Archive for the ‘Best Cost Country Sourcing’ Category

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Redefining Sustainability

November 21, 2008

We have recently blogged quite a bit on the topics of the current global recession. I want to share a comment today on sustainability, inspired in part by a recent white paper by Jason Busch on Redefining Sustainability that focuses on the theme that going green usually implies a lot of other benefits by reducing risk and ultimately leads to savings. Highly recommended read.

I agree on most parts of the white paper and the fact that the public relations part of going green should never be underestimated – I think you first and foremost need to look at sustainability as a goal you will achieve by having the right knowledge, processes and company culture/values in place. While company culture or values are not the easiest thing to change, focus should be on ‘doing your home work before going to class’.

Regardless of any green initiative, I am pretty confident that identical or bigger savings could have been realized if the home work had been done in the first case. Why do you need a global recession to reinvent your supply chain? In the words of former Bundeskanzler (’74-’82) Mr. Helmut Schmidt at the recent BME Special Conference on China:

Everybody is talking about China but nobody really knows it

This is spot on I think – reinventing the wheel over and over again or rushing in because China was the ‘next big thing’. It is of course wrong to promote the idea that all failed initiatives should be blamed on lack of home work done, but it should be common sense that it minimizes the risks considerably.

So, do the home work and you might just find sustainability was not all that hard to achieve.

Posted in Best Cost Country Sourcing, Global trade, Supply Chain Management | Leave a Comment »

The Re-emergence of Nearshoring – aka Best Cost Country Sourcing

October 23, 2008

In response to the latest business trend (as reported by most American business press) backshoring Booz&Co has authored a piece in their strategy+business publication called “Is Backshoring the New Offshoring?”. Their answer is a vague “not yet”. The increasing presence of India’s Wipro and TCS and the backshoring efforts of Dell and American Express might be a sign of things to come but it’s not nearly enough to make backshoring a viable business trend.

So is there a definite trend in offshoring vs. nearshoring vs. backshoring?

From a European perspective the answer is rather clear. As deregulation efforts are increasing in Eastern Europe and the near East; this is where European business is going. And it’s easy to understand why: it’s close, it’s cheap and it’s a great place for doing business.

Just take a look at the results of Doing Business 2009 – the sixth annual in a series from IFC and the World Bank; out of the ten economies making the most regulatory reforms, the top four are from Eastern Europe or the near East (Azerbaijan, Albania, the Kyrgyz Republic and Belarus).

Whilst backshoring might be something to think about for strategic or customers value reasons; I believe that what the press is really talking about (and this is echoed by Booz&Co as well) is plain old fashioned best cost country sourcing. In the words of Booz&Co:

..,companies have begun to rethink their offshoring decisions in a way that ultimately will render “offshore” and “onshore” no longer meaningful or relevant. Instead, companies are making choices about the best place to do a given piece of work — be it offshore, onshore, or nearshore.

Posted in Best Cost Country Sourcing, Business, Global trade, Low Cost Country Sourcing, Outsourcing, Supply Chain Management | Leave a Comment »

Using organizational layout to achieve supply chain excellence

October 1, 2008

Last week, I promised that Purchasing Transformation would take a closer look on how purchasing can ascend in the value chain of a company to truly become a valued partner and fully exploit the potential which sometimes is left unexplored.

At the Spanish fast fashion company Zara, the organizational layout has been designed to facilitate speedy communication and deep co-operation between designers, purchasing and marketers in order to speed up the supply chain to deliver fashion that is up-to-date, trendy and affordable.

For those of you that don’t know Zara, they are part of the Spanish Inditex corporation, the worlds second largest clothing retailer, only overshadowed by Gap Inc, but what makes them so special in terms of supply chain and procurement practices is the tightness in which marketing, designers and procurement interact.

Zara has a single centralized design and production centre in La Conuña; which is set up in three large halls; one for the women’s line, one for men’s and one for children’s. Designers, marketers, production planners and procurement all sit next to one another and large circular tables are continuously shared between the different practitioners. In each hall a small prototype store is set up so that everyone can comment on the new garments as they are developed.

The idea behind this layout is that Zara wanted to do away with the layers of bureaucracy that usually hinder inter-departmental communication. The physical closeness of the different business practices makes it possible for Zara to design, develop, procure and commit resources for production as well as introduction within hours if necessary.

With a super fast fashion profile, Zara has been pivotal in restructuring the fashion industry; forcing competitors (and even high-fashion brands such as Prada and Gucci) to adapt to Zara’s frequent product updates and speedy supply chain practices (Zara claim to be able to design, procure, produce and deliver new garments in little over two weeks time)

Now the organizational layout is not the only thing that sets the Zara supply chain apart from its competitors; instead of opting for the traditional far east supply base, Zara still produce many of its garments in Spain – citing closeness and speed of delivery as arguments over low cost of production – as well as at production facilities in nearby countries such as Portugal, Morocco and Turkey.

With the recent globalization of Zara’s markets, the company now faces new challenges; with stores in the US and Asia the company’s supply chain is coming under heavier pressure and time will tell if they need to adjust their current supply chain to facilitate the expansion and keep costs of logistics down.

Posted in Best Cost Country Sourcing, Organization, Strategy, Supply Chain Management | 1 Comment »

Supplier Risk Management 101

September 24, 2008

With all the supplier quality scandals rising these days it might be time to refresh everyone’s memory of supplier risk management 101.

Most of the stories that are hitting the headlines (and the bottom line results of those involved) can easily be traced back to the failure of understanding the extended supply chain risks involved or addressing these risks early enough in a constructive manner.

One problem that arises when you look at risk management is that many companies only look at the physical flow, and forget (deliberately or not) potential risks in the extended supply chain as well as financial risks. All levels need to be covered and a strategy has to be available if anything occurs and you need to execute accordingly.

Supplier Risk Management Framework

Supplier Risk Management Framework

This basic model can be used as a framework when assessing your risk management strategies, since it takes a holistic perspective on the risk management issue. At the same time it’s important to remember that no risk management strategy is final; practice makes perfect, and sometimes you might need to get a bloody nose in order to find the best-fit strategy for your operations. But with the appropriate strategies and processes in place, the impact will be minimized.

Risk management is very much on the agenda at the moment, so expect the blogosphere as well as big firm analysts to exploit and dive into this subject with vigour in the upcoming months.

Posted in Best Cost Country Sourcing, Low Cost Country Sourcing, Risk Management, Supply Chain Management | 1 Comment »

Teddy Bears With Quality

September 4, 2008

This summer I read an article in Financial Times about Steiff, the German company that claims it made the first teddy bear with moveable arms and legs in 1902. A hundred years after the foundation, the teddy bear company followed the outsourcing wave and moved parts of the production from Germany to China. Now, five years later, they are bringing the production back in-house. They have learnt that cost is not everything. Martin Frechen, co-chief executive, says “The things we wanted to be done were not the things the Chinese were used to doing” and “We have learnt our products are better if we make them ourselves”.

What I like in Steiff’s product strategy is the striving for quality. They tried to enter a lower price range and therefore sourced from China. They then identified a lower quality in the production and brought it back in-house. I think this high quality thinking is a good counterweight to the many discounters that are dominating the toys market.

Posted in Best Cost Country Sourcing, Low Cost Country Sourcing, Supply Chain Management | 1 Comment »

Peak Oil (Part IV) – The Legend of the Space Pens

June 27, 2008

Today hit the oil price 142 dollars and the stock exchanges react as predicted: they were going down. (It did not even help to stabilize the oil price, that 30.000 brand-new Volkswagen were destroyed by a hail storm) . The background stories, on how companies are going to react, are however missing.

More Companies localize their production

Vertically integrated production called it underwear producer American Apparel. Already in May Jason Bush was blogging about the localization of Wal-Mart. One of the main aspects in this post was that this is good marketing. As a marketing person I agree, it is, indeed. And I think that this will also pay off on the long term by reducing costs. It is pretty obvious, what possibilities purchasing functions have short- and mid-term, to react on the given challenges:

  • - Shorten Supply Chains
  • - Localize Production
  • - Localize Supplier Base
  • - Review “oil contribution” to the main products

Central purchasing will become hard, central led the standard, especially with qualified local purchasers. I dare to predict, that Franchise concepts will be on the rise. Delivery and production standards are defined centrally; as well as the specifications from purchasing, production will be done locally. (Of course it will help if you have a sophisticated e-Sourcing solution in place, to guarantee still global standards on quality)

Personally, I am more afraid of small products, which will have major impact and which are hard to foresee, similar as the donkey story in the very beginning of this series. An open ear for supplier innovations will be in the next years a deciding factor to succeed. Perhaps the style of Germany’s leading retail discounter Aldi could be there a role model: rumor has it, that every interested supplier has just to drive to the headquarter and he will get, without arranging an appointment, at least 5 minutes with a purchaser to present his product.

An Urban Legend

Originally I wanted to end with another story: End of the 60ies, during the race to the moon, the Americans realized, that their pens do not work in outer space because of the missing gravity. They invested 11 million Dollar to invent the so called space pen, which works under water, in the vacuum and in zero-gravity. And what did the Russians do? They took pencils. Unfortunately this is an urban legend. (Read the real story here) But the true story gives me even more hope to cope with peak oil. Ordinary capitalism found the right answer to the zero-gravity problem. Paul Fisher succeeded with his company to develop the right writing instrument, and as a true capitalist he sold them to both: Russians and Americans. Anyway: The right mixture of capitalism, inventive talent, reasonable politics and smart purchasers will hopefully lead to a good answer to the peak oil problem. 

