Taking a global view
Good sourcing strategies are about more than finding the lowest cost
By Malcolm Wheatley, Senior Contributing Editor -- Manufacturing Business Technology, 11/1/2006 7:00:00 AM
Wal-Mart, widely recognized as the retail industry’s low-price leader, gets roughly 85 percent of its goods from countries with labor rates far below those in the U.S. But does the pure pursuit of low-cost suppliers make for a sound global sourcing strategy? Some manufacturing industry experts say no.
John Caltabiano, senior director of OEM and mechanical sourcing at Solectron, a Milpitas, Calif.-based electronics manufacturing services provider, believes the secret to developing a solid global sourcing program is looking at sourcing as just one part of a company’s overall business strategy. And it appears a growing number of manufacturers—including some operating in what are perceived as low-cost countries—share Caltabiano’s point of view.
Consider SGAI Tech, a Hong Kong-based electronics manufacturer that operates four manufacturing plants on mainland China, but rarely sends product development or prototyping jobs there because it fears its intellectual property could be stolen.
“[In Hong Kong], intellectual property protection is as good as you’ll find in the West,” says Tim Moore, chief executive of SGAI Tech, a joint venture between Cambridge, U.K.-based technology consultants Scientific Generics and Automatic Manufacturing, an electronics company also based in Hong Kong.
On the rare occasion SGAI does send product development work to the mainland, Moore says, “We do it with disparate teams that don’t know the others exist, with each team working on only part of the project.”
Finding a match
Protecting intellectual property is just one aspect to consider when developing global sourcing strategies that add real value to—and not just subtract costs from—their operations.
After 20 years of sourcing goods and services from Asia and Eastern Europe, Solectron’s Caltabiano stresses the importance of matching a potential supplier and the country in which it is located to the characteristics of the product being supplied. With consumer products, for example, low cost and a fast time-to-market are paramount. That prompts sourcing decisions based on good logistics, a supplier’s capability to deal with high volumes, and an economy with low labor costs. With industrial and medical products, selecting a supplier with a higher level of technical capability and the potential for a long-term relationship assumes greater importance, Caltabiano says.
So a location in southern China—close to Hong Kong or Shenzhen, for example—might be the place to look for a supplier of a consumer product. And while Singapore might be a better source of suppliers for industrial or medical products, Caltabiano says sweeping characterizations of a country or region “can be too simplistic. There’s actually a lot of variability in the supplier base.”
It’s also simplistic to focus too much on relative labor costs, observes Adrian Griffiths, business development director at Vendigital, a creator of private electronic marketplaces in which overseas suppliers bid to win Western manufacturing orders for items such as engineering components. Despite regularly connecting clients with suppliers in China, Griffiths always urges his clients to consider all sourcing options before making a decision.
For products such as castings, he notes, it’s worth bearing in mind that a significant portion of Brazil’s electricity comes from hydroelectric schemes—whereas China’s comes from fossil fuel—a factor that will heavily influence the end price of castings from suppliers in those countries.
Lower here, higher there
As in several other countries, the Singapore government offers tax incentives to specific types of businesses, which can offset the country’s higher-than-China labor costs.
But savings through lower labor costs must be weighed against higher costs elsewhere in the supply chain, warns David Morgenstern, a managing director for e-procurement vendor Ariba. “There is a surprising amount of purchasing 'bad practices’ going on, where companies opt for sourcing from China without looking at the overall cost picture—otherwise they’d see that China was costing them more, not less,” Morgenstern says.
What’s needed, he says, is to figure out the total cost of acquisition—the landed cost, as it’s known, that’s involved in global sourcing. Factor in the impact of freight costs and tariffs, for example, and the logic of sourcing large castings or sheet metal enclosures from China, with its lower labor costs, largely disappears: “Near shore” sourcing from Mexico or South America makes much more sense, says Morgenstern—even if the factory gate price is higher.
“We’ve seen instances when product has been moved out of China to Mexico, where although wage rates are higher, the overall cost is lower,” says Morgenstern. “In essence, it’s all about weight, volume, and applicable tariffs. There isn’t a golden rule: You have to look at each case separately.”
For example, he notes, while it’s a combination of factory gate cost and weight that often dictates the sourcing of products like forgings, castings, and sheet metal enclosures, it’s a combination of factory gate cost and tariffs that come to bear on the sourcing of chemicals.
Accordingly, Paul Loftus, managing partner in the North American industrial sourcing practice of New York-based Accenture, recommends a category-based approach to global sourcing, with manufacturers—especially those new to the process—tackling the easiest and highest-yielding categories first. On a landed-cost basis, Loftus explains, Accenture research shows the typical savings achieved by low-cost country sourcing of sheet metal, forgings, and printed circuit boards to be just 8 percent, while savings on machined parts, steel castings, and plastic injection moldings are 44 percent, 39 percent, and 49 percent, respectively.
Seeing it through
Companies like Piscataway, N.J.-based American Standard and Houston-based Cooper Industries used these findings to their advantage. American Standard saved $300 million in materials-management costs in the first five years of a global sourcing program. And while savings at Cooper Industries have not been disclosed, the company acknowledges sourcing 35 percent of its direct materials from suppliers in low-cost countries.
Loftus says that for every American Standard and Cooper, there are many more industrial companies that could be benefiting from smart global sourcing strategies.
“For a typical industrial products company, the impact of global sourcing on profitability can be around $100 million to $200 million in annual savings for a $5-billion company spending 50 cents out of every sales dollar on direct materials,” he says.
But those savings come at a price: not just the establishment of a local Asian sourcing office, for instance, but also extended lead times, cash tied up in containerized freight, travel costs, and management time. “Manufacturers have to understand that they are introducing a whole new level of complexity into their supply chains,” Loftus warns. “There is no blanket answer: They have to figure out for themselves if the juice is worth the squeeze.”
But that can call for expertise well outside the skill set of the average manufacturer. Although import quotas—which could turn off supply chains like a faucet once imports reached a certain level—have largely disappeared, figuring out tariff bands, for example, remains a complex business.
Careful: There’s coding
The manuals governing which tariffs apply to which products comprise five volumes almost a foot thick, warns John Brockwell, global supply chain practice lead at JPMorgan Chase Vastera, which offers manufacturers a trade-management service.
These manuals contain Harmonized Tariff Schedule codes published by the Office of Tariff Affairs and Trade Agreements of the U.S. International Trade Commission—with upcoming changes to the coding system due in 2007 adding further complexity to tariff determination.
Careful study is essential if a sourcing decision isn’t to backfire. Leather gloves attract one tariff, for example, while wool gloves attract another. And would that be lined or unlined gloves? Again, different tariffs apply. Or another example: a T-shirt with a logo on it attracts a different tariff to one without, as does a shirt with a button sewn on the breast pocket, as opposed to one that hasn’t.
In short, manufacturers wanting to minimize the landed cost of what they import need to consider not just the country they import it from—different countries attract different tariffs, as well as different products—but also the form in which they import those products. Maybe it’s better to import a shirt without a button, for example, and sew it on in the U.S. or Mexico, rather than having it sewn on in China, Thailand, Vietnam, or Indonesia.
Even so, sourcing decisions ultimately will be at the mercy of the global economic and political climate—as recent protests over the U.S. Senate’s proposed Schumer-Graham bill underscore. If China didn’t revalue its currency, the bill proposed slapping a 27.5-percent tariff on all imports from the country.
It’s a “lose/lose” scenario for manufacturers sourcing from China: Either imports become more expensive because the Chinese currency has been revalued, or imports become more expensive because an additional tariff has been imposed.
For manufacturers, there’s a peculiar irony in the fact that the famous old curse—”May you have an interesting life”—also is, you guessed it, an import from China.
China expansions: JDA Software, New Momentum
06/06/2009
Featured Company
Most Recent Resources
- From CAD Systems to Customers - New collaboration capabilities bring...
- Real Time Energy Management - FREE White Paper and Video
- Deployed in 45 days, Zebra Enterprise Solutions Material Flow System...
- How to Eliminate 7 Wastes from your Supply Chain with Real-Time...
- Is Your Website Really Winning You Business
