Symphony Consulting Newsletter – Q1 2004
"Sourcing and Supplier Management in the Far East"
As the center of gravity for manufacturing activity shifts to the Far East,
US companies are finding that migration to this region of the world presents
both opportunities and challenges. The opportunities are more obvious and
center around the ability to have products manufactured at significantly
reduced costs. What is less visible, particularly at the onset, are the challenges
that come with having your products built offshore. Here are a few of the
most common challenges and what you can do to address them:
-
Finding the right supplier: No matter how complex or simple your products
are, your suppliers need to perform to your expectation for you to be successful.
You want to find a supplier that can deliver consistent results through a
proven process. It is hard to make an informed decision based on samples
and brochures. Even if you are confident that you know the manufacturing
process, an equally important but less obvious facet of a supplier is its
decision making process. Do you know the key decision makers? Do you understand
where you stack up in priority relative to other customers? What is your
escalation path beyond your daily sales contacts and to the executive management?
Before awarding business, you must know your suppliers. It can be an unpleasant
surprise to realize that the supplier that you just selected is going through
significant management changes, has been awarded business by a customer ten
times your size that will take up most of its manufacturing capacity, or
is considering moving a key part of its manufacturing process to another
location or a subcontractor. Awarding business to an offshore supplier where
there are different legal, cultural, and business issues to consider requires
a lot more due diligence and investigation than doing so domestically.
-
Managing across time, distance, and culture: The process of managing
a supplier (i.e. setting expectations, monitoring performance, driving continuous
improvement) can be difficult with a supplier next door. Add to that ~15
hours time lag, ~7,000 miles, different languages, and some fundamental cultural
differences and the task becomes much harder. This challenge is magnified
during transitions (new products, significant forecast changes, etc) or crises
where the elements of time, distance, language, and culture work against
you in unforgiving ways. Mistakes, misunderstandings, and time delays can
hurt your company and have a negative impact on financial results.
It is
critical for you to have on-going and effective communication with your
supplier. The more important the supply relationship, the higher up
you will want to go in engaging the supplier’s organization. Build
support at these upper levels before you need it. In many cases, the higher
up you go in a company’s management team, the less familiarity
there is with the English language and the Western culture. This is due
to the
fact that speaking a foreign language is more common among a younger
generation that has not yet made it to influential positions. If you
cannot be there
physically because of time or expense constraints, find ways to make
certain that the communication is more effective.
-
Ensuring on-going competitiveness: The driving force behind the transfer
of manufacturing to the Far East is cost competitiveness. Most US companies
decide to take this route in response to margin pressures. Unfortunately,
some of these companies rush through this exercise and are surprised to see
less bottom-line benefit than they expected.
It is important to fully account
for the total cost of doing business in the Far East and make sure that your
sourcing strategy continues to offer
you the competitiveness you set out to achieve. Consider transportation costs
under a variety of scenarios. Initially, a landed cost that looks great on
paper with 100% ocean transportation, starts to look unattractive with just
10-20% air shipments. When using ocean-freight, factor in the cost of inventory
on the water or delayed responsiveness due to the extended transit time.
You must also include the additional overhead costs and travel expense that
it will take to manage the long-distance relationship successfully.
The world
is changing and most companies have either started sourcing products in the
Far East or are considering it. Managed appropriately, you can realize
significant savings for your company. With the idea of helping companies
achieve their potential in these endeavors, we launched Symphony Far East
to handle sourcing and supplier management activities throughout the region
for US companies. Our staff, headquartered in Kuala Lumpur, Malaysia, is
comprised of individuals who are multilingual, particularly in Chinese dialects,
and understand how to do business in the Far East.
