Mitigating the risks within the global supply chain
April 21, 2014
[April 2014 print edition]
These days, supply chains are faster and longer, and companies have become accustomed to sourcing abroad for a competitive advantage. Many are familiar with sourcing in China, while Asian countries like Vietnam, India, Bangladesh and Thailand have grown as sourcing destinations. Latin America and Mexico are also rising in popularity.
But global sourcing involves risks as well as rewards. Natural disasters, factory fires and other events have highlighted risks to an organization’s reputation, efficiency and bottom line.
To explore these risks and how to mitigate them, PurchasingB2B held a panel discussion at the Cargo Logistics Canada Conference in Vancouver, January 29-30. The discussion touched on trends in global sourcing, steps to minimize the hazards and tools and resources available to deal with them.
On the panel were: Bruce Winder, president of Bruce Edward Winder Consulting Limited; Warren Sarafinchan, vice-president of supply chain/information services at SunRype Products; and Joshua Kroeker, assistant vice-president, business development—global trade and receivable finance at HSBC.
China and Asia
The panel looked at China, along with the risks and rewards of sourcing from that country. While the country remains a “powerhouse” in terms of where many consumer products are made, whether it’s a suitable destination depends on the commodity being sourced, said Winder. But organizations can definitely save money by looking to China for goods or services.
“You really have to know what you’re doing, though,” he said. “You have to understand the total cost of ownership—and there are a lot of inherent risks.”
While China will remain a viable sourcing option, other Asian countries such as Vietnam and Cambodia will become more popular. “You’re already seeing that for certain commodities where it makes sense,” Winder said. “If Vietnam has a number of natural resources in wood, you’ll see a lot of wood products coming out of Vietnam.”
Winder stressed labour as a reason for the narrowing gap between China and other Asian sourcing destinations. As the country’s middle class grows, China’s wages are increasing. Oil costs have also risen, which affects everything from raw materials to transporting products to North America. “Then, you also have to look at the changing foreign exchange rates, as well,” he said. “If the RMB strengthens and the Canadian dollar strengthens, and the US dollar, those are all in play. We went from having sort of an on par Canadian dollar to the US dollar to having to add another 10 percent on when you land products now. That’s not just China, but those are just some of the things you look at when you look at your total line of cost.”
China remains an emerging market, which means the country is still learning and developing its banking system, rule of law, transparency and intellectual property, Winder noted. Quality management also remained a concern. “Part of it is because it’s so far away,” he said. “By the time you have a problem and it ends up in North America you may have already paid the supplier.”
Kroeker agreed that China is changing rapidly from producing low value-add goods to higher value-add products, often with a higher technology component. Chinese manufacturers had done well in building relationships around the world to ensure they can deliver a higher quality product. As well, currency issues factored strongly. He routinely asked customers whether Chinese suppliers still want to be paid in US currency, since that’s expected to shift dramatically in the next five years. In the future, he said, those suppliers will want to be paid in RMB instead. “How can that (shift) benefit you and how can that benefit your supplier?” he said. “I think that’s going to be a trend over the next few years.”
Relationships are also important with Chinese suppliers, he added. Those sourcing from China can run into trouble if they look to Chinese suppliers for occasional or one-off orders. “You need to make sure that your suppliers and your entire supply chain realizes that they can make more money by giving you the right products at the right time with the right quality, on an ongoing basis,” he said.
While several other Asian sourcing options exist, where you look depends on what you’d like to source, Kroeker said. Bangladesh, for instance, is a “textiles powerhouse,” that makes lots of fabrics, T-shirts and related products. But the market is very different from China, as are the risks, he noted. For example, it takes much longer for documents to get through Bangladesh’s system than through China’s, and the list of banks that Canadian organizations can deal with is limited.
One potential risk, Kroeker said, involves sourcing professionals getting a tour of one factory, when in reality the goods are made in another facility. This has been a problem in Bangladesh, he noted, and to avoid the situation banks are asking more questions of their clients to understand their supply chains. “It’s not just a CFO and CEO meeting anymore, we want to talk to the purchaser—the supply chain people—to make sure we understand that the supply chain risks are being managed before we get involved in any sort of financing,” he said.
Up-and-coming locations like Bangladesh, Vietnam and Cambodia can have underdeveloped infrastructures compared to China, said Winder. That can increase lead times for goods, he noted. There can also be risks associated with rule of law and intellectual property management. “In some cases, folks actually have to import raw materials from China or other countries into these secondary countries, and that takes time and adds costs,” he added. “It’s not just labour that’s a risk; it’s also how you manage inputs into production, rule of law, infrastructure and other issues.”
A rigorous methodology for factory and product assessments can help mitigate some of those risks, he said. Never buy without visiting the factory and asking questions. Find out how much production is outsourced and visit local raw material makers, he advised. For example, when sourcing bikes, he used to visit the factory that made the handlebars, chain and wheels to understand better how the finished product came together.
Supplier relations are key, added Kroeker, who agreed that asking suppliers questions cut risk and helped minimize miscommunication. Documentation can also help ensure safe supply chains. “Using letters of credit, using inspection certificates, all of those traditional ways of managing risk are going to be very important,” he said. “But nothing will take the place of a good relationship.”
Closer to home
While Asia remains a popular sourcing destination, other places have also resurfaced. That’s given rise to practices like near shoring, which Sarafinchan said applied to bringing some of that sourcing volume back to North American locations. When challenges arise—especially when with large products or volume—responding can be slow or expensive. Establishing proper relationships with international partners can result in a well-functioning global supply chain, he said.
