As discussed in The Gain and Pain of Global Retail Sourcing, for anyone who has not spent the last several years in hibernation or stranded on a remote island, it has become apparent that several market-driving forces have come together to create a “perfect storm,” one that makes control of the supply side more important to overall business success than ever before. Some of these driving forces include globalization (the prospect of new potential markets, but at the price of growing competition), sourcing in low-price and low-wage countries (and even outsourcing of some, if not most, manufacturing or service operations), and continuous cost pressures (that is, ever shrinking margins).
Although global strategic sourcing might be as old as sailing ships and riding on camels, there has been much talk these days about globalization and its effects on business, and there is no doubt that competing corporations are increasingly butting heads in the global playing field. But the same globalization of sourcing, manufacturing, and delivery processes is also making supply chains far longer and more complex than ever before; they require more coordination and collaboration amid trading partners. Indeed, many manufacturers and retail chains have expanded both nationally and globally, creating the need for more formal and structured mechanisms to coordinate supply chain activities.
What's more, market demands are becoming more volatile and harder to predict due to the increasing power and speed of information available to both comparison-shopping consumers and competitors. Global sourcing can be defined as the process of identifying appropriate domestic and far- or near-shore suppliers of goods and services (preferably from countries with significantly lower cost bases), ordering the goods, and arranging for their payment and delivery. Global sourcing has become a standard practice for many businesses. In fact, global sourcing has become increasingly important as a corporate strategy, and is rapidly developing into a survival strategy too—a sharp contrast to its stepchild and “ugly duckling” treatment of previous decades in procurement departments.
Contrary to yesteryears, today there is a growing imperative within organizations to source directly from an ever-expanding global universe of prospective vendors. According to the World Trade Organization (WTO), about 55 percent of all raw materials for American manufacturing are now sourced outside the United States (US) compared to the approximate 12 percent in the 1980s. As another example, not that long ago, the Wall Street Journal reported huge increases in the volume of Far East imports through the port of Savannah, Georgia (US), where the cargo container volume of 1.7 million shipment units per year of a decade ago has tripled.
The Global Sourcing Allure
In a nutshell, companies source globally for three main reasons: to differentiate their products (in terms of affordability, quality, availability, etc.), to gain competitive advantages through reduced price points, and to realize margin improvements. Many recent studies, surveys, and benchmarking reports have concluded that a well-devised and well-executed sourcing strategy can produce up to a 2 percent improvement in margin (through more efficient trading partner collaboration), reduce cycle times by up to 30 percent, reduce cost of goods sold (COGS) by up to 5 percent, and increase gross margins by up to 15 percent.
The above percentages are achieved through increased international sourcing of low-cost labor and supplies from East and Southeast Asia, Eastern Europe, and South America, with Africa slowly showing signs of becoming the next potential frontier. Sure, expectations are usually much higher than the above figures, since initial savings might provide false gains, but with many costs and risks being hidden (such as logistics complexity and increased lead time ramifications), businesses should always take a long-term view and make the appropriate analysis (but more about the impediments later on).
What's more, trading quotas and other barriers have been disappearing (or are being significantly reduced) globally, while the expansion of the European Union (EU) eastward opens up new potential countries to source from as well new potential markets in which to sell. With the end of apparel import quotas, this sector is growing rapidly in India and the Far East, while the passage of the Central America Free Trade Agreement (CAFTA) promises to bring additional activity into Central America as well. Today, consequently, retailers are, on average, following the top executive mandates to increase imports of both raw materials and finished goods to up to a quarter of total purchases (a substantial increase from the current level of 5 to 12 percent).
Additionally, there has been an increasing awareness of suppliers having more strategic importance; retailers and manufacturers are trying to nurture long-term collaborative partnerships with their trading partners and to leverage the suppliers' strengths and savvy, all with the idea of forging win-win relationships (as opposed to the traditional price- and transaction-based, “buy on the market” encounters that only benefit one side—usually a large channel master). For instance, many organizations have realized significant benefits when they involve suppliers in the early stages of product life cycles. Taking the conceptual design process (new product idea or old product enhancement) as an example, such benefits can include lower costs for development, purchased material, and manufacturing; shorter development times; and better quality of purchased material and in final product feature levels.
Similarly, a strategy for mass customization (also known as postponement or delayed differentiation) should give organizations a competitive advantage, but this requires the quick and efficient delivery of a wide variety of customized goods or services at a low cost. Again, early supplier involvement (as opposed to after the product has already been designed and “thrown over the wall”) is critical to maximizing the potential of the postponement strategy. In this respect, a supplier's involvement typically adds value and improves time to market (that is, getting products into the hands of customers more quickly) while helping to ensure quality, and ultimately increases customer satisfaction and loyalty.
Furthermore, in some industries and markets (pharmaceuticals, for example), strategic alliances, joint ventures, or ongoing partnerships may enable organizations to combine resources and share the burden as a way of overcoming barriers to entry into the market, as well as in searching for and developing new opportunities. In other industries, such as home improvement and appliance design and manufacturing, partnerships between retailers and manufacturers that lead to better advertising or increased access to new market channels are certainly mutually beneficial.
According to the 2004 report from sourcing consultants A.T. Kearney titled Making Procurement a Priority, true market leaders are collaborating more than ever with suppliers—and in a true win-win manner. This collaboration is occurring mostly in the areas of product design (development), supply chain (logistics), merchandising strategy, and strategic and tactical buying. The rapidly changing face of global supply emphasizes the importance of strategic partner collaboration (that is, strategic relationships, differentiated primarily by deeper levels of planning and workflow integration, and sharing of information) and supplier performance measurement in enabling top-notch sourcing operations.
Backed by more recent data from analysts Aberdeen Group and strategic consultants McKinsey & Company, there are many indications that leading retailers gain from working collaboratively with their suppliers to facilitate visibility across the entire supply chain, starting from product concept stage to product delivery—even to the supplier's shop floor. Also, today's leading retailers increasingly try to ensure that their corporate social responsibility (CSR) policies and practices are integral parts of their supply chains, and they are therefore adhering to ever more responsible sourcing practices by harnessing conscientious trading partners' expertise (for example, those that abide by the US Fair Labor Standards Act [FLSA]). For more information, see Global Trade and the Role of Governance, Risk Management, and Compliance Software.
Although global strategic sourcing might be as old as sailing ships and riding on camels, there has been much talk these days about globalization and its effects on business, and there is no doubt that competing corporations are increasingly butting heads in the global playing field. But the same globalization of sourcing, manufacturing, and delivery processes is also making supply chains far longer and more complex than ever before; they require more coordination and collaboration amid trading partners. Indeed, many manufacturers and retail chains have expanded both nationally and globally, creating the need for more formal and structured mechanisms to coordinate supply chain activities.
What's more, market demands are becoming more volatile and harder to predict due to the increasing power and speed of information available to both comparison-shopping consumers and competitors. Global sourcing can be defined as the process of identifying appropriate domestic and far- or near-shore suppliers of goods and services (preferably from countries with significantly lower cost bases), ordering the goods, and arranging for their payment and delivery. Global sourcing has become a standard practice for many businesses. In fact, global sourcing has become increasingly important as a corporate strategy, and is rapidly developing into a survival strategy too—a sharp contrast to its stepchild and “ugly duckling” treatment of previous decades in procurement departments.
Contrary to yesteryears, today there is a growing imperative within organizations to source directly from an ever-expanding global universe of prospective vendors. According to the World Trade Organization (WTO), about 55 percent of all raw materials for American manufacturing are now sourced outside the United States (US) compared to the approximate 12 percent in the 1980s. As another example, not that long ago, the Wall Street Journal reported huge increases in the volume of Far East imports through the port of Savannah, Georgia (US), where the cargo container volume of 1.7 million shipment units per year of a decade ago has tripled.
The Global Sourcing Allure
In a nutshell, companies source globally for three main reasons: to differentiate their products (in terms of affordability, quality, availability, etc.), to gain competitive advantages through reduced price points, and to realize margin improvements. Many recent studies, surveys, and benchmarking reports have concluded that a well-devised and well-executed sourcing strategy can produce up to a 2 percent improvement in margin (through more efficient trading partner collaboration), reduce cycle times by up to 30 percent, reduce cost of goods sold (COGS) by up to 5 percent, and increase gross margins by up to 15 percent.
The above percentages are achieved through increased international sourcing of low-cost labor and supplies from East and Southeast Asia, Eastern Europe, and South America, with Africa slowly showing signs of becoming the next potential frontier. Sure, expectations are usually much higher than the above figures, since initial savings might provide false gains, but with many costs and risks being hidden (such as logistics complexity and increased lead time ramifications), businesses should always take a long-term view and make the appropriate analysis (but more about the impediments later on).
What's more, trading quotas and other barriers have been disappearing (or are being significantly reduced) globally, while the expansion of the European Union (EU) eastward opens up new potential countries to source from as well new potential markets in which to sell. With the end of apparel import quotas, this sector is growing rapidly in India and the Far East, while the passage of the Central America Free Trade Agreement (CAFTA) promises to bring additional activity into Central America as well. Today, consequently, retailers are, on average, following the top executive mandates to increase imports of both raw materials and finished goods to up to a quarter of total purchases (a substantial increase from the current level of 5 to 12 percent).
Additionally, there has been an increasing awareness of suppliers having more strategic importance; retailers and manufacturers are trying to nurture long-term collaborative partnerships with their trading partners and to leverage the suppliers' strengths and savvy, all with the idea of forging win-win relationships (as opposed to the traditional price- and transaction-based, “buy on the market” encounters that only benefit one side—usually a large channel master). For instance, many organizations have realized significant benefits when they involve suppliers in the early stages of product life cycles. Taking the conceptual design process (new product idea or old product enhancement) as an example, such benefits can include lower costs for development, purchased material, and manufacturing; shorter development times; and better quality of purchased material and in final product feature levels.
Similarly, a strategy for mass customization (also known as postponement or delayed differentiation) should give organizations a competitive advantage, but this requires the quick and efficient delivery of a wide variety of customized goods or services at a low cost. Again, early supplier involvement (as opposed to after the product has already been designed and “thrown over the wall”) is critical to maximizing the potential of the postponement strategy. In this respect, a supplier's involvement typically adds value and improves time to market (that is, getting products into the hands of customers more quickly) while helping to ensure quality, and ultimately increases customer satisfaction and loyalty.
Furthermore, in some industries and markets (pharmaceuticals, for example), strategic alliances, joint ventures, or ongoing partnerships may enable organizations to combine resources and share the burden as a way of overcoming barriers to entry into the market, as well as in searching for and developing new opportunities. In other industries, such as home improvement and appliance design and manufacturing, partnerships between retailers and manufacturers that lead to better advertising or increased access to new market channels are certainly mutually beneficial.
According to the 2004 report from sourcing consultants A.T. Kearney titled Making Procurement a Priority, true market leaders are collaborating more than ever with suppliers—and in a true win-win manner. This collaboration is occurring mostly in the areas of product design (development), supply chain (logistics), merchandising strategy, and strategic and tactical buying. The rapidly changing face of global supply emphasizes the importance of strategic partner collaboration (that is, strategic relationships, differentiated primarily by deeper levels of planning and workflow integration, and sharing of information) and supplier performance measurement in enabling top-notch sourcing operations.
Backed by more recent data from analysts Aberdeen Group and strategic consultants McKinsey & Company, there are many indications that leading retailers gain from working collaboratively with their suppliers to facilitate visibility across the entire supply chain, starting from product concept stage to product delivery—even to the supplier's shop floor. Also, today's leading retailers increasingly try to ensure that their corporate social responsibility (CSR) policies and practices are integral parts of their supply chains, and they are therefore adhering to ever more responsible sourcing practices by harnessing conscientious trading partners' expertise (for example, those that abide by the US Fair Labor Standards Act [FLSA]). For more information, see Global Trade and the Role of Governance, Risk Management, and Compliance Software.
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