Sunday 17th Dec 2017 - Logistics Manager

Buying into Sustainable Global Sourcing

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Although the attendance was severely affected by snow, February’s ‘Supply Chain Standard’ Round Table, in association with IBM, managed to tease out a number of supply chain questions and challenges posed by global sourcing. (Dr Carlos Mena, of Cranfield, has appended some of the views he would have put forward [in square brackets] to help ballast the discussion).

One obvious and topical question is at what point will people strike the balance between the benefits of sourcing from low cost countries, and the ‘carbon cost’ of increased transport? Peter Cunningham (see panel for participant details) noted that Stuart Rose of Marks & Spencer had recently been asked that question on the BBC and had said in effect that while M&S is doing a lot of good things environmentally, ‘we are a business that has to make an offer to the customer’. But even in the past few months, said Cunningham, there has been ‘a rush’ to get control, measurement and reporting around the carbon footprint, as a crucial part of the business case.

[Carlos Mena comments, ‘That’s right. People are just starting to talk about carbon costs and carbon exports, but there is a lack of understanding about how to measure it. Many companies are looking into Life Cycle Analysis and other techniques to assess the impact of their sourcing decisions, and Cranfield is currently developing a model to help companies understand the CO2 implications.’]

That requires investment, said Michael Storey, and all depends on the quality of the statistics. Is it really true that a fully loaded aircraft is ‘better’ than a Mini because it emits less per passenger kilometre?

Traditionally, the retailer markets a proposition to the consumer – it may this time round be the consumer, that ‘educates’ the retailer. Steve Leng saw growing awareness by retailers of consumer concerns in ‘globally sourcing’ products , but at present the momentum is still towards sourcing in the Far East. ‘Everyone looks at Walmart and says “we’ve got to be in that game” – everyone is developing and staffing overseas procurement offices’.

Nick Allen suggested that while the potential for consumer-driven action over ‘food miles’ is obvious, the same pressures may not be apparent for manufactured products, electrical goods and such. But Storey suggested that, in the automotive industry for example, choice of transport modes is high up the agenda. ‘A rail connection, especially for outbound movement, is one of the top things on the list. Trucking is visibly “damaging”, and also firms believe that legislation will have increasing impacts on trucking so firms will have to be less reliant on that mode’. Location decisions have to look at transport, not just cheap labour and cheap land. In particular, as the ‘coastal belt’ of China is becoming saturated – even to the pint of experiencing skill shortages – low cost opportunities are moving further inland. The ability of such companies to make an offer on the Internet is unparalleled – but if road access is only negotiable by yak…?

Reverting to ‘food miles’ the panel discussed the ‘food labelling bunfight’ and the possibility that messages about food miles may ‘get lost’ in the welter of other information about salt, fat, E-numbers and so forth. Leng suggested that food retailers do see getting the right messages on the label as a point of competitive differentiation, but asked Cunningham, who will foot the bill? And are they going to get enough additional revenue back and over what time period? It took 15-20 years for the recognition that customers were becoming more demanding fully to translate into the physical supply chain. [Mena comments: Labelling is important, but food miles are not the issue; impact on the environment is. There are studies showing that producing tomatoes in the UK generates more CO2 than shipping them from Spain, because the latter don’t need heated greenhouses]. A similar conflict, which the reactor, Sam Tulip, brought up, was, topically, Valentine Day roses – is organic, Fairtrade, but shipped from Africa (as in the current Waitrose offer) ‘better’ or ‘worse’ than hot-house grown closer to the market?

But Leng insisted that, whatever consumer pressures may be emerging, ‘global sourcing is still the Wild West for retailers – there are large opportunities on costs out there and many retailers are still at the starting gate’.

The question, he said, was how do we make this work for us, and how manageable is global, and so probably somewhat decentralised, sourcing given a centralised corporate culture? How do overseas and domestic organisations work together? Who makes the decisions? And who arbitrates between separate organisations with separate ways of working?

Some retailers, in Cunningham’s view, are already effecting global transactions well. ‘Everyone is at a different place, but some are now at the point where they are looking for connectivity across the whole supply chain and are asking consultants about the designs and costs required. The concept has been bought into, firms are asking not “why’ but ‘how”,’ [and Dr Mena confirms from Cranfield’s research that most companies still expect to increase global sourcing in the future].

Quality improvements
Radically improved performance by lower cost sources is also driving the global sourcing train. Leng claimed that Quality has improved dramatically, with retailers putting much more resource into putting quality teams ‘out there’, inspecting and rejecting goods and processes. One driver, he suggested, is the better use of scorecards around supplier performance, and although most retailers are still trying to put the right scorecard together for end to end global performance, this will drive a step change in performance. Also critical, in Leng’s view, has been better, more detailed and tighter product specifications, worked out directly with the supplier, not intermediated by agents.

That raised the ‘million dollar question’ – do I need to have my own people on the ground? Cunningham said the feedback his firm receives is that it is imperative to have direct reports on the ground, although those could be third parties. Leng added that it is both instructive and influential that both Walmart and IBM (his own company) have their own procurement offices in China. But product quality is only part of the equation. Cunningham said, ‘The other part is those elements of quality that enable supply chain operations, for example, labelling, track and trace capabilities, perhaps RFID application. We have to enable the information flow and turn it into an operational reality’.

