For all the reasons detailed in The Anatomy of Retail Sourcing Processes, the issue of how to achieve more transparent and cohesive sourcing processes has become a frontline concern for many retailers, driven by boardroom directives to boost margins through the direct sourcing of lower priced international products.
For more information and background, please see The Blessing and Curse of Global Sourcing and Supplier Management, Distinctions and Benefits of Strategic Sourcing, The Promise (and Complexities) of Private Labels, and The Anatomy of Retail Sourcing Processes.
The sad fact is that few information technology (IT) systems fully support the complexities and unique requirements of global trade. Many outmoded sourcing programs (some of which are part of traditional enterprise resource planning [ERP] and accounting systems) have not been designed to factor in currency fluctuations, customs duties, or additional bank processing fees. This has resulted in much of the accounting for these items still being performed manually. It is no wonder that, within only a few years of deployment, less than 15 percent of available software functionality is customarily being used (see Application Erosion: Eating Away at Your Hard Earned Value).
While outmaneuvering the global competition requires that companies be well prepared to source anywhere and sell anywhere in addition to having an understanding of the global supplier market trends, buyers require much more intuitive tools to solicit quotes from trusted suppliers, analyze and compare responses, and ultimately manage critical path items, such as testing and sampling. In other words, to rapidly respond to customers' demands, companies must have the ability to seek out the most appropriate global suppliers and factories, and then get these facilities up and running on the retailer network of systems as soon as possible. In terms of major “ifs, ands, or buts,” according to the Retail Systems Alert Group's (RSAG) benchmark study from November 2006—see The Promise (and Complexities) of Private Labels—the following top sourcing challenges remain:
* finding and keeping dependable partners;
* unpredictable lead times and delivery windows;
* geographically dispersed supply chains slowing down reaction times;
* potential profit not always realized;
* vulnerability to shocks within supply chains;
* counterfeiters and diverters diluting the brand equity;
* cultural and language barriers;
* increased working capital for imported goods;
* fair labor practices in sourcing countries; and
* political instability in sourcing regions.
Outsourcing to geographically remote countries has introduced many additional difficulties for retailers. Even with the benefit of Web conferencing, retailers find it ever more expensive and time-consuming to travel the long distances to outpost research and development (R&D) centers, since the costs of doing so may negate the initial potential benefits of outsourcing. It is particularly costly and time-consuming to set up an international sourcing office, as it takes at least a few months to get new suppliers on board and the office running effectively. Additionally, increasing fuel prices and fear of disease outbreaks like severe acute respiratory syndrome (SARS) or bird flu can contribute to reduced executive travel and more reliance on Web-based collaboration (although the benefits of the rapport established in person-to-person meetings cannot be replaced in some cases).
Delays and other problems in communication caused by different time zones, workdays, and holidays can further reduce supply network visibility and the closeness of the working relationship, thus seriously obstructing an effective, demand-driven approach (see Demand-driven Versus Traditional Materials Requirement Planning). Cultural and language differences are other hurdles to outsourcing successfully, and even slight misunderstandings or miscommunications can prove quite costly.
Skills availability and consistency as well as differing standards in quality can also present problems with far- or near-shore sourcing. Since cultural differences are generally less pronounced with near-shore locations, and because of the real concern over political instability and currency fluctuations in some geographic regions, US retailers might still prefer to deal with “south (or even north) of the border” options. In addition, alignment with the European Union (EU) laws can be complex, and EU law favors dealing with EU and soon-to-be EU countries.
The 2007 APICS program Certified Supply Chain Professional (CSCP) Learning System, Module 2: Building Competitive Operations, Planning, and Logistics summarizes well why a company should thoroughly consider the advantages and risks of product assembly in another country. On the plus side, potential benefits include lower labor rates (depending on the country); lower material costs; lower benefits costs in countries with national health care; favorable duty rates (especially if materials are domestic); lower taxes; and smaller capital investment (if assets are transferred to the foreign country).
On the minus side, however, a company may encounter a multitude of potential problems. These challenges include possible costs and disruptions caused by time zone differences (there is up to a fifteen-hour difference between the US and Asia); higher transport costs and longer lead times; higher relationship management costs for communications, travel, etc.; possible political risks in unstable, unfriendly countries; costs of hedging currency exchange risks; costs of maintaining environmentally responsible forward and reverse logistics chains; environmental costs for mitigating air, water, and noise pollution and for preventing the spread of disease-harboring species; higher costs of increased safety stock; costs of holding inventory in warehouses or in the pipeline; shrinking inventory due to theft, damage, spoilage, etc.; increased costs of insurance against damage, theft, spoilage, etc.; and so on. For more information, see Understanding the True Cost of Sourcing.
How to Reconcile These Conflicting Objectives?
The benefits of private label merchandise can be so large that they become crucial to retailers' strategies—to the extent that ignoring global sourcing is no longer an option for most. The issues discussed above could be particularly critical and even more complex for companies that offer their sourcing services to other independent retailers. They must also comply with those retailers' unique billing and documentation requirements as well as internal invoicing and vendor payment for goods bought on their own behalf.
