Sourcing: pitfalls to anticipate before sourcing abroad

The many challenges faced by retailers when working with suppliers on an international scale can be facilitated by specialized software. The problem is that few IT systems are perfectly adapted to the complexities and demands of global trade.

What are the 10 fundamental problems in sourcing?

The question of how to achieve more transparent and consistent sourcing processes has become a key concern for many retailers, guided by office-based directives aimed at boosting margins through direct sourcing of cheaper international products.

15% of available software functions are used.

The pity is that few IT systems fully support the complexities and specific requirements of global trade. Many outdated sourcing programs (including some traditional enterprise resource planning (ERP) and accounting systems) were not designed to take account of currency fluctuations, customs duties or additional bank processing fees, and so many of these elements are still handled manually. It's hardly surprising, then, that after just a few years of deployment, only less than 15% of available software functionalities are actually being used, according to a TEC study ("Application Erosion: Eating Away at Your Hard Earned Value").

At a time when global competition demands that companies are well prepared to source and sell anywhere, in addition to having a good understanding of trends in the global supplier market, buyers need much more intuitive tools to solicit quotes from reliable suppliers, to analyze and compare responses, and finally to manage the items that will guide their choice, such as testing and sampling. In other words, to respond quickly to customer requests, companies need to be able to search worldwide for the most appropriate suppliers and factories, then commission these installations as soon as possible on the distributors' network of systems. Among the major stumbling blocks, according to a Retail Systems Alert Group (RSAG) benchmarking study dating from November 2006, the biggest sourcing challenges are those mentioned here:

1. Finding and keeping reliable partners
2. Juggling unpredictable delivery times
3. Managing geographically dispersed supply chains, slowing reaction times
4. Finding that the expected benefit is not always achieved
5. Managing the vulnerability of supply chains
6. Dealing with counterfeits and misappropriations that weaken brand image
7. Overcoming cultural and linguistic barriers
8. Increase working capital for imported goods
9. Ensuring fair labor practices in sourcing countries
10. Living with the risk of political instability in sourcing regions

Outsourcing to geographically distant countries presents many other difficulties for companies. Despite the advantages of modern audio and video communication technologies, for retailers it is still costly and time-consuming to travel long distances to set up a research and development (R&D) center, since the resulting costs can wipe out the potential benefits initially expected from offshoring sourcing. Setting up an international sourcing center is particularly costly and time-consuming, as it takes at least a few months to find new suppliers and get the center up and running efficiently. In addition, rising fuel prices and fears of epidemics such as SARS or avian flu can reduce the need for senior executives to travel, and increase confidence in remote collaboration, when it has been established that, in some cases, physical, face-to-face, person-to-person meetings are essential to project progress.

The problem of cultural differences

Delays and other communication problems resulting from time differences, differences in the organization of the working day and the presence of public holidays in local calendars can further reduce the visibility of the supply network and the fluidity of the professional relationship, making it very difficult to apply an effective demand-driven approach. Cultural and linguistic differences are also obstacles that make successful outsourcing more complicated, since even slight misunderstandings or miscommunication can ultimately prove very costly.

The availability and consistency of know-how, as well as differing quality standards, can also cause sourcing problems both nearby and further afield. Given that cultural differences are generally less pronounced the closer one gets to the border, and given the real concern about political instability and currency fluctuations in certain geographical areas, US retailers may well still prefer to choose to work with suppliers "south of the border" (or even north of it). Moreover, alignment with European Union (EU) laws may prove complex for an American company, especially as EU law favors trade with its member states and also with those that will soon be part of it.

Product assembly

The 2007 APICS Certified Supply Chain Professional (CSCP) Learning System Module 2, Building Competitive Operations, Planning and Logistics, sums up why a company needs to consider the benefits and risks of assembling products in another country. On the positive side, potential benefits include a smaller workforce (depending on the country), lower material costs, lower benefit costs in countries with a public health system, favorable customs duties (especially if materials are local), lower taxes, and lower capital investment (if assets are transferred to the foreign country).

On the negative side, on the other hand, the company can potentially encounter a whole host of problems and challenges: possible costs and disruptions caused by time zone differences (the time difference between the USA and Asia can be as much as fifteen hours), higher transport costs and longer delivery times, additional relationship management costs linked to communication problems, travel to be planned abroad, political risks in unstable or hostile countries, currency risk insurance costs, costs of maintaining environmentally-friendly direct and reverse logistics chains, environmental taxes to combat air, noise and water pollution and to prevent the spread of disease-ridden species, increased costs of managing a larger safety stock, costs of maintaining stock in warehouses or pipelines, reduced stock due to theft, breakage or damage (and the cost of insurance to combat these scourges).

How can these conflicting objectives be reconciled?