[Dr Mena comments: ‘The academic view tends to be that presence on the ground is very important. Most large companies have procurement operations in the sourcing regions, but smaller companies can’t afford this – trusted third parties might be a solution, and this could indeed be an additional service provided by 3PLs’.]

But should retailers give control of the supply chain to third parties to implement track and trace and the rest, or manage it themselves through leveraging their own technology? A live issue, suggested Leng, and Cunningham admitted, ‘We’ve been challenged – “are you going to take over my supply chain?” – we can do that, but practically it isn’t going to happen, if only for obvious reasons of self-preservation. You don’t take it over, but you find practical ways to help them create connectivity in their systems and organisations’.

But as Michael Storey pointed out, ‘There is certainly a need for us [the logistics service providers] to provide more visibility and connectivity – but where’s the difference between visibility from Vietnam, or visibility from 50 miles down the road? These things are most important where there is the greatest consequential loss, for example stopping the line. The issues aren’t about geography, they’re about risk and loss. The control our clients are asking from us over longer distances is only what they’ve been doing themselves over shorter distances for years. Retailers possess a lot of the skills already – in theory they should be able to ‘cut and paste’ these to new sources and geographies’ [although in practice, as Dr Mena and those at the Round Table agree, local cultures, laws and regulations may prevent this].

A classic response to risk is to increase inventory close to market. Is that an observed consequence of global sourcing? In one way, suggested Storey, the lower prices on goods almost automatically allow people to accept greater inventory levels. Distance itself isn’t key, uncertainty is what drives inventory. You can supply right across a continent with no demurrage issues and so plan to low inventory levels. A much shorter passage with a deep sea leg (for example, North Africa to Europe) may have much greater uncertainty attached. [Mena notes that while higher finished goods inventory levels are often the ‘solution’ to increased risk, organisations often underestimate the total cost of holding inventory, leading to poor decisions and higher total landed costs].

As an aside, Storey noted an observable trend in the growth of ‘campaigns’, where a retailer procures a quantity of goods that appear to be a marketable proposition but ‘when it’s gone it’s gone’ – no question of repeat orders and therefore of a conventional supply chain. This is by no means restricted to the budget end of the market, either.

Given that logistics providers have the task (both in their own interest and as a responsibility to their client to educate suppliers in the requirements of the supply chain, might they not be in a position to take on the whole procurement role? Cunningham was emphatic that ‘merchandising’ is a set of skills that logistics companies shouldn’t profess to have, nor should the 3PL ‘own’ the supplier relationship. ‘We’ll do the mechanism bit – we’ll work with and train the supplier to conform to the logistics requirements. But it would take a lot to persuade a buyer to drop a supplier simply because of poor logistics performance, given that factors like design and price remain attractive’.

A lot of buyers are trying to impose standards on their overseas suppliers so that they can know, for example, when their goods are leaving the factory, and there are a lot of systems available. But, Cunningham asked, ‘What are they going to do with the information?’ As Storey said, merely recognising that something is going wrong is one thing – having the ability to change things is another.

Leng emphasised the importance of treating the whole chain, starting from product development. ‘You’ve got to look at it as one co-ordinated set of activities’. Equally, he advised, ‘Don’t ask “Where’s my greatest pain point”, ask “where’s my greatest opportunity”? Tracking shipments better can take a lot of grief out; but better sourcing capabilities can prevent the grief in the first place, and adds directly to the bottom line.  Ah, the bottom line! Nick Allen asked to what extent the people doing the sourcing are aware of the ultimate landed cost of the product. Not enough, was the consensus – Cunningham said that ‘Retailers in many instances still base decisions on gross, not net, margins – often a lack of data means they can’t do net margins [and Mena notes that this isn’t just a problem for retailers – ‘Few people have complete visibility of cost across the chain’.]

Making a commitment
Nor can they necessarily give a long term commitment, although they expect their logistics partners to commit. As buyers ‘chase the euro down’ to ever lower cost sources, there is a risk which Storey acknowledged of being stranded with ‘white elephant’ infrastructure. Ideally, in Eastern Europe for example, there will be a sufficiently developed economy for the investment to be revamped and redirected, but in ‘virgin’ territories, this may not be possible.

This, and many of the other issues already discussed, raises some big issues for retailers and their logistics providers. Cunningham asked, ‘Do we put more infrastructure into the UK, to hold more inventory close to market, and how does that work if 60 per cent of the range is produced offshore? But are there the facilities out there to enable me to pick-to-store overseas, or to configure to my manufacturing lows? And who’s going to take the risk on the investment?

Add to that a whole range of other issues – the systems required to handle Customs, quota allocations, all of which are in constant flux. A retailer may believe himself to be compliant, but face a big hit down the line from Customs, if, as has happened, goods are on the high seas when the EU changes the rules. Then there are carbon footprints, food miles, changing demographics…

As Steve Leng summarised: ‘A lot of retailers can no longer manage import growth just by throwing more people at it – that can actually make things worse. Volume is its own tipping point, where firms need to move to new platforms, capabilities and tools.’

Meet the Panelists

Nick Allen (Chair)
Editor Supply Chain Standard

‘To what extent are the people doing the sourcing aware of the ultimate landed cost of the product?’

 

 

Paul Cunningham
MD, Holistica

‘In the last few months there has been a rush to get control, measurement and reporting around the carbon footprint, as a crucial part of the business case’

 

 

Michael Storey
Commercial Director, NYK Logistics

‘[Visibