Global Sourcing and Logistics

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Key challenges With foreign direct investment climbing year-on-year by 25.4 percent and exports growing at 16.5 percent, China is rapidly becoming a global economic powerhouse. Currently ranked as the fourth largest exporter in the world, China has quickly become a benchmark option that no procurement executive can afford to ignore. A key question for senior executives considering a global sourcing and logistics strategy is whether the time and effort invested in setting up an international procurement organization in China will yield the expected returns. The short 6 answer is yes. More than 70 percent of companies that set up international procurement organizations in China believe that the ventures have met or exceeded their expectations. Surveys of procurement executives also confirm that executives view highperformance procurement organizations in China as a fundamental part of a global sourcing and logistics strategy. Many companies plan to double their expenditure in low-cost countries over the next three years and expect to reap the benefit of even greater savings. 4 Accenture's broad experience coupled with the insights we have distilled from continuous research enable us to successfully address many of the issues on the road to profitable global sourcing and logistics. Those issues include: Information and certification integrity Companies that contact suppliers in countries such as China with requests for proposals often receive initial quotations and quality assurances that are hard to resist, only to find out further into the process that those statements are frequently misleading or incorrect. For Western companies, integrity is therefore a serious concern. English or foreign language proficiency Although many suppliers in low-cost countries have English-speaking sales people, difficulties can arise when they need to interact with Western executives to discuss technical intricacies. Key personnel
at low-cost country suppliers do not always have sufficient command of English or of other Western languages to engage in lengthy or detailed exchanges. Using translators is one option, but they often do not have the technical background to address industry specifics. The risk of misunderstanding and communication impasse cannot be underestimated. Industry standards not synchronized with international standards Sharing drawings with suppliers who may use different technical standards can result in delays while the situation is evaluated and the differences clarified. Once again, misunderstandings may filter into the scenario. It may take low-cost country suppliers an inordinate amount of time to understand written text explanations of required industry standards that may be self-explanatory in the West. Industry standards that are not synchronized with international standards—or with your expectations—can cause costly delays. Risk management on delivery continuity Longer lead times that result when sourcing from countries such as China and India require companies to adopt new approaches to risk assessment and mitigation. Many Chinese suppliers lack international trade or export experience, are unfamiliar with Western terms and conditions that offer the best pricing, and are not experienced with export requirements. Few export under the Delivery Duties Paid (DDP) formula, preferring Ex-Works instead. 5 Western companies have to pick up the transportation costs and work with thirdparty logistics operators to secure the best terms. Western companies must also address the issue of payment terms. Asian suppliers rarely agree to 60 or 90 day terms with a new customer or early in a new relationship. Their initial offer is typically 30-days prepayment. The negotiation gap is therefore considerable and can heavily impact budgeting and revenue. Underestimating the true total cost Business cases may suffer if total cost models do not have all cost elements within their scope. Time-to-benefit statements can often be overly optimistic. The time and effort necessary to build relations with suppliers, conduct product and production testing, integrate suppliers in the supply chain, and accelerate the physical material flow can seriously impact the overall picture. Total cost of ownership models do not take into account the potential for quality problems during the production phase, or the risk of increased warranty costs. Lack of a holistic supply chain view In recent years, supply chains have systematically improved in the Western world. Low-cost country suppliers, on the other hand, lack experience with the most modern processes and are often unfamiliar with the high standards required, such as sequence deliveries combined with just-in-time, vendor-managed inventory solutions or electronic data interchange communications. These supply chain aspects are important when determining which categories can be appropriately sourced from suppliers based in low-cost countries. Limited high-quality research and development capabilities While research and development capabilities at low-cost country suppliers are improving, they are still below Western standards. Building a relationship with a strategic partner who will be fully integrated within the development process is a challenge. It can take time to secure understanding and trust. Collaborative information technology supporting the product development process may not be optimal due to failure to rapidly meet the demands of innovation. Internal organizational barriers When sourcing in low-cost countries, there is a clear need to ensure that the internal organization has been adapted to suit new circumstances. For example, sourcing in low-cost countries creates a number of change management issues. Internal buyers who have spent time and effort fostering their existing supplier base are often reluctant to begin the relationship-building process again, especially since they will need to accommodate often considerable differences in cultures and time zones. Accenture is increasing its commitment to the Chinese market, with seven offices, and 50 classes from the Supply Chain Academy translated into Mandarin Chinese. Accenture should be on the shortlist of consultancies when looking for business consulting expertise in Chinese procurement, sourcing of local suppliers and setting up offices in China. AMR Research 2005, ‘Random Notes for November 11, 2005,’ November 2005 4 Source: European Leaders in Procurement by Steve Wilson and Jamie Bolton, Fall 2005 5 Source: http://www.iccwbo.org/incoterms/ 7
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Global Sourcing and Logistics

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