Economic Meltdown

Well, it's been a while now since panic first set in with our current economic crisis. Although the panic has somewhat subsided in favour of some more rational thought, we are far from the end of this slowdown, although we do seem to have bottomed out.
Although these downturns are indeed somewhat nerve-wracking, it certainly does impact the supply chain management field in a bit of a different way...........usually we are in a profession where we have to fight to obtain our rightful place at the boardroom table, but not these days.
Quite often in times of economic trouble, we are suddenly "a hot commodity", the people who may be able to play a large role in "righting the ship".
It's not that I am enjoying these challenges, especially with my investments in the market, but it is times like these where our role on cost reduction, strategic sourcing, and our impact on the bottom line becomes much more apparent.
There is no question that not only does our role contribute on a day to day basis for business, but in times like these, it is definately a buyer's market. As a result, it becomes easier to lead a successful negotiation and add to our company's bottom line.
It is important to remember that we have to be careful not to take advantage of our suppliers. If we operate in a truly strategic nature, we have carefully selected our supply chain to work as "partners" with us for the long-term, and have realized the value they add with their individual brand of expertise. We also need to remember that they, and their organizations, are also facing challenges, and we need to be cautious that we do not add to their load.
After all, they won't add much value for us if they are in Chapter 11.
Food for thought

The "Nearshoring" New Years Resolution

Happy New Year to all, and I hope you are as excited about the possibilities for success that await us all in 2009 as I am. Best of luck with your New Year's resolutions.

Over the past several months, the term "nearshoring" has been getting a lot of attention in the media. The panic ensued by rising gas prices has launched this terminology into the "buzzword stratosphere" which if history is any indication, should make us all a little nervous.

So what's the big deal about nearshoring?

Well, here is North America, we tend to have a predisposition about products and services that are not "from here". I have commented on this predisposition in previous postings. This predisposition results in us looking at everything to do with imports and offshoring through a flawed lens, looking for facts to support our predispositions that imports are bad, that they don't make sense, that when you look at things "holistically" we are better off with sources of supply within our own communities, countries, or continent.

Although as I have previously stated, doing business offshore in "far away lands" is not the magic pill that resolves all of our business issues in all situations. It definately can play a critical role in an organization's success, but in some cases, it is contrary to what we are trying to accomplish from a strategic point of view in our businesses.

So what's all the hoopla about nearshoring? The argument goes that there are many reasons that doing business close to home makes more sense from a total business perspective. Whether the argument is to reduce our carbon footprint, to bolster our local economy, or most recently to find a way to deal with escalating fuel and freight costs, nearshoring is a solution that is being escalated to an elite status....the "be all and end all" of great solutions to an ever-increasing cost escalation problem.

Although I agree that in some cases, the fuel crisis has indeed eroded the cost savings with moving sources of supply offshore, this is not the case in most situations. Why? Well, there are a few reasons.

For starters, when companies make the decision to move sources of supply offshore, it is a decision that is most often very carefully thought out as there are not only cost and other benefits, but inherent risks involved in doing so. These risks range from longer lead times, higher inventory carrying costs, and other such factors that are often a natural consequence of moving your source of supply farther from your market.

As a result of these inherent risks, most organizations are very hesitant to make such a move unless the potential gains (such as cost reductions) are substantial. In other words, we do not make these decisions to save one or two percent on our spend.... we make them to save twenty or thirty percent. As a result, it would take an absolutely huge shift in transportation costs to errode these gains.

Well, what we experienced over the last several months can undoubtedly be argued as a substantial shift in the cost of fuel, right? Well, yes it can, although it is doubtful that this could continue for any prolonged length of time, and we are already seeing evidence that it can't. But lets assume for a minute that increased fuel costs are substantial and are sustained for some longer period of time. There are still other factors that we need to consider.

One of these "other factors" that limits the negative effect that this situation can have on offshore opportunities is the fact that most of the goods and supplies sourced offshore are minimally freight sensitive. In other words, the items that are impacted greatly by freight costs (light, bulky, low cost goods) are rarely the goods we tend to source offshore. As a result, the impact of freight increases on offshore products (as a percentage of purchased cost) tends to be significantly less than the impact found on the goods we tend to source closer to home, even though the total cost to move a "unit of freight" is less domestically than internationally. When you also throw in the economics of supply and demand, and the tendency for prices to subside offshore to help prevent demand from sliding too far due to increased transporting cost, or for freight margins to go down due to excess carrier capacity, in many cases doing business offshore continues to provide us with reduced costs and increased competitive advantage.

In summary, we need to be careful not to take an "all or nothing" point of view when considering the decisions we make on a day-to-day basis in our businesses. Most often, the truth lies between the two extremes, and we need to remain aware of this and to not over emphasize the impact of changing trends in the global marketplace. A combination of offshoring, nearshoring, and domestic in-house production in most cases offers our organizations with a balanced solution resulting in mitigated risk and a much less volatile enviroment as we move into the future.

All the best for a great start to 2009!

Linking Execution to Strategy

As purchasing professionals, it is tempting to get caught up with our desire and goal of reducing the yearly spend by category for our organizations. In fact, it is often one of our most focused on objectives that are brought up during the dreaded "performance appraisal".

Sometimes, however, we need to reflect at a 50,000 foot view of where our organization is going, and what our corporate strategy is. This seems like a "no brainer", but it is surprising how often we forget this important attempt at ensuring we are on the right track.

If you think about it, how can we possibly work effectively on a day to day basis, at the tactical level, if we haven't first thought strategically about where we are and where we are supposed to be going? How can we actually get to where we want to go, if we are not sure where it is we are supposed to be going? It's kind of like hitting the TransCanada highway heading west, when we actually intend to end up in Boise Idaho. Is heading west enough?

The point is, all of our day to day activity needs to come from our organization's overall strategy. In other words, first you decide "what you want to be when you grow up", in the organizational sense, then develop the strategy that will get you there. Once you have this vision clearly in mind, you have the ability to ensure that the day to day activities are in line with getting you to the end result.

I do a significant amount of business dealing with importing products for domestic manufacturers from low cost labour countries. It is an activity that strategically has to happen for these domestic manufacturers to remain competitive. In other words, without the import strategy, they would lose customers to competitors.

Despite the fact that this is a major part of what my company does, potential customers are often taken aback when I tell them during our initial meeting that importing is not for everyone. I often hear comments like "What do you mean? Isn't that why you're here?". No that is not why I'm here. That would be a very short sighted view of business development. I am meeting with them to see if I can help them reach their goals, and to gain a competitive advantage to grow their business. Don't get me wrong, if I can retain them as a customer, that's great too, but the goal is to find customers that I can add value to....customers that I can make a difference with.....customers for life.

What I am of course referring to when I say importing is not for everyone, is the fact that it depends on what your corporate strategy is. If you are selling your products at premium "value added" prices, and the value that you are providing your customers is high flexibility, short lead times, industry leading service, it is difficult to do that when your supply base is on the other side of the world. I would guess that in most cases, importing is not in line with where you need to go.

On the other hand, if you are in a "down and dirty", highly competitive industry, where your value proposition is (unfortunately) being the low cost producer and therefore the lowest priced supplier, importing is probably one of the most critical strategies to your organization's potential success.

The point is, we need to start with where it is our organizations want to be in 10 years..........What does that mean for us with where we need to be 5 years from now, and then finally, what do we need to do over the next 1 to 3 years to at least get us on the right road? Once we do that, we can then choose our current activity plans that put us in the best position to succeed at making this 10 year vision a reality.

It's all about vision and strategy....................before execution.

It's about starting at the end, and working back to the beginning.

The Naked Truth about Product Quality

In this day and age of global sourcing, and the increased competitive battles in the marketplace, product quality seems to be getting its fair share of press. North Americans seem bent on perpetuating the belief that products made in other parts of the world, particularly in China, are of inferior quality, and are even putting our health and welfare at risk. What is particularly frustrating is the fact that the slightest issue of potential quality issues on imported product results in constant and unwaivering assaults on any and all products that are not from domestic sources, yet we seem to have such a high tolerance and forgiving attitudes (not to mention short term recollection) of much more serious incidents here at home.

Let us not forget about some of the major events that have happened in our domestic business world, such as the Tylenol tamperings and most recently in Canada, the escape of unsafe meat products from some of our normally dependable production facilities. These events, I would argue, have had much more serious consequences to our health and welfare here in North America than anything that has come out of China. The fact is, that these situations will happen from time to time, and that is not intended to excuse the seriousness of such events.

One particular event that has occurred in recent times is the "lead paint on the toys" event that has gained so much publicity. What is particularly interesting is that even when the domestic company (who for the purposes of this article shall remain nameless) has publicly taken total responsibility, and has made efforts in the media to ensure that we are all aware that the blame should not be placed at the feet of their supply partners in China, we still tend to ignore this and harp about the "unsafe products" from "over there" that should be avoided at all costs.

Don't get me wrong, there have indeed been instances of substandard quality products coming from China and other low cost labour countries, but my point is there have been just as many instances of the same in Canada, the USA, and every other part of the globe that dares to manufacture products to feed our current over-inflated standard of living.

