Thursday, October 20, 2011

Sourcing in low cost geographies

When you have been involved in procurement for as many years as I have, you’ve seen the migration of low cost sourcing continue to move to different countries and new suppliers. For the industry I was in, I saw movement from Taiwan and Hong Kong to Singapore, then to Mexico then Korea along with a number of countries and currently with China and India. In certain industries there have been migrations to other low cost locations.

Other than governmental rules and regulations,the problems you face each time are pretty much the same. How do you know the supplier is real? Do they have the capability? Is there product high quality? Will they ship on time? Do they have the financial assets to perform? Are they doing the work or are they sub-contracting to the back-alleys? Do they have the legal right to manufacture the product, etc.?

In a recent post on LinkedIN there was a simple question raised: "Being a sourcing manager how to verify your supplier without an on-site visit". There were a large number of responses that fell into four categories. One was you need to do much more than just an on-site visit. A second was that buyers absolutely needed to do a site visit. The third group was individuals providing suggestions on how to do it. The last group was responses from companies that wanted to function as your purchaser or sell you a service. Those responses were from individuals and companies that want to sell their buying services or sell inspection and on-site audit services for both qualification and management. It’s this last group I want to discuss first.

There was a store I would go to on occasion that had a sign I remember “In God we trust, all others pay cash”. That sums up my attitude that unless the person is from my company or from another company or supplier where I know and trust their opinion because they have earned it, I don’t just trust what people say. To purchase products or services from a third party you really need to do due diligence on that company as much as or even more than the Supplier itself. While there are reputable companies that perform these services, there frequently are also a large number that may not be reputable or have the capability they promise. In addition to their fees they may also be working kickbacks from the suppliers for either giving them the business if you were to have them do buying or kickbacks for looking the other way and not providing you with the service you need.

The other problem with having someone purchase materials is none of these companies are authorized channels of the supplier like an authorized distributor would be. What this means is you have no privity of contract with the supplier in the event of a problem. Most suppliers don’t allow third parties to pass on the terms they received in the purchase to their customer so any warranty wouldn’t come from the supplier, it would come from the buying company. When you buy through these types of companies its like buying a product on an as-is basis with no warranties or indemnities.

As to the other groups, my own opinion is that what you need to do in qualifying suppliers is clearly dependent upon the risks you would have if they failed to perform. For anything but very low risk, low cost and low volume situations I would always recommend both significant due diligence of the suppler, product samples and on-site visits.

I have written a number of posts that I would recommend reading

Supplier financial analysis – January 26, 2011

Supplier risk - pre-qualification of the supplier risk – January 26, 2011

Supplier surveys – common questions to ask and why August 12, 2011

Lastly I would strongly suggest reading "supplier qualification or vendor validation use in negotiation" dated August 8, 2011. On-site visits allow you to add two additional dimensions to the qualification process that you can use in both making sourcing decisions and in negotiations. The first additional dimension is “what is the cost impact of what I see in their operations”. You use that in both negotiating cost but also identifying whether the Supplier will be capable of delivering future price reductions and that is something you would want to know if you planned to use the supplier for the long term. The second additional dimension is what problems do I see form the site visit. Get a tour of their entire operation from raw material incoming to final shipment. You use the information about problems to potentially eliminate them as a source. You can use it to get commitments negotiated into your contract to make sure you don’t have those problems or you have appropriate controls and remedies if you do. You can also use it as leverage to get a better price versus their competition. If you don’t have the skills to understand and evaluate what you see, bring someone along who does and learn from them what you need to look for.

If you learned from this post, think about how much more you could learn from the book.
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