The advantages of private merchandise can be so great that they become an essential part of retailers' strategies (since most of them can no longer afford to ignore global sourcing). The issues listed above could be particularly critical and even more complex for companies offering their sourcing services to other independent distributors. They must also comply with the specific invoicing and documentation requirements of these distributors, as well as internal invoicing and vendor payment for goods purchased on their own behalf.

Again, intelligent sourcing Product Lifecycle Management (PLM ) and good financial management should make it possible to list all the items (considered by reference, not quantity) in an original order, and then trigger the production of other documents such as the Letter of Credit (L/C), packing list, advance shipment notice, purchase order, commercial invoice and service invoice. These documents - and detailed information on carriers, shippers, country of origin, country of export, country of import and final destination - are essential to meet ever more stringent trade security standards, and to clear customs without delay. This synchronization of all participants in the supply chain would be a major performance enhancement to reduce time-to-market.

A number of major, and often conflicting, objectives discussed so far have led retailers to turn to IT solutions to streamline their procurement and logistics processes. One key objective is the constant quest for low prices, which often implies extended supply chains to remote regions at lower cost. Another conflicting objective is to shorten cycle times, an essential goal, coupled with quality control to ensure that companies receive their goods on time and to precise specifications.

The role of online PLM and sourcing software

Until recently, the Internet was neither reliable nor ubiquitous in its ability to support such large supply networks, and to solve the problems inherent in them. But now the Internet has achieved a much higher level of security, bandwidth and connectivity, encouraging emerging applications designed to run over the Internet and offer near-real-time data and events for the management and analysis of global sourcing variables. For example, online supply chain visualization tools have enabled many companies to improve lead times, better manage inventory movements and track production and product delivery in near-real time. In addition, online sourcing tools can help these organizations identify suppliers, negotiate contracts, send manifests, streamline sourcing through event management, collaborate and plan with their trading partners, and finally increase their on-time delivery rates.

Some importers may find themselves with both expensive items and high volumes of inexpensive accessories sourced directly from Asia. Such a situation calls for an integrated approach to the supply chain and greater visibility. Again, collaboration between suppliers, logistics partners, buyers and product managers is essential throughout the product lifecycle. An intelligent sourcing software suite should enable product managers and buyers to quickly develop requests for quotations (RFQs) for their global sourcing efforts.

Such a solution should also be able to harmonize different currencies, languages and delivery times, and automatically calculate landed price estimates for clearer understanding and comparison of all offers submitted by competing suppliers. For these suppliers, located all over the world, the suite would smoothly unify and coordinate details (such as product specifications, tenders, quality control, packing lists and all invoices and other customs formalities) thus eliminating recurring data entry errors and speeding up production. Such a solution would then be a tool for both buyers and trading partners, who could cooperate more rapidly in arranging change orders to meet fluctuating market conditions.

With suppliers located on the other side of the planet, it's difficult to check that everything is running smoothly at a moment's notice, and it's usually only realized that there has been a problem after the fact, particularly when the goods arrive. Therefore, if we consider the analysis (above) of strategic sourcing, although relationships with some suppliers may be fluid and operate in automatic mode (meaning that companies might occasionally go along with their office supplies suppliers to get better prices and service requirements), a much deeper and more involved relationship is essential for strategic suppliers, i.e. suppliers of retail products who must deliver the goods to specification, on time and at the right price. These suppliers can be assessed on the basis of a number of well-ordered key performance indicators (KPIs) that provide a holistic view. These KPIs include on-time delivery, quality, innovation (technology and organizational health), responsiveness and customer service, safety, social compliance, and so on.

Some suppliers, including Eqos, TradeStone, i2, MatrixOne (now part of Dassault Systèmes), New Generation Computing (NGC) or TXT e-Solutions, to name but a few, attempt to holistically combine sourcing, PLM and supplier management procedures during all the following stages:

1. Concept: study of fashion influences and mood boards (result of cooperative brainstorming)
2. Specifications: design and technical information, with systematic supplier approval
3. Selection: identifying the right product, at the right price, from the right supplier, which involves tendering, analyzing responses, creating and selecting suppliers, and testing products or prototypes.
4. Purchasing: management of the purchase order (PO) process, involving product creation, PO creation and product sample testing.
5. Production: production and quality monitoring, including manufacturing and inspection of product batches
6. Shipping: monitoring of shipping in the supply chain
7. Sales and service: monitoring and management of the product lifecycle, to ensure product availability and quality

The underlying and ubiquitous "quality, risk management and compliance" procedure, which involves the recruitment, management and monitoring of suppliers, as well as quality control and compliance monitoring, is quite simply vital.

