Sourcing: the pitfalls to be aware of before sourcing abroad

The many challenges faced by retailers when working with suppliers on an international scale can be facilitated by specialised 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, driven 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 Many outdated sourcing programmes (including some of the traditional enterprise resource planning (ERP) and accounting systems) were not designed to take account of currency fluctuations, customs duties or additional bank processing fees, so many of these elements are still handled manually. So it's not surprising that after a few years of deployment, only less than 15% of the available software functionality is 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, as well as having a good understanding of trends in the global supplier market, buyers need much more intuitive tools for requesting quotes from reliable suppliers, analysing and comparing responses, and ultimately managing 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 globally for the most appropriate suppliers and factories, and then put these installations into service as soon as possible on the distributors' network of systems. Among the major stumbling blocks, according to a November 2006 benchmarking study by the Retail Systems Alert Group (RSAG), the biggest sourcing challenges are as follows:

1. Finding and keeping reliable partners
2. Juggling unpredictable delivery times
3. Managing geographically dispersed supply chains, which slows reaction times
4. Realising that the expected benefit is not always achieved
5. Managing the vulnerability of supply chains
6. Managing the presence of counterfeits and misappropriations that weaken brand image
7. Overcoming cultural and language barriers
8. Increasing working capital for imported goods
9. Ensuring fair labour 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 communications technology, for retailers it is still expensive and time-consuming to travel long distances to set up a research and development (R&D) centre, since the costs involved can wipe out the potential benefits initially expected from offshoring sourcing. It is particularly costly and time-consuming to set up an international sourcing centre, as it takes at least a few months to find new suppliers and get the centre up and running efficiently. In addition, rising fuel prices and the fear of epidemics such as SARS or avian flu can contribute to a reduction in travel by senior executives and an increase in confidence in remote collaboration, when it has been established that, in some cases, physical, face-to-face, person-to-person meetings are essential for projects to progress.

The problem of cultural differences

Delays and other communication problems resulting from time differences, differences in the organisation 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, as 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 you get to the border, and because of the real concern about political instability and currency fluctuations in some geographic areas, US retailers may well still prefer to choose to work with suppliers 'south of the border' (or even north of the border). Aligning with the laws of the European Union (EU) may also prove complex for an American company, especially as EU law favours 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, summarises 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, favourable customs duties (particularly if materials are local), lower taxes, and lower capital investment (if assets are transferred to the foreign country).

On the negative side, however, the company can potentially encounter a whole host of problems and challenges: possible costs and disruptions caused by the difference in time zones (the time difference between the United States and Asia can be up to 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, insurance costs against exchange rate risk, costs associated with 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 stocks in warehouses or pipelines, a reduction in stocks due to theft, breakage or damage (and the cost of insurance to combat these scourges).

How can these conflicting objectives be brought together?

The benefits of private merchandise can be so great that they are becoming 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 that offer their sourcing services to other independent distributors. They also have to 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 enable all items (considered by reference, not quantity) on an original order to be listed 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 about carriers, shippers, country of origin, country of export, country of import and final destination - are essential to meet ever-stricter trade security standards and to clear customs without delay. This synchronisation 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 supply and logistics processes. One key objective is the constant quest for low prices, which often means extending 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 supporting such large supply networks and in solving 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 to provide near real-time data and events for the management and analysis of global sourcing variables. For example, online supply chain visualisation tools have enabled many companies to improve lead times, better manage stock movements and track production and product delivery in near real time. In addition, online sourcing tools can help these organisations identify suppliers, negotiate contracts, send manifests, streamline sourcing through event management, collaborate and plan with trading partners, and ultimately increase on-time delivery rates.

Some importers may find themselves dealing with both expensive items and high volumes of low-cost accessories sourced directly from Asia. Such a situation requires 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 harmonise different currencies, languages and delivery times, and automatically calculate landed price estimates for a clearer understanding and comparison of all offers submitted by competing suppliers. For these suppliers, located all over the world, the suite would enable details (such as product specifications, tenders, quality control, packing lists and all invoices and customs formalities) to be smoothly unified and coordinated, eliminating recurring data-entry errors and speeding up production. Such a solution would then be a tool for buyers and trading partners to cooperate more quickly in arranging change orders to meet changing market conditions.

With suppliers located on the other side of the world, it is difficult to check that everything is running smoothly at a moment's notice, and it is generally only realised that there has been a problem after the event, 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 organisational health), responsiveness and customer service, safety, social compliance, and so on.

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

1. Concept: study of fashion influences and mood boards (the result of collaborative 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 issuing invitations to tender, analysing responses, creating and selecting suppliers and testing products or prototypes
4. Purchasing: management of the purchase order (PO) issuing process, involving product creation, PO creation and product sample testing
5. Production: production and quality monitoring, including the manufacture and inspection of product batches
6. Dispatch: monitoring dispatch within the supply chain
7. Sales and service: monitoring and managing 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 a minimum, 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 joint packaging and marketing strategies. As competition increases and the pace of product launches continues to grow, a 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 lifecycle, 'pre SKU' (stock keeping unit) integration with 'post SKU' information is vital.

Thus, because of the integration with the 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 should be managed from the earliest stages throughout the product life cycle. This centralised data repository should allow suppliers to retain the information they deem relevant (as it changes and, of course, only for data authorised by the vendor), while automatically creating a supplier record in the main business systems once that supplier has been approved.

Then, as the process extends into the production phase, it should be guided by monitoring the order management process and workflow management (to control order definition, acknowledgement and acceptance) while the supplier's performance KPIs continue to be monitored through the inspection and audit process. Control and monitoring doesn't stop there, as tracking and workflow is extended to manage logistics processes via integration with third-party logistics providers (3PLs). Ongoing assessment of supplier performance continues on the quayside (for example, ensuring that everything complies with the measurements and recommendations of the Intergovernmental Organisation for International Carriage by Rail [OTIF]). Finally, during the sales and service phase, the performance of products in shop must be monitored. 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 continuously 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 changes, such as management decisions, organisational 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 and incremental improvements are systematically built in.

Information shared between partners should enable them to work more effectively with each other. As a result, clothing retailers 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 also need to continually look at how they can both help each key supplier to succeed, and ensure that they are strengthening relationships with individuals within the distributing companies, not just the companies themselves.

For example, clothing distributors need to recognise that their buyers will not be the only employees directly affected by every relationship they form with a remote fashion manufacturer. Marketing decision-makers will criticise issues around 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 issuing purchase orders to tracking in-store deliveries and transfers of discounted goods. Other issues, such as quality control and logistics (shipping and delivery), also need to be taken into account. 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 per cent 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 labelling), resulting in delays or long lead times. In addition, heightened global concerns about safety mean that governments are demanding a great deal of information (as opposed to simply applying Harmonised 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.

With security measures having been stepped up since 11 September, importers of retail clothing have had to adapt to new customs compliance rules for their shipments. Indeed, having to ensure that shipments comply with US 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, US Customs and importers have largely refocused their attention on security compliance. For example, in the aftermath of September 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 practising 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 recognises companies with good business practices and would exempt them from mandatory non-random security inspections and ensure faster time to market.