I am proud to say that in my business life dealing with importing of products from a variety of countries, I have been directly involved in hundreds if not thousands of containers of high quality goods making their way to the North American marketplace. And of those numerous containers, there have been virtually no quality issues to speak of, and of the issues that did arise, it was clear that the responsibility for the shortcoming predominantly rested on this side of the water, and not the other as recent media reports would suggest. In fact, I have been pleasantly surprised, time and time again, at the level of technical knowledge that I've witnessed in uncountable Chinese factories, and the well executed quality control systems that I have had the pleasure of seeing first hand.

I think society as a whole has a tendency to see what it wants to see, when it wants to see it. Maybe it's just human nature, but I think we should all come to recognize that the days of the significant quality gap between production in North America and the rest of the world are long gone.........whether we want to admit it publicly or not.

I remember as a young golfer of 10 or 11 years old (and trust me, that wasn't yesterday) we would pull out our Japanese golf balls that we had found in the woods (because we certainly wouldn't buy them despite our limited financial status) when we were hitting over the water holes. We would constantly argue that those same Japanese balls were probably the cause of us going in the water, more often than not.

How quickly times have changed, and the perception of the quality of production out of Japan. It is only a matter of time until we are faced to admit the same about China, Southeast Asia, India, and the rest of the business world.

Could it actually be the case that these countries are superior to us from a product quality standpoint? However unfathonable that may seem to us here at home, it is certainly a question worth pondering.

It's all about Relationships

Ah..............the good old days. The suppliers would come and visit, almost begging for our business. We, as purchasing professionals, would make them compete with each other, like it was the "procurement olympics", or some such significant event. Then, once we got the best price, despite the cries of misery from the successful candidate, we would proudly announce that it still wasn't good enough, and ask for a kidney, or maybe their first born, just to make them understand that we were in fact doing them a huge favour by even letting them compete, let alone awarding them the business......and we were proud of our accomplishment! We would shout from the roof tops, "I AM A NEGOTIATOR...........go ahead, make my day!"

As society has evolved, so too has our procurement profession, evolving into what we today call Supply Chain Management. We have finally come to realize, that suppliers can do much more for us than shave a couple of points off the purchase price. It is not that we can afford to have a source of supply today that is not competitive, but we are now focused on the big picture...... What can our suppliers do for us to help us be more and more competitive? How can we use their expertise in their specific industry or process, to help us improve our bottom line? What is the true "total cost of ownership", and not just the sticker price? How can they help us gain a competitive advantage and gain marketshare? What is the effect of their product on our operation? What is the effect of their "system" on our distribution network?

As this evolution has taken place, it has become increasingly evident that business is all about relationships. As the Lean gurus at Toyota would say, respect for our customers, respect for our suppliers, respect for our employees..... We want our suppliers to be our partners in business, to help us grow our top and bottom lines. As a result, we need to involve them in our process, to share information with them, and to not treat them like the enemy.

Now I will be the first to admit, that several years ago when I would have sales people come to visit me, and tell me that they wanted to be my "partner"(the buzzword of the day), I wasn't overly enthused about the prospect. In fact, most suppliers at the time were only paying lip service, and what they really meant to say was "I would like to be your partner in business, when it is to my advantage, but would rather not have anything to do with you, when it is not to my advantage". No win-win thinking there..... (Now it is always possible that I may have been a little too sensitive to their comments, and that most of this was in my imagination, but it's my story, so we'll go with my perception of the world, if that's all right with you).

OK, that's enough of the dirty laundry. We as purchasers were not perfect, and neither were the sales people on the other side of the desk. Enough said.

Gladly, we have now evolved to a point where we are actively working at establishing relationships. Not the definition of relationships from twenty years ago, wine and dine to get a PO, but true "let's see what we can accomplish if we work together" kind of stuff. Situations like "I'll take on a little more work which will increase my costs, but it will allow you to save many times my cost, and we can share in the gains". And not only share in the gains between the supplier and the customer, but also share it with others in the supply chain, and reduce the price to the end consumer as well. What a concept!

And it's working. Just look at the price today we pay for many of the things we buy each and every day. There are numerous items that we buy today that have the same and often superior quality, at a fraction of what we once paid, not to mention the value of money then compared to now.

So what does all this mean?

It means that although it is good to challenge your supply chain partners, and to expect superior results and continuous improvement year after year, we need to view these relationships as long term commitments (assuming of course you have done the due diligence upfront and have chosen the right partners), and to do everything we can do as supply chain partners to compete in the marketplace.

Remember, competition today is often competition between supply chains, so choose your partners carefully, but once you have them, involve them, and work as a high performance unit to bring the utmost value to the end consumer, and you'll come out ahead every time.