Quality assurance never stops

In contrast to the harsh realities faced by today's vendors (where processes remain highly siloed, with no automated workflow management), the software vendors listed above recommend that, at the very least, the initial stages of sourcing (from concept to purchase) should be automated and monitored. The potential benefits can be significant for vendors working in collaboration with key suppliers to improve cross-company product development processes, in addition to adopting innovative common packaging and marketing strategies. As the competition gets tougher and the pace of product launches continues to grow, the real increase in product development and lifecycle activities becomes mandatory. Both in terms of facilitating collaboration with key suppliers, and reducing communication problems and errors in the early stages of a product's life cycle, "pre SKU" (stock keeping unit) integration with "post SKU" information is vital.

Thus, due to integration with core systems for Product Data Management (PDM) and purchasing, from the initial stages of the sourcing process, a single data entry (with all relevant information) must be made into a single repository and shared with users and other stakeholders (as appropriate). In terms of quality and risk management, supplier evaluation must be managed from the earliest stages throughout the product life cycle. This centralized data repository should enable suppliers to retain the information they deem relevant (as it changes and, of course, only for data authorized by the vendor), while automatically creating a supplier record in core business systems once that supplier has been approved.

Then, as the process extends to the production phase, it must be guided by monitoring the order management process and workflow management (to control order definition, acknowledgement and acceptance) while supplier performance KPIs continue to be monitored by the inspection and audit process. Control and monitoring don't stop there, as tracking and workflow are extended to manage logistics processes via integration with third-party logistics providers (3PLs). Ongoing assessment of supplier performance continues on the quayside (e.g., ensuring that everything complies with the measurements and recommendations of the Intergovernmental Organization for International Carriage by Rail [OTIF]). Finally, during the sales and service phase, product performance must be monitored in-store. This evaluation process is guided by KPI tracking and monitoring, individual product performance and KPIs are shared with suppliers where appropriate.

Most retailers strive to constantly improve the performance of individual suppliers, while market leaders effectively build and manage supplier relationships and look for ways to improve the performance of their entire global supplier network. The emergence of industry standards, more effective KPIs and analytical tools enables companies to benchmark individual suppliers against other partners in the network, as well as suppliers outside the distributor's network. As the cliché goes, "change is the only constant", but the need to plan for change can never be underestimated, from accidental and unavoidable changes to significant business shifts, such as executive decisions, organizational restructuring or changes in competitive or regulatory environments. Business partners also need to anticipate the positive changes that need to occur within their alliance, as a supplier relationship can only be successful if continuous, incremental improvements are systematically built in.

Information shared between partners should enable them to work more effectively with each other. This is how apparel vendors find themselves in a particularly dynamic environment in which suppliers appear and disappear with astonishing frequency, and in which key designers and buyers often move from one company to another. Their response must therefore be multi-dimensional, starting with finding ways to move supply channels quickly when a supplier fails. However, apparel distributors must also constantly look for ways to both help each key supplier succeed, and ensure that they strengthen relationships with individuals within the distributing companies, not just with the companies themselves.

For example, apparel distributors need to recognize that their buyers will not be the only employees directly affected by every relationship they establish with a remote fashion manufacturer. Marketing decision-makers will criticize issues of responsiveness and timing, while regional managers will prefer to know how flexible the supplier can be to respond to the variety of local trends. IT departments will need to devise methods for sharing information in real time at all points in the supply chain, from the issuing of Purchase Orders to the tracking of in-store deliveries and the transfer of discounted goods. Other issues, such as quality control and logistics (shipping and delivery), also need to be taken into consideration. In each case, the people directly responsible - and those most directly affected - need to be brought into the process as early as possible.

Even simple paperwork can account for up to seven percent of the total cost of international trade. Companies spend most of their time on activities such as coordinating documentation changes with their suppliers (e.g. specification changes, work in progress [WIP], revisions to delivery dates, shipping and labeling), with consequent delays or long lead times. Furthermore, as global safety concerns intensify, governments are demanding information (as opposed to simply applying Harmonized Tariff Nomenclature [HTS] codes, or knowing whether a product has been made from endangered animal species), and traceability has become essential for cross-border transactions.

So, when it comes to their shipments, with heightened security measures since September 11, retail clothing importers have had to adapt to new customs compliance rules. Indeed, having to ensure that shipments comply with U.S. Customs and Border Protection (CBP) requirements has added a new level of complexity to the apparel import process, and the risk of non-compliance is now much higher than before.

Particularly with the elimination of trade quotas, and the consequent reduction in the need to monitor data for quota compliance, U.S. Customs and importers have largely refocused their attention on security compliance. For example, in the wake of 9/11, US Customs requires importers to classify the ingredients of all foreign-sourced products by country of origin. For some time now, many importer-distributors have been practicing a zero-tolerance policy when it comes to safety and social compliance measures, rather than simply paying reasonable attention to customs and trade compliance. Some hope to achieve level 3 of the Customs-Trade Partnership Against Terrorism (C-TPAT), which formally recognizes companies with good business practices, exempting them from mandatory non-random security inspections and ensuring faster time-to-market.