June 20, 2011
by Bruce Winder
PURCHASINGB2B MAGAZINE: MAY 2011
Sourcing offshore has become an important capability for many companies. If your main competitors are doing it and you are not, you’re probably in trouble.
However, sourcing offshore can bring numerous risks as well as benefits. I don’t need to mention the many benefits—lower net cost, new global suppliers who can bring innovation and new ideas for doing business.
But much can happen on the risk side to disrupt business, such as delivery and quality problems, intellectual property issues, liability and insurance issues.
Most companies decide when they source offshore whether to set up their own infrastructure, buy from makers with local presence or use a sourcing agent. Each has their advantages and disadvantages. In fact, often, firms can find themselves starting out with the latter and progressing through each option until they leverage the former, having their own infrastructure. For those who decide on the agent route one must be careful of potential pitfalls, as we discuss below.
The use of an offshore sourcing agent can add value and be advantageous under the right circumstances. The right agent can offer a full menu of sourcing services under one roof with variable cost. You only pay when you buy and can easily add this cost to your landed cost or total cost of ownership. You can also avoid tying up capital and adding people in an unfamiliar country, with foreign laws and business norms and a steep learning curve. You can hit the ground running and avoid the one or two years it may take to build your own office. You can pay the experts in that country or region to be the experts for you.
Conversely, using the services of an offshore agent can offer unique challenges. Some of the pitfalls you may encounter include:
• perceived or real conflict of interest between the agent and factories or other importers;
• incentive to drive profitable growth vs. growth at any cost; and
• adequate resource allocation and lack of controls.
These problems can hurt a firm through additional cost, poor quality, brand equity damage, legal costs, disruption in supply chain and dilution of differentiated advantages over competitors.
The first challenge speaks to potential real or perceived conflicts of interest. The agent may not have an arms-length relationship with factories. They may have a business or family interest in the suppliers they bring to you.
In addition, you will need to know up front and have clear written rules to determine which other companies the agent represents. To mitigate this risk, firms need to be proactive and ask agents to declare this. It is also healthy to have a direct contact relationship with all makers, even if the agent helps. This way, you can monitor the relationship first hand and watch for odd requests.
Another challenge relates to incentives to drive profitable growth. Driving growth at all costs is very different from driving profitable growth. If an agent is compensated based on volume alone (especially if that payment does not net out returns or defects), this may exacerbate the dilemma. Agents may be tempted to source products that don’t meet your needs or from factories with poor quality or delivery. Agents need to be paid “net of defects” on returns and must have provisions in their agreement for late merchandise.
They need to feel as good or as bad as you do, based on the transaction. Only then will their incentives match yours and your behaviors be synchronized.
The third challenge involves ensuring the agent allocates appropriate resources to your account. It’s easy to showcase top talent during negotiations, only to have your account delegated to a junior sourcing clerk once the action starts.
Agents may skimp on frequency of factory visits, number of vendors they seek for proposals and other tasks. Articulate exact resource allocation in the written agreement. Firms should be specific regarding qualifications and level of personnel working on and managing their interests. It’s easier to haggle over these issues before inking the deal.
Ensure proper controls
A fourth potential issue revolves around lack of controls. This means having someone outside your company managing your global sourcing. Sometimes companies live in front of a sourcing firewall when they have an agent, and reporting can be suspect or non-existent. Key metrics may not be measured or may not exist.
This can create problems getting a feel for productivity measures, vendor performance, vendor over and above collections and relationship satisfaction between you and your supplier. Companies can measure KPIs and use corresponding action for each KPI if they meet certain thresholds. Organizations can also create a scorecard agreed upon by the firm and agent.
Using an offshore agent’s talents can work well. But one of the keys to success is taking the time to review expectations up front, in detail, and to commit to these in writing through a formal service level agreement with reinforcing financial and non-financial repercussions. Taking the time to act before the agreement is solidified will pay off later. b2b
Bruce Winder, MBA, is a retail executive with over 20 years of experience in merchandising, global sourcing, capability building and leadership. Reach him at firstname.lastname@example.org.