Posted in Best Cost Country Sourcing, Business, Global trade | 1 Comment »

Peak Oil (Part III) – No More Miles & More for Shrimps and Airbags

June 26, 2008

SkysailsDuring the last decade shareholder value was the big driver for big companies. With the oil price peak I expect that purchasing will face the next big challenge … perhaps the biggest challenge ever. Especially big companies, who are not too good in reacting fast on the changing environment, will have big problems. It is a little bit like the evolution and the dinosaurs.

I remember a speech eight years ago from Heinz Traudt, the former Director International Purchasing of BMW. It was about the e-procurement project of BMW and he also explained the value chain of airbags. Until the airbag was mounted into a car in Munich or in the US, the drapery was produced in Africa, then it was delivered to South America to be sewed and after that the bags were at last mounted in Germany or in the U.S. The airbags were traveling approximately 10.000 miles, until finally assembled into a brand new BMW. 

There are thousands stories like this. For instance about our delicious shrimps: They are trawled in the Northern Sea. Then they are shipped to Tunisia for peeling. After that, they return to the Northern Sea to the Northern European harbors. After a short stop for packaging in another factory the shrimps are finally distributed to the super markets. This means an additional 4.000 kilometer journey for the crustaceans, instead of 10 to 700 kilometers. I guess that we can celebrate a big misgiving, when we tell these stories someday our grandchildren (perhaps we should make a pact to never tell them).

When it comes to logistics, we were not too innovative lately. 95 % of global logistics is based on petrol. There are concepts rising like the company Skysails, who tools up vessels with large towing kites. Perhaps there will arise also the cargolifter concept again. Cargolifter was offering logistic services with zeppelins.

What about power supply?

The energy sector does not look as bad as the logistics. At least on the first view. Depending on the countries between 30 to 60 % is depending on oil. But when you have a closer look on the sources: most of it is based on gas, uranium and coal. These resources are as finite as oil. In Europe the spend of renewable energy is currently on a level of 6.5 %. The role model countries for using renewable energy are Austria and Sweden. Austria copes with more than 20% of its demand by renewable energy sources. The problem is the scalability. Although the big countries like France or Germany are taking some effort to become less dependent on fossils, they are stuck on a level between 5 to 10%. The good news is: innovation is going on in this sector, using wind, wood, bio resources, etc. The question is: is it enough to feed the enormous appetite for power of our societies? Another problem arising is that we risk famines, as too big agricultural crop lands are used for biodiesel production.

Purchasing can drive change

To talk about abstinence was in the past not too popular. But we have to think about our behaviors and as you can see already now, the high gasoline price makes at least private consumers think. Purchasing is in charge to drive the change in companies. Companies, focusing on smart purchasing and supply chain strategies will be prepared for the changes created by peak oil. They will adjust and fit faster to the new environment. Darwin was once getting his inspiration from an economist to come up with his evolution theory and now evolution comes back to economy. Once more: the fittest will survive.

Today another discussion about oil exploration was in the media. The conservative U.S. candidate McCain wants to get hands on potential oil resources nearby Alaska.

Tomorrow I will come up in the last part of peak oil, how some companies are preparing already for the further rise of oil prices.

Posted in Best Cost Country Sourcing, Business, Global trade | Leave a Comment »

Peak Oil (Part II) – the big global Angst

June 25, 2008

What is peak (of) oil? According to Wikipedia, Peak oil is the point in time when the maximum rate of global petroleum production is reached, after which the rate of production enters terminal decline. Currently the global daily output is at 87 million barrels. According to Christophe de Margerie, the managing director of Total, we will reach peak oil at 100 million barrels per day at 2020. Of course there are even more pessimistic, but also more optimistic, estimations on the market. The big news is that this is the very first time an official representative of a petrol company admitts, that we could reach that point in a near future.

Olivier Appert from the French institute IFP, predicts already for this year huge problems fulfilling the demands. According to the German magazine “DER SPIEGEL“, Mr. Appert sees even the danger, that we reach an oil price level of 200 to 300 Dollar until 2015. Of course, all stake holders should be interested in avoiding this high level, as this would affect the global economy very hard.

The Statistical Review of World Energy 2008 which was published by BP is only mediocore optimistic. The oil production decreased by 0,2%, the global demand was increased by 1,1%. The picture could be even worse, when the Europeans would not reduce their need for energy. Germany’s proportion of the Global oil consumption is 2,8%, whereas Northern America needs 28,7%. The US and Canada have together 4 times higher population, which  would justify an oil consumption of 10%. It was no big surprise, that Mr. Bush was not too eager to sign the Kyoto protocol.

According to the BP study, the given oil resources will last another 41 years. The question is now, why BP changed the name from British Petroleum to Beyond Petroleum?

As Per Svanberg stated already earlier in this BLOG: oil fields, which were not profitable in the past, become more interesting to exploit in the future.  At the moment there is a race going on for new oil resources. Denmark, Russia, Canada and the US are competing about the rights to exploit oil in the North pole region. A Russian submarine has even placed a Russian flag under the solid ice. It is pure irony that the global warming and the melting ice, makes it more interesting to exploit iron, manganese, uranium and … oil there.

Competition is not only rising in the Northern hemisphere: in the Pacific, the Japanese take intensive care for the corals surrounding the small Island Okinotori. The reason: without the corals they are running the danger, that the 7.8 square kilometer big island would be just swallowed by the ocean for good. As long as the island exists, Japan has the right according to international sea law to exploit all resources within a radius of 200 sea miles. Of course, the competing Chinese define Okinotori not as an island, but as a pile of rocks. Let us wait and see, if there will be oil findings around Okinotori and hope for the Japanese, that the corals prosper.

Tomorrow I will write about the alternative energy sources and about the influences on logistics and power supply.

Posted in Best Cost Country Sourcing, Global trade | Leave a Comment »

Peak Oil Part I: Donkey Business

June 24, 2008

donkeyLatest victim of the oil price rollercoaster ride were the farmers of central Anatolia: the prices for donkeys increased within one year from 26 to 180 Euro, which implies a price advance of 558 %. According to the Turkish newspaper Zaman the amount of traded donkeys was doubled in the Yozgat region. In the village of Lök almost all farmers changed to donkeys as preferred transportation vehicle, because Diesel is not longer affordable for the locals.

The sudden increase of oil prices shocked the Chinese economy, American consumers are praying for lower gas prices and U.S. airlines expect losses of 10 billion Dollar.

When you have a look on the news from India, you get the feeling that we are just at the start of a much bigger problem: During autumn Tata motors launches the “Nano”, a full operational car sold for 1500 Euro (click here to see a earlier blog entry). This could become a similar success story as the Tin Lizzy, the legendary Ford success story of the last century. And this means that the daily need for oil will increase even more, as also the Chinese, the Indians, the Brasilians, the people of all the emerging economies have the same need for mobility as the Europeans, the Japanese or the Northern Americans.

The question is: are the current prices only a peak, caused by wild traders at the stock exchange? Are they the herald of a long term development? And what are the consequences for purchasing?

I will figure out in a small series on purchasing transformation, how the fear about peak oil influences the oil price, how this could influence power supply and logistics and what mid-term strategies purchasing departments could consider.

Posted in Best Cost Country Sourcing, Global trade, Supply Chain Management | 1 Comment »

Sourcing of company cars

June 13, 2008

In Sweden, the most bought company cars are Volvo and Saab, followed by some German brands. It seems like the professional buyers of company cars are not thinking of low cost country sourcing in the same way as buyers for other categories. I understand the challenge of sourcing the cars. Both the employee satisfaction and total cost of ownership have to be taken into account. So, how can these two criteria be fulfilled in the best way?
 
Imagine this; a four door car, designed in Italy and available in red. Rear engine and rear-wheel driven, just like a Porsche. Sounds pretty good, right? Employee satisfaction! In addition to this, the make of the car is the same as for Jaguar and Land Rover. Now I know what you are thinking; it is probably expensive and will not fit into the total cost of ownership budget. But, it is not expensive!

Tata Motors has produced the Tata Nano. It is a small car in the same size as the new Fiat 500 or the Smart Fortwo. But it has four doors instead and place for four people so with these advantages it is not completely comparable to the Fiat and Smart. The drawback might be the small motor with only 33 hp. On the other hand, nowadays you really cannot drive fast anymore and the top speed of 110 km/h might do it. The small motor also results in a low fuel consumption of only half a liter per 10 km. It reaches 90% of its top speed in 21 second which is very good comparing to any car. If you have more need for speed there probably will be a tuning kit available in the future.      

The car is produced and sold in India and the price there will be 1700 EUR. That is like the price of two better lawnmowers. The Fiat and Smart cost approximately six times that price.

The car is available after this summer. Why not buy it for all employees? Paint it in the company colours and put the logo all over the car. What a marketing campaign at the same time. When buying a large volume I also suppose there will be some room for negotiations.

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Posted in Best Cost Country Sourcing, Business, Global trade, Sourcing, Supply Chain Management | 2 Comments »

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