August 22, 2016
by Michael Power
From the August 2016 print edition
For many Canadian companies, global sourcing has become an essential and ingrained part of their procurement practices. But while offering many advantages, sourcing from overseas is also replete with risks that can potentially slow down supply chains, cut into profits, obscure visibility and jeopardize a company’s brand. At the same time, business has become more complex and developments in technology are changing the way organizations operate, including their global sourcing practices. So how should procurement navigate the often-turbulent international waters of global sourcing?
Twenty years ago, China was the go-to location for low-cost sourcing. But that situation has shifted—at least somewhat—with slightly diminished advantages from seeking inexpensive goods there, says Garland Chow, associate professor emeritus, operations and logistics division, at the University of British Columbia. Exports from China to the US, for example, were once in the double digits but have more recently fallen to single-digit numbers. At the same time, the amount of sourcing that US companies are doing from the NAFTA countries of Canada and Mexico has increased—in the meantime it’s fallen from Asia (from eight percent to three or four percent). “There’s been a slowdown,” Chow notes. “Offshore will always be there, but the growth is slower.”
The decline in the growth rates in sourcing from China began around 2010. But even before the Great Recession, Chow says, the economics hit a break-even point between China and other locations. Part of the shift came from transportation costs, with fuel prices climbing in 2008 but capacity still in excess. Then, a fuel glut has meant that the cost of getting products from Asia to a port of entry in North America has declined, but costs associated with domestic transportation have increased, says Chow. The increase isn’t a direct cost, but rather shows up as a result of delays and congestion. For example, rail has experienced trouble on the West Coast—as has the LA-Long Beach port—which can make getting goods to their destinations slower.
And while some of the focus has shifted from China to other countries such as India, Asia overall—China included—does remain a viable destination from which to source, Chow says. Competitive prices have been the driving force towards these alternative locations, but underdeveloped infrastructure still presents a challenge.
Other roadblocks emerge when sourcing from regions like South Asia, Chow notes. Several clothing manufacturers won’t buy products from certain countries out of fear their image risks association with poor working conditions. That’s been especially true since the 2012 fire in the Tazreen Fashion factory near Dhaka, Bangladesh. The disaster killed at least 117 people and injured over 200 more, making it the deadliest factory fire in the country’s history.
The perception of sustainability and corporate social responsibility can be paramount, depending on the product. Companies that market hygiene and personal care products, for example, base their image around being good corporate citizens, Chow says. At the same time, they must search constantly for new fragrances and products, often from small farmers in rural areas overseas. These suppliers can be tough for an organization to certify and evaluate, and the need for novelty drives a constant search for them. Part of the solution lies in visiting the locations that are supplying the products and establishing relationships, Chow says. Such relationships can include helping those suppliers improve the sustainability of their own operations—a practice in which coffee and chocolate companies have long engaged.
These days, the amount of global sourcing that he sees is on the rise, says Calgary-based Jerome Ferber, strategic procurement manager at Versen Energy Infrastructure—but working to meet quality standards can be a challenge. Ferber notes that the costs of doing business with some regions can also be an issue, largely due to increases in local wages and transportation. Longer lead times can mean maintaining more inventory, while moving towards shorter lead times to reduce on-hand inventory—for example, through a just-in-time (JIT) structure—requires quicker transportation. That means turning to the more costly option of air transport.
“This does reduce the time significantly, a ship is four to five weeks whereas a plane is 10 to 12 hours,” Ferber notes. “This translates into less inventory but a higher transportation cost and more frequent shipments. However, it also means quicker to market, sales and revenue.”
Technology can increase visibility, Ferber says, which is key to forecasting, planning and scheduling, as well as proper customer service. But technology also comes with a cost, and it must be both reliable and current. Ferber sees an increase in technology use in the global sourcing process in order to enable that visibility. Proper forecasting is also needed to enable shorter lead times, as well as reduce transportation and inventory carrying costs. This all requires training through organizations like the Supply Chain Management Association (SCMA), Ferber says.
John Bermudez, vice-president of supply chain at Infor, agrees with Chow that costs associated with sourcing from China have risen in recent years. As many companies are becoming more international, they’re growing global sourcing efforts and shifting to locations like Vietnam and Indonesia for certain products. An increasing amount of global sourcing will happen in Southeast Asia as the region becomes more stable, he noted. “Like any other shift it’s starting with less complicated items—apparel, footwear, those types of things,” Bermudez says. “It’s followed by less complicated tech products. It’s really no different from 25 years ago when stuff started to shift away from Japan to China. The simpler stuff moved there first, and as the manufacturing capabilities of those regions improved then you’ll see more complicated products shift there.”
In the short term, visibility has challenged many organizations as supply chains have lengthened to accommodate an international reach. And depending on the product, late deliveries can be costly. Take, for example, a fashion retailer or manufacturer making one-time buys for a fashion season—if the company wants to bring in fall fashions but the clothing arrives in September rather than August, that’s two weeks of back-to-school sales lost, which can be costly. “We see more companies going with higher-value items that are very time-sensitive—like high-end fashion items—using more air freight,” Bermudez says. “But there’s a need to have that visibility to what’s coming in because you need to make decisions. What if you’re a manufacturer and these are key components going into something that you’re making, what is the change in delivery date going to do to your ability to promise this to customers? If you’re a fashion and apparel company, you’re always worried about agreements with retailers and their sensitivity to selling days and getting it in on time.”
It’s not only fashion and apparel companies, Bermudez notes. Pharmaceutical companies, for example, often want to know where everything is. “There’s a recognition that the global supply chain is a reality but you have to manage it,” he says.
Technology helps in dealing with these challenges. Easy-to-use, cloud-based networks can keep companies up-to-date regarding shipment location by constantly supplying updates. Infor’s cloud-based global commerce platform, GT Nexus, for example, has close to 30,000 suppliers on the network that feed the system updates on product status they provide. When goods leave the factory, the time of arrival at port and other information is now available in real time through the cloud.
Technology now offers previously unavailable insights into where a product was manufactured, or “assurance of supply.” After the 2012 fires in Bangladesh, many global brands released statements saying they didn’t produce goods at the Tazreen Fashion factory or similar facilities. But it can be challenging to trace products, and some suppliers were outsourcing to sweatshops, unbeknownst to those organizations. But technology can improve traceability, as smartphones provide first-piece inspection through videos and updates during order production. “Global sourcing, coupled with better technology, can starve out those types of sweatshops because we can ask for video and pictures,” Bermudez says. “We can know that the video came from a smartphone in a factory in Kuala Lumpur, not Bangladesh. And if it is in Bangladesh, we can get a factory that’s safe and treats its workers well.”
Michael Shelton, director, strategic supply chain management, Electrovaya Corporation, notes that 3PLs and ERP providers are moving towards the cloud to obtain visibility into shipments. Lower oil prices have made freight costs more attractive, Shelton says, while the shipping industry has consolidated so overcapacity has helped promote that good pricing. If oil hit $300 per barrel as once predicted, the re-shoring trend would likely have been stronger, Shelton notes. China remains the main provider he sees of globally sourced goods, while other locations also play a role. Taiwan is a strong goods provider but at a higher cost than China; Vietnam is popular for textile products; Mexico is still robust and low-cost European countries are also becoming popular sourcing options.
To mitigate risk, Shelton recommends due diligence on supplier selection. Depending on the situation, he advocates performing a “desktop audit” of potential suppliers. For Electrovaya, that includes a seven-page questionnaire with certifications provided, such as ISO registration numbers. Such audits take about a week to complete, but don’t always reveal potential issues that dealing with a supplier may result in. A physical audit of a supplier that involves a team site visit—including standard questions for suppliers to answer—can take up to three days, Shelton says. Visits can either be done in-house or by a third party.
He also recommended looking at quality systems a supplier uses, such as ISO or TS, and validating them to ensure what a supplier has registered is legitimate. Import compliance should also be considered when dealing with overseas suppliers, since a country could be on the federal government’s list of nations that Canadian companies can’t trade with. Companies should also investigate the geopolitical situation of a region they’re considering sourcing from. Certain products or commodities may also have import duties attached to them, so check into them.
“An example is anti-dumping,” Shelton says. “Years ago I was dealing with a supplier, buying hardware items. All of a sudden, we got notification from CRA that because they were dumping product into the country at pricing less than (it was being sold) domestically, they put 100-percent duty on it. We had to rerun our total cost of ownership and obviously dismiss that supplier from our approved vendor listing.”
Overall, global sourcing continues to play a role in supply chains and the practice is unlikely to vanish. Companies should ensure they consider as many factors as possible, including total cost of ownership, if they plan to source from overseas.