becoming a ringmaster
Sourcing internationally may be a competitive necessity today, but it can also be a perilous journey, as Martin White will attest. White was supply chain director for the U.K.-based grocery giant Sainsbury's in the late 1990s when the company set out to expand its international sourcing, and he remembers hitting a lot of potholes along the way. Despite 130 years in the grocery business, Sainsbury's had little idea of the challenges it faced, and its inexperience occasionally led to stumbles. Or as White puts it, "We committed every crime in the book." What started Sainsbury's down the international sourcing road was the decision to expand into non-food product lines—clothing, stationery, home electronics, and the like—in a bid to keep up with competitor Tesco. For reasons of cost, that would mean sourcing from outside the European Union.
Initially, Sainsbury's looked to what White terms the Near East: countries like Turkey, Morocco, and some of the Central European nations. The retailer chose those countries because they were both low cost and relatively nearby, which kept transit times down. White says goods shipped from Turkey or Morocco could reach the U.K. in as little as three days. Eventually, though, the lure of low-cost sourcing farther East proved too strong to resist, says White, who is now European research director for retail consumer goods for the consulting firm AMR. "Then we had the stampede to China and to some extent, India," he says. And that's when the trouble began.
Almost overnight, Sainsbury's found itself grappling with issues it hadn't faced before. The retailer quickly learned, for example, that it wasn't enough just to find low-cost suppliers with reasonable lead times; it also had to make sure those suppliers would be stable and reliable. There were new decisions to make as well. Sainsbury's had to choose whether to work with suppliers through agents or by going directly to their factories and plants. Further, the decision to do business in underdeveloped countries carried with it an ethical responsibility to investigate labor conditions in potential vendors' factories.
Supplier troubles were only the beginning. As the first shipments began to roll in, more problems arose. White recalls receiving containers with labels in Chinese and no other identification. He remembers finding goods other than what was expected when cartons were opened. That, of course, meant more work for the staff. "We were opening up pretty much every box," says White. Predictably, handling costs went through the roof.
Before long, the problems caused by these uneven and unpredictable shipments began to be felt at the store level. "We were getting patchy displays, with 50 to 60 percent of the expected merchandise," reports White. Clearly, practices had to change.
And change they did. Over time, Sainsbury learned its lessons and got the assistance it needed. With the help of technology designed to bring visibility to international transactions and product flow, it eventually gained control over its international supply chain.
A new level of challenges
The problems faced by White and Sainsbury's are common, says Chris Foulkes, chief product officer for Eqos, a U.K. based vendor of sourcing and supplier management software solutions for worldwide retail supply chains. And it's easy to see how they happen, he adds. For one thing, few companies realize at the outset how much the processes involved in international trade can vary from domestic procedures.
Then there are the added difficulties of having to work with a dozen or more third parties for a single transaction, Foulkes says. "You are dealing with a whole community of people, and changes come quickly. You may be dealing with a supplier you will never deal with again. You have to reform relationships very quickly."
Retailers like Sainsbury's that are expanding into new lines of business face some added challenges. One of those is the need to adjust to a very different type of schedule, says Foulkes, whose clients include Sainsbury's and other food retailers. "A lot of food retailers have lots of experience selling fast-moving consumer goods and churning product a dozen times a year. Where a typical lead time might be 10 days or even two days within the U.K., they now have to manage a supply chain with up to 18 months' lead time and turn rates of once or twice a year. The problems they have to address are fundamentally different."
Ironically, it often turns out that the biggest hurdle for companies attempting to integrate their external supply chain operations is a lack of coordination in their internal operations. Even after the two-plus decades of movement to coordinate operational functions within corporations, it is still often the case that purchasing, distribution, and transportation within companies have difficulty coordinating their efforts when it comes to international sourcing.
Nathan Pieri, vice president of marketing for Management Dynamics, a supplier of global trade management software, says he continues to see that as a problem, even within large companies. "They are often not on the same page for the lowest delivered cost," he contends.
Modern technological tools can go a long way toward helping managers understand total landed costs and evaluate potential sourcing risks and the tradeoffs associated with different scenarios, says Pieri. In addition, he says, those tools often prove valuable in the subsequent, ongoing execution of a sourcing plan and can help with that internal coordination he senses is often missing.
"Technology really is a leveler," adds Pieri. "Without good technology, it is impossible to get everyone on the same page unless they are in the same room. That does not happen often, especially in global trade."
What you get depends on what you see
In the case of Sainsbury's, the retailer was able to get the technological help it needed from its major international carrier, Maersk Line, and from Eqos. White tapped into their systems to improve track and trace capabilities, to set up an extranet to allow the speedy exchange of data with suppliers, and to work with suppliers on new product introductions.
Foulkes says his company's systems, which are based on a service-oriented architecture, provide visibility of orders over the long time frames involved in international sourcing, something he says many order management systems are not able to do. In addition, he says, the Eqos system, which is designed to make it easy for trading partners to tap into the system, provides a single management process for all the parties engaged in a transaction.
Getting control over Sainsbury's international sourcing took the better part of two years, says White, but it was worth the wait. "Once we got it under control, we could predictably know what was on the water. If someone could not ship, we could see that in real time. We got visibility, and that did give us control of our supply chain," he says.
White acknowledges that what Sainsbury's accomplished is not unique— he notes that some of the clothing retailers have made great strides in this area. But the lessons learned still bear repeating. "I would recommend to anyone going into this to get a good workflow software tool to help in the journey," he says. "We also learned that we have to have control ourselves rather than rely on the vendors. You have to be the ringmaster."
New trends take shape
From his new vantage point as a consultant, White says he's seeing a shift in global sourcing patterns. More buyers these days are developing postponement strategies in which they do their major sourcing in low-cost countries, but arrange for final configuration to take place closer to the point of consumption. White cites the example of goods like washing machines that eat up a lot of cube in shipping containers. Some companies, he says, are purchasing the motors in low-cost countries, but having the casing manufactured and the final assembly take place in the destination country, or at least closer by. That sort of practice is happening more often with consumer goods or consumer electronics, where packaging may wait until reaching a DC in the consuming nation. That saves shippers from moving manuals, foam packaging, and the like across great distances. "You get better density in transit," he says.
But that sort of strategy requires superb synchronization among the moving parts, he warns. "It puts more pressure on the logistics chain," he says. "You have effectively added a stage, with work-inprogress in the chain. You are producing semi-finished goods, and you don't want a warehouse full of semifinished goods. You can end up with a lot of stuff that is obsolete before its time. That is not the best lean supply chain.
"My key piece of advice would be to decide how much you want to do yourself and how much with a quality partner," he adds. "Some of it is quite tricky." White considers visibility across the supply chain to be crucial. "Having a window on the world … is quite important," he says. "And there is no substitute for sending your own people and having them on the ground. They can visit the factory and chase things through freight expeditors. You also need a good tax and customs expert on your team. It is easy to fall afoul of the import regimes."
Too much too soon?
It's important to note that it's not just the novices that get into trouble with global sourcing. Even companies with long experience in international procurement sometimes find themselves overwhelmed, particularly when they're expanding their operations. "What we're finding is that companies are ramping up quite a bit faster in this area, whether they're going to Brazil or Shanghai or back to Mexico," says Bob Bassett, vice president of sales and marketing for Menlo Worldwide, a leading third-party logistics service provider. "They are ramping up faster than their infrastructure can handle."
Bassett says the result is that many end up turning to logistics service providers like Menlo to take advantage of the provider's existing network and transportation management capabilities. "Typically, what we have found is that the customer handles procurement and sourcing decisions … and then [hires Menlo to] handle the front-end and back-end activities." Among other activities, he says, third parties can help customers calculate the goods' total landed cost and evaluate the risks of supply chain disruptions—including potential political or security threats or factors affecting the reliability of the transportation systems in a particular sourcing location.
Bassett says that sort of knowledge is one of the key attributes of an experienced logistics service provider. "The design of the network and the knowledge that goes into understanding cultures and trade and transportation costs are more important to us than the infrastructure," he says.
