developing countries. In developing countries food and grain are locally produced and consumed ( Thanks to the poor logistics infrastructure, lack of cold storage facilities and inability to industrialize food production), making them much more environmentally friendly.

Innovation is the key - concerns exists about waste water disposal, lack of clean water in the future, transportation infrastructure, product usage & disposal. When developing countries are in the process of improving or installing new infrastructure (transportation, building, waste disposal) developing countries have a better scope to be much more environmentally friendly than in developed countries (Given they understand and accept the importance of environmental friendliness).

It is everyones problem - Developing countries are increasingly made as the factories of the world. There will be little debate for the claim that "China is the factory of the world", "India as the IT hub of the world". While these global clusters are being formulated, developed countries naturally take the roles of supply chain orchestration, product & services development, technology development and customer satisfaction. Even though there are arguments that developing countries are substantially affecting environment, the impacts are global (like global warming). Hence the problem resolution has to be global rather than pushing the problem to specific developing countries/regions.

LCC sourcing - tips & tricks

One of the typical problem in sourcing from LCC is that , purchasers believe that the pilot batch or the sample batch has no quality issues whereas most of the production batch has quality issues. Here is what a purchaser did in sourcing from China.............

A purchaser has to source 10000 nos/month components from a LCC supplier, however is aware that the sample batches are always better than the production batch. 

So he orders 10000 samples/ month  ;-)

The idea behind the story is to emphasize that local presence is necessary in sourcing from China or in LCC sourcing to enhance control. 

Source: Managing director - Enkey Engineering, India

The world is flattening

There seem to be two contradicting opinion/school of thought about globalisation. One if the famous argument put forward by Thomas L. Friedman that the world is flat and the other argument that the world is not flat. Instead of religiously following a specific thought school, in this blog I decide to take a factual approach to this commonly addressed debate.
Now for the school that advocates that the world is flat - this school cites the new mobility of workers happening globally, increased outsourcing, offshoring, increased information technology adoption, access to information for all people, disintegration of the value chain globally and performing the value addition where it could be done best ( global search for optimal competence) as attributes suggest that the world is flat.
The world is not flat - this can be argued by a series of questions - why are the differences between the rich and the poor still very high? Why are innovations mostly still taking place in the silicon valley? Why are cities like Frankfurt, Hong kong, New York and London still in the height of activity than others? Why is agriculture still not globalised and integrated across economies?. Disparities between economies in terms of population, innovation, electricity, etc point to the direction that the world is not flat in fact it is argued as being spiky.

The truth lies somewhere in between - simply termed as the world is in the process of getting flattened at a faster pace than ever before, however we have still not reached there (The world being flat) and we will never reach there also.

Six step International Purchasing Office (IPO) set up procedure

There has been a sharp increase in the number of International Purchasing Office in recent times. What remains unfolded is the process of IPO setup and operation. Based on the research so far and the discussions with industry experts – I have charted a few steps that successful companies have done in regard to the IPO setup. 

(1)   Identify the opportunities of the Indian supply market

What remains a mystery is a documented approach towards understanding the supply market for foreign companies. Most multinationals stereotype India as an exotic country of snake charmers and national highways with elephants rides. IPO’s typically need to create knowledge about the nature of the Indian supply market and its potentials. 

(2)   Identify and select suppliers to partner with 

International sourcing involves long term association with suppliers to partner with. This is the case to build a sustainable supply platform from India hence the choice of the supplier and long term sustainability is important. 

(3)   Identify the internal and external coordination processes necessary

Successful IPO operations need good adaptation and integration of both external and internal coordination processes. Internal coordination includes coordination within the same function, across different functions and business units. External coordination includes coordination with suppliers and other service providers.

(4)   Hire, train and retain talent at IPO 

Given the challenges of IPO it is important to hire the right talent of people. Even more important is to train and retain the talent for IPO. Purchasing in IPO is much more of a balance between strategic skills and operational capability.

(5)   Set internal and external performance measures 

IPO’s in particular are service centres for global operations of Multi national companies, IPO’s are savings generators rather than revenue generators. It is important and critical to set the performance measures for IPO based on internal and external issues

(6)   Develop, monitor and sustain supply base 

Rather than selecting suppliers, supplier development is more essential for companies. This helps to sustain the savings from supply base. Monitoring the supply base and also constant feedback to suppliers will help improve the supply base. 

Managing logistics in global sourcing

Increasing global sourcing increases the lead-time and also inventory in the supply chain. Companies generally face challenges of obsolescence and difficulty to manage supply chain volatility. Hence there is tremendous pressure on logistics issues in global supply chain activities.

Logistics is more than a Total cost approach
Companies consider logistics more from a cost perspective companies seldom take a more serious approach or perspective towards logistics. Companies involved in global sourcing perform calculation of increased inventory cost and other logistics cost.

Inventory positioning for strategic advantage
Inventory plays a critical role in the supply chain. Most companies take inventory as a burden, however inventory can also be positioned for strategic advantage in global sourcing. Global sourcing typically goes for 20-40% cost savings and inventory cost increase is generally about 10-15%.For instance inventory increase should be used with other logistics strategy like coordinating with TPL for fast response, rationalisation of logistics facilities for strategic advantage etc...,

Rethink logistics coordination
There is a desperate need to change logistics coordination to take full advantage of global sourcing. Consider Walmart which is a pioneer in global sourcing, they have mastered strategies like cross docking as a means to reduce inventory in the supply chain and at the same time capitalise on global sourcing.

Global sourcing – Generating sustainable value

Global sourcing is predominantly done for cost reduction reasons. However we all are aware that cost is rising in countries like China, India and other low cost countries. So purchasers are constantly faced with sustaining the cost advantage of 20-40% from sourcing from these countries. Here are a few methods with which cost savings can be sustained.

Constantly iterate product portfolio
Most global sourcing activities start with simple labor intensive products to test the suppliers technical and logistics capability. However sourcing is not limited to these products. As and when the purchasers understand the capability of the suppliers they begin to constantly try sourcing different products. So there is a constant need to reiterate the products that are sourced.

Increase the value generated from Supply network
Though component sourcing is very common in these countries, companies are moving towards module and system level sourcing. i.e. increasing the value generated from the supply network. For instance an aluminium casting manufacturer once a component supplier, now is getting involved in product development activities and designing the aluminium systems hence increasing the value generated. Generally the supplier needs some efforts from the buyers in terms of technology transfer, product development cost sharing etc.., to make these things happen.

Develop supply base to enable market access
Rather than selecting the supplier developing the supplier seems to work in the long run. Some companies are smart enough to develop the sourcing base for specific product lines that will be sold in these countries in the near future. In a way they develop a sourcing base not only for their global operations but also so set up supply base for potential market entry.

Global SCM Innovate – Integrate – Rationalise
Constant innovation from the supply network and efforts to integrate the benefits of the supply network in to the global supply chain renders good results. But certainly a saturation point arises with constant innovation and integration and that when there is a need for rationalisation and rethinking of supply chain. With this approach and looking at global sourcing as an opportunity beyond sourcing helps to sustain the value generated.

Hindering Global Sourcing

Global sourcing is an area that has been on the agenda for may companies since the WTO treaty of 2000 and the integration of countries like China and India in to the global trade. However services seems to have take a higher impact on global sourcing than manufacturing given the potential for global sourcing activities in manufactured products. There are several factors that hinder global sourcing here are a few internal and external factors.

Internal Resistance

Most of the companies are facing an internal resistance to move from a supplier near shore to a supplier offshore. This is even more difficult for supply networks where relationship is a necessary pre requisite. Cultural differences, difficulty of coordination and communication, poor change management to accept new suppliers, very low affinity to take risks and organisational inability to unlearn & relearn creates internal resistances in global sourcing.

Process stabilisation

Companies pick the potential products and fish for suppliers to deliver their products and the expectations are an immediate 30% reduction in price. But in LCC like China and India there is generally a high learning cost and establishment time. So to reach a stabilised process of global sourcing takes time to reach which is generally under estimated. Apart from this companies also have to understand that costs are rising in countries like China and India, so to secure the saving potential global sourcing process should constantly work with new product portfolio’s of sourcing.

Fluctuations in Currency and Commodity

There are large fluctuations in the commodity market of prices of metals and other raw materials. This fluctuation is also clubbed with the fluctuations in the currency market which creates price volatality and uncertainity in global sourcing deals. Smart hedging is required to accommodate these fluctuations in the supply chain.

Getting Sourcing Logistics right

With increasing fuel prices and challenges faced by the transportation industry logistics cost are increasing and changing the scope of global sourcing activities. Most companies feel that the landing cost at site is different than the cost of sourcing it in the LCC. So companies clearly have to work with Transportation companies and also with TPL guys to evaluate the costing on a landed cost basis. Apart from the cost coordinating with the TPL or logisitcs companies to get the sourcing also increases the delivery reliability.

Global sourcing ??? - Purchasing function or SCM responsibility

Global sourcing activity is on the rise across the world admist challenges of fluctuating currencies, rising input cost, difficult transportation and supplier management. However the question remains if global sourcing is an activity of just the Purchasing function or is it more SCM ????

If it is considered as a purchasing activity how are these issues addressed?

1. When the companies move from a transaction cost & cost competitiveness based sourcing to value based global sourcing - Can this be handled just by the Purchasing function?
2. When shorter product life cycles are coupled with market volatality - the longer leadtimes in global sourcing is a hinderance for responsiveness - Can purchasing function alone increase the responsivness or is it a Supply Chain problem?
3. The hidden cost of global sourcing are enormous like lost opportunity cost, logistics & transportation issues - Can these costs be evaluated just by the purchasing function in global sourcing decisions?
4. When you involve new actors like TPL companies o take care of the coordination - you change the supply chain structure affecting the organisation of activities and processes in the supply chain - Can purchasing function alone tke responsibility for this.

It is evident that the responsibility of the purchasing function is at the highest in the initial stages of global sourcing. But to have sustainable global sourcing with a longer time frame it needs integration through coordination across different functions and also to the external supply chain. Global sourcing is considered strategic for a company and decisions in terms of targets are taken by the top management. However process of global sourcing seems to be typically run by the purchasing function with perfomance monitoring from the top management. The question is for sustainable global sourcing it needs a move from top management monitoring to top management involvement along with other function to take a supply chain approach rather than a purchasing function approach.

Where is the global sourcing optimum - Automotive companies in India

Hyundai
Hyundai Motors is interested in increasing their global sourcing from the existint level to a higher level. Sourcing for Hyundai takes place across global plants in China, Turkey, South Korea and the USA. Hyundai has also chosen India for manufacturing their small cars for global sales operations.

Mr Lheem said that Hyundai was sharing manufacturing facilities with its plants in China, Turkey, South Korea and the US with regard to import of certain components from these countries and exports of some of them from its production facility here.

“We are importing some components from these countries and exporting components like body panel to Turkey and engine components and assembly units to Korea and we would like to increase this,” he said, refusing to divulge details on the size of export opportunity that the company intends to give to its Indian suppliers.

He said that the company planned to source components from the local vendors for exports, but cited concerns regarding quality and price as against competition from some of the other countries.

“We are not concerned about the quality of the tier-I suppliers but across the industry. They have to match the superior quality standards for the kind of products required in the European nations. We are not complaining at the moment so much about price competitiveness of India vis-À-vis other countries,” said Mr Lheem.

Hyundai Motors India, which exported about 1.15 lakh cars last year, expects the number to increase to about 1.50 lakh this year.

Source: The Hindu

• The Supply chain is getting dispersed from a local perspective to a global network - Large companies are taking actions to have global foot print. Today it could be China and India who are becoming the factories of the world.......The pursuit will continue !!!!!!!!!!
• The question that remains to be answered is that what the point of balance between global sourcing and local sourcing ?
• Factors like environmental concerns, responsivess to market seem to be the powerful factors that will determine the balance but how are the companies taking this in to account in their decision making?

Global sourcing - Scandinavian View

Edvin Bekkhus - Nycomed
Identify the people and the companies that you would like to see, go out there and have a look and meet them.

Andrew Clough - Fast Search & Transfer
What we’re noticing now is that as the world flattens and we become global, we see that there is a lot of brainpower in lower-cost countries and there is an opportunity to get in there. We can keep our top-end engineers doing research and outsource a lot of the D in R&D. … Make sure your own house is in order first. We all know there are opportunities out there in global sourcing, but make sure you get buy in from the company, make sure that the people, processes and technology are matched up with the long-term strategy.

Philippe Courregelongue - EMEA/Emptoris
You can alleviate the issue of being blacklisted by suppliers by making sure you understand the total cost of ownership associated with low-cost countries, that you compare terms in a sophisticated fashion with low-cost suppliers on a regular basis, and by bringing transparency to the process through RFQs.

Johan Dingertz - Stora Enso
It’s also about what kind of relationship we would like to develop with our supply base. If you identify a supplier and say you are the low-cost provider, we don’t expect anything but low cost, that’s it. I think many Asian suppliers won’t accept that long term.

Johan Eriksson - Autoliv
It’s very easy to get quick wins, but you must not let those divert you away from your long-term strategy. You must also avoid it being a purchasing activity; it needs to become a company activity that all your colleagues understand and support.

Per Hill - AstraZeneca
I believe the best time to change a supplier is when there is an introduction of a new product or product generation.

Tommy Karlsson - Alfa Laval
You should go for local people and train them, then it’s a matter of doing your homework to make sure you have clear specifications and that you communicate clearly. You also need to have patience, because it will not happen on day one.

Laurence King - Elekta
It’s really important to get commitment right at the top of the company to driving it through, and to keep everyone informed. … You need to keep internal people, and the old supply base, in the loop. Two or three years ago we got our existing suppliers in the same room and told them that we intended to source from low-cost countries, but that ideally we’d like them to go there. Very few of those have done anything about it, so now we are going back and saying that the next phase is the exit plan.

Henrik Larsen - AP Moller-Maersk
You have to communicate the issue, engage in dialogue with stakeholders and harvest the ideas from them, because for a company our size, leveraging our global intelligence from our stakeholders is one of our finest tasks to do.

Christina Lundman-Lagerstedt - Telia Sonera
We will use the same processes, the same evaluation templates for suppliers in emerging markets that we would use for all other suppliers.

Marc Magistrali - Kone Corporation
Global sourcing has replaced purchasing and procurement terminology as it more accurately reflects the strategies and goals of forward-thinking businesses to succeed in a global landscape. … It’s about people first, setting aggressive but achievable targets, and acceptance that this is a journey with many bumps along the way that will require determination and resilience to overcome. Inspire and reward your personnel so that the right level of passion exists. And have fun.

Claes-Erik Noren - Assa Abloy
When we start up a new project we have a kick-off meeting with core teams, we look at success cases where we’ve done this before, and of course if something goes wrong it’s important to share that experience as well. … The relationship is all important, and I think we Westerners put too little emphasis on that. If you don’t you will have more problems; if you have good relationships it makes it much easier to solve them when they crop up.

Per Segerberg - Accenture
One other aspect that’s important to be successful is to have a clear sourcing strategy and to communicate that to the supply base.

In summary, start with support, get your house in order, understand your costs, start with a strategy, preferably a long term one, look for long term partners and not just long term providers, evaluate low cost country providers as you would local suppliers, work with, and train, your suppliers, and constantly communicate. Sounds good to me.

Source:E Sourcing Forum Archive

Swedish company Volvo placed orders worth E80 million with a group of Indian auto-component firms for 2007

To meet the needs of its global operations in France, Brazil, Sweden and the US.Industry experts view Volvo's move as an effort to vie with the Japanese auto industry that is increasingly interested in the Indian market.

"Global sourcing in India is undertaken by our purchasing organization located in Europe and the US. Volvo 3P, a Volvo business unit responsible for product development, purchase and product planning, provides the local support to our global organization for sourcing from Indian suppliers. At Volvo, we strongly believe India is increasingly becoming the global hub of auto components sourcing," said Eric Leblanc, managing director, Volvo India.

Mr Leblanc added that Volvo 3P intends to support the company's strategic expansion in Asia apart from helping its main global development sites in Allentown, Gothenburg, Greensboro and Lyon.

Apparently, the company is also planning to tap the markets of Mexico, China, Brazil, Turkey and eastern Europe also to source auto components. "Volvo believes emerging markets have a strong potential to serve global demand. These markets have been identified as they are quality conscious besides offering a relative cost advantage," Mr Leblanc said.

Source:Automotive Business Review