“Where it doesn’t, I’ve seen products come back onshore,” Sarafinchan said. “There are advantages to both strategies; in some cases sourcing domestically makes better sense for an organization. And in some cases it really depends on your company.”
Whether an organization chooses to source locally, across North America or globally, it pays to understand the total cost of ownership involved, he said. The costs of duty rates, for example, can take supply management practitioners by surprise. “Those dollars start to add up,” he said. “And once you establish that supply chain it can be really expensive to push the undo button. Making sure you do the due diligence up front is key.”
Nearing shoring is especially effective for products where lead times are king, Winder noted. Tapping a Mexican supplier rather than sourcing the product from Asia can see the time drop substantially. “If something goes wrong it’s a lot easier to take a five-hour flight down to Mexico and check it out—or Alabama and check it out—than to go to China,” he said.
It’s possible to successfully source both at home and abroad, added Kroeker. Organizations sometimes do the prototyping and customs processes locally, then offshore for large-scale manufacturing work. “As long as your product doesn’t have a lot of IT that you’re concerned about, it’s a very, very good way of doing it in terms of giving good customer service, but also being able to get the sort of large-scale manufacturing overseas that just isn’t available here all the time because we don’t have the skilled people to do a lot of the high-tech manufacturing,” he said.
Regardless of destination, organizations can use best practices to mitigate risk. Factors to consider when sourcing nearby can be transferred to international sourcing, Sarafinchan noted. He also recommended investigating an organization’s statements to understand its financial situation. It pays to meet with not only sales staff but also with the organization’s senior team and R&D department, he said. Asking for KPIs and to tour their facility can help determine whether a supplier is a good fit. “Spending as much time as you can spend with a prospective vendor—wherever they’re based—is key,” he said. “In some cases you’re entering into long-term relationships and you want to make sure those relationships will be ones that are good for both parties.”
Winder advocated taking it slowly at the start of a relationship with a new vendor. From the beginning of the process to receiving the first shipment usually takes from a year to a year-and-a-half. “If you’re doing it quicker than that you’re probably missing a few steps,” he said.
Winder also recommended starting by building a global sourcing strategy that looks at where the organization plans to buy, from which suppliers and so on. From there, do supplier assessments and narrow down the list of potential vendors. Think about the sourced product and its specifications before putting out an RFI or RFQ, Winder recommended. This process builds towards a sourcing trip where an organization can visit key manufacturers, build relationships, look at sub-contractors and so on. Organizations can then build a sourcing plan, which is contingent on numerous factors. “There are a lot of things you do and a lot of best practices; it’s a long process and very detailed,” Winder said. “You can save a ton of money and make material gains for your company, but you have to do it right—and you need help to do it.”
Kroeker noted that some Canadian companies develop an ownership stake in an overseas manufacturing facility. Doing so aligns supplier and buyer interests, he said. But he cautioned that even companies that own an overseas manufacturing facility outright must check that operations are running properly. “You still need to have certain things in place to make sure that everyone is doing what they’re supposed to,” he said.
Sarafinchan stressed the importance of building the right team to assess a new supplier—procurement alone wasn’t enough. Operations, finance and quality departments should be involved in looking at whether to bring a new vendor on board. “Don’t underestimate the complexity of setting up a new supply chain,” he said. “Ensure you’re getting the right supports. There are lots of global logistics companies out there that can help you.”
As well, don’t lose site of global sourcing’s positive outcomes, like growth, Sarafinchan added. Communicate to suppliers that an initial order could lead to more future business, he said. “If you can let them know that that’s your plan, that’s going to go a long way in building that relationship.”
Establishing a vendor agreement that is balanced and treats vendors fairly is useful, Sarafinchan said. When doing business in new regions, get appropriate legal advice, since the rule of law is different depending on which country you’re sourcing from.
While such agreements were critical, Winder warned, in some countries those agreements weren’t especially enforceable. That’s why relationship building remains important. “If you build a win-win relationship, usually the supplier will help you out if something goes wrong,” he said. “Agreements are good just to clarify it.”
As well, it’s important to understand the culture of the sourcing location, Winder added. In some countries, for example, it’s rude to say no. A supplier who nods his or her head through an entire meeting might not actually be agreeing to everything being said. That’s why it pays to get agreements in writing, he noted.
The panel also discussed component traceability and the global supply chain. With events like deadly garment factory fires in Bangladesh recently, companies have more public pressure than ever to ensure their supply chains are ethical and socially responsible, said Winder. That includes not just operations at overseas factories, but the raw material inputs into that facility. That’s why auditing factories is so important to ensure an ethical supply chain. “You need to do your homework and buy from folks who buy into that—and you have to police them,” Winder said.
Such due diligence has moved from a “nice-to-have” feature to a mandatory one—even with banks—noted Kroeker. For example, to open a bank account, organizations are run through several searches to ensure there are no hits related to child labour or other negative characteristics. “This is kind of the new normal in terms of the way the world is going, and I think it’s a good thing,” Kroeker noted.
Ultimately, it’s neither possible nor desirable to eliminate global sourcing risk completely, the panel agreed. But it’s important to understand what the risks are in order to manage them. As the panel discussion highlighted, mitigating risks can lead to rewards within any sourcing strategy.