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

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?

Visualising Friedman’s Flat world

Friedman’s book “The world is flat” has created a huge impact in understanding the flat world. He argues that the invention of the Netscape browser, Windows operating system and the workflow software as the fundamental areas that created the movement of work in the flat world.
Other phenomenon like offshoring, Outsourcing, Insourcing, informing, open sourcing, Supply Chaining are more of steriods in creating the flatworld. Here is a pictorical representation of Firedman’s idea of the flatworld.

Logistics – Competitive advantage of Nations

There are several advantages that a nation can provide to make itself competitive. Logistics though discussed was overlooked before. However recent studies by WTO helps measure the logistics competence on a nation level based on operators on ground worldwide.

Logistics Performance Index (LPI) is measured on

(1) Perceptions of the logistics environment of trading partner countries

• Efficiency and effectiveness of Customs and other border procedures,
• Quality of Transport and IT infrastructure for logistics
• Ease and affordability of arranging shipments
• Competence in the local logistics industry (e.g., transport operators, customs brokers
• Ability to track and trace shipments
• Domestic logistics costs (e.g., local transportation, terminal handling, warehousing
• Timeliness of shipments in reaching destination.

(2) Information of the logistics environment in the home country of operation

• Direct freight costs,
• Quality of transport and IT Infrastructure
• Competence in the delivery of input services logistics operators need
• Performance of the clearance process of exports and imports
• Constraints affecting logistics performance
• Trends

(3) Real time-cost performance data for country of operation

• Number of border agencies,
• Customs performance indicators (time release, inspection data, possibility of review for imports
• Percentage of damaged shipments
• Lead times to export and import (based on best 10%, median 50% and worst 90% of shipments).

Source: WorldBank

Science and business - Interesting Dissimilarities

Science holds methods sacred; business cherishes results.
Science should be about openness; business is about secrecy.
Science demands validity; business requires utility.

Source:HBS working knowledge

Purchasing becomes strategy

In the beginning was the Plan.
And then came the Savings Targets.
And the Targets were without form.
And the Forecasts and the Budget were without substance.
And darkness was upon the face of Procurement.
And the purchasing agents spoke among themselves, saying, "This is crock of sh*&, and it stinks."
And the purchasing agents went unto their Senior Buyers and said, "It is a pail of dung, and we can't live with the smell."
And the Senior Buyers went unto their Commodity Managers, saying, "It is a container of excrement, and it is very strong, such that none may abide by it."
And the Commodity Managers went unto their Regional Directors, saying, "It is a vessel of fertilizer, and none may abide its strength."
And at the annual global Procurement conference, the Regional Directors said to the CPO, "It contains that which aids plant growth, and it is very strong."
And the CPO went to the CFO, saying unto her, "It promotes growth, and it is very powerful.."
And the CFO went to the President, saying unto him, "This new Procurement plan will actively promote the growth and vigor of the company and in these areas in particular."
And the President looked upon the Plan and saw that it was good.
And the Plan became Policy.
And that, my friends, is how sh%& happens.

Source: Spend matters

Opensource, Google software - where does the change lie

While everybody are fighting for the freeware version of the operating system, I believe that the industry is taking another direction - if you have a mobile phone and an access to internet you can compute - this is a different revolution that will be even more powerful than the linux times atleast from a consumer or common man perspective ( though businesses will still cling on to LINUX or windows or hard computing).
This is better positioned for two thirds of the world population who still have reduced possibility for computer access ( but they have mobile phones). Google has moved in to this direction and brings application in to the mobile phone ( we must remember that they already have integrated all office applications through google doc etc..,)

click here for the source - here is one reason why industry giant is moving in that direction.

The changing trend of Supply Chains

Scientific management has been the centre of industrial management since the T model days of Ford. We have moved from that era of vertical integration to value creation to supply chain value creation in recent times through management of dispersed supply chains.
Since the 1980's there are various mechanisms of value creation like outsourcing ( focus on core competence) which moved the focus from vertically integrated factory to Supply chain management. This was further fueled by the combination of Information Technology (IT) and business process re-engineering through IT revolution happening faster during the 1990's where companies like DELL thrived. With the entry of WTO and increased globalisation in the millennium markets became wider than before and so did the source of supplies. We are globalising continuously without engaging in the critical debate of when will this globalisation hit the balance between localisation and globalisation. This comes also with the concern for environment which is beginning to influence supply chains. It is important for companies to understand this because any company and every supply chain (other than deeply rooted local service companies) will be affected by this.
From the "Ford's T model days " till todays "Toyota's today" we have seen a sea change in the way organisaitons are managed/evolved and how Industrial engineers job profile have changed. It is very hard for any Industrial studies to neglect supply chain thinking because thats the way businesses are managed today and will continue to dominate till times known and will continue to change even more faster in the future.