For more information and background, please see The Blessing and Curse of Global Sourcing and Supplier Management, Distinctions and Benefits of Strategic Sourcing, The Promise (and Complexities) of Private Labels, and The Anatomy of Retail Sourcing Processes.
The sad fact is that few information technology (IT) systems fully support the complexities and unique requirements of global trade. Many outmoded sourcing programs (some of which are part of traditional enterprise resource planning [ERP] and accounting systems) have not been designed to factor in currency fluctuations, customs duties, or additional bank processing fees. This has resulted in much of the accounting for these items still being performed manually. It is no wonder that, within only a few years of deployment, less than 15 percent of available software functionality is customarily being used (see Application Erosion: Eating Away at Your Hard Earned Value).
While outmaneuvering the global competition requires that companies be well prepared to source anywhere and sell anywhere in addition to having an understanding of the global supplier market trends, buyers require much more intuitive tools to solicit quotes from trusted suppliers, analyze and compare responses, and ultimately manage critical path items, such as testing and sampling. In other words, to rapidly respond to customers' demands, companies must have the ability to seek out the most appropriate global suppliers and factories, and then get these facilities up and running on the retailer network of systems as soon as possible. In terms of major “ifs, ands, or buts,” according to the Retail Systems Alert Group's (RSAG) benchmark study from November 2006—see The Promise (and Complexities) of Private Labels—the following top sourcing challenges remain:
* finding and keeping dependable partners;
* unpredictable lead times and delivery windows;
* geographically dispersed supply chains slowing down reaction times;
* potential profit not always realized;
* vulnerability to shocks within supply chains;
* counterfeiters and diverters diluting the brand equity;
* cultural and language barriers;
* increased working capital for imported goods;
* fair labor practices in sourcing countries; and
* political instability in sourcing regions.
Outsourcing to geographically remote countries has introduced many additional difficulties for retailers. Even with the benefit of Web conferencing, retailers find it ever more expensive and time-consuming to travel the long distances to outpost research and development (R&D) centers, since the costs of doing so may negate the initial potential benefits of outsourcing. It is particularly costly and time-consuming to set up an international sourcing office, as it takes at least a few months to get new suppliers on board and the office running effectively. Additionally, increasing fuel prices and fear of disease outbreaks like severe acute respiratory syndrome (SARS) or bird flu can contribute to reduced executive travel and more reliance on Web-based collaboration (although the benefits of the rapport established in person-to-person meetings cannot be replaced in some cases).
Delays and other problems in communication caused by different time zones, workdays, and holidays can further reduce supply network visibility and the closeness of the working relationship, thus seriously obstructing an effective, demand-driven approach (see Demand-driven Versus Traditional Materials Requirement Planning). Cultural and language differences are other hurdles to outsourcing successfully, and even slight misunderstandings or miscommunications can prove quite costly.
Skills availability and consistency as well as differing standards in quality can also present problems with far- or near-shore sourcing. Since cultural differences are generally less pronounced with near-shore locations, and because of the real concern over political instability and currency fluctuations in some geographic regions, US retailers might still prefer to deal with “south (or even north) of the border” options. In addition, alignment with the European Union (EU) laws can be complex, and EU law favors dealing with EU and soon-to-be EU countries.
The 2007 APICS program Certified Supply Chain Professional (CSCP) Learning System, Module 2: Building Competitive Operations, Planning, and Logistics summarizes well why a company should thoroughly consider the advantages and risks of product assembly in another country. On the plus side, potential benefits include lower labor rates (depending on the country); lower material costs; lower benefits costs in countries with national health care; favorable duty rates (especially if materials are domestic); lower taxes; and smaller capital investment (if assets are transferred to the foreign country).
On the minus side, however, a company may encounter a multitude of potential problems. These challenges include possible costs and disruptions caused by time zone differences (there is up to a fifteen-hour difference between the US and Asia); higher transport costs and longer lead times; higher relationship management costs for communications, travel, etc.; possible political risks in unstable, unfriendly countries; costs of hedging currency exchange risks; costs of maintaining environmentally responsible forward and reverse logistics chains; environmental costs for mitigating air, water, and noise pollution and for preventing the spread of disease-harboring species; higher costs of increased safety stock; costs of holding inventory in warehouses or in the pipeline; shrinking inventory due to theft, damage, spoilage, etc.; increased costs of insurance against damage, theft, spoilage, etc.; and so on. For more information, see Understanding the True Cost of Sourcing.
How to Reconcile These Conflicting Objectives?
The benefits of private label merchandise can be so large that they become crucial to retailers' strategies—to the extent that ignoring global sourcing is no longer an option for most. The issues discussed above could be particularly critical and even more complex for companies that offer their sourcing services to other independent retailers. They must also comply with those retailers' unique billing and documentation requirements as well as internal invoicing and vendor payment for goods bought on their own behalf.
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