The world is Flat - Thomas L Friedman

Friedman suggests that the world is "flat" in the sense that the competitive playing fields between industrial and emerging market countries are leveling. Friedman recounts many examples in which companies in India and China are becoming part of large global complex supply chains that extend across oceans through a process called offshoring, providing everything from service representatives and X-ray interpretation to component manufacturing. He recalls seeing such major American companies as Dell, AOL, and Microsoft using Eastern teleoperators who are paid much less than their counterparts in the West. He describes how these changes were made possible through intersecting technologies, particularly the Internet, fiber-optics, and the PC.

Friedman lists ten "flatteners" that have leveled the global playing field:

* #1: Collapse of Berlin Wall-11/9: Friedman attributes the collapse of the Berlin Wall as the starting point for leveling the global playing field. The event not only symbolized the end of the Cold war, it allowed people from other side of the wall to join the economic mainstream. (11/09/1989)

* #2: Netscape: Netscape and the Web broadened the audience for the Internet from its roots as a communications medium used primarily by scientists (8/9/1995)

* #3: Workflow software: The ability of machines to talk to other machines with no humans involved. Friedman believes these first three forces have become a “crude foundation of a whole new global platform for collaboration.”

* #4: Open sourcing: Communities uploading and collaborating on online projects. Examples include open source software, blogs, and Wikipedia. Friedman considers the phenomenon "the most disruptive force of all".

* #5: Outsourcing: Friedman argues that outsourcing has allowed companies to split service and manufacturing activities into components, with each component performed in most efficient, cost-effective way.

* #6: Offshoring: Offshoring, the manufacturing equivalent of outsourcing.

* #7: Supply chaining: Friedman compares the modern retail supply chain to a river, and points to Wal-Mart as the best example of a company using technology to streamline item sales, distribution, and shipping.

* #8: Insourcing: Friedman uses UPS as a prime example for insourcing, in which the company's employees perform services--beyond shipping--on behalf of another company. For example, UPS itself repairs Toshiba computers on behalf of Toshiba. The work is done at the UPS hub, by UPS employees.

* #9: In-forming: Google and other search engines are the prime example. "Never before in the history of the planet have so many people-on their own-had the ability to find so much information about so many things and about so many other people", writes Friedman.

* #10: "The Steroids": Personal digital equipment like mobile phones, iPods, personal digital assistants, instant messaging, and voice over IP or VOIP

In addition to Friedman's ten flatteners he also offered the concept of the triple convergence which created a new, flatter, global playing field.

* CONVERGENCE I: Up until the year 2000 the ten flatteners were semi-independent from one another. However around the year 2000, all of the flatteners converged with one another. This convergence could be compared to complementary goods, in that each flattener enhanced all of the other flatteners; the more one flattener developed, the more the global playing field was leveled.

* CONVERGENCE II: After the emergence of the ten flatteners, a new platform had to be built in order to do business. Businesses had to begin collaborating horizontally as opposed to vertically (top down method of collaboration where innovation comes from the top). Horizontalization meant that companies and people had to start collaborating with other departments or companies in order to add value creation or innovation. However, the convergence occurred when horizontalization and the ten flatteners began to reinforce each other. In other words when people began to reorient themselves and their businesses to new technologies the world flattened a little more.

* CONVERGENCE III: After the fall of the Berlin Wall, countries such as: China, India, Russia, Eastern Europe, Latin America, and Central Asia that followed a Soviet economic plan began to open up their economies to the world. When these new players converged with the rest of the global playing field, they added new brain power to that field. Therefore, the convergence enhanced horizontal collaboration across the globe. In turn, this convergence was the most important force in shaping politics and economics in the early twenty-first century.

The Unflat World

Friedman acknowledges there are some 3 billion people in places like rural India, rural China, and Africa who still live in an "unflat world", unaffected by the technologies and socioeconomic changes outlined in the book, and addresses what is needed to extend the "flat world" beyond its current borders.

Source: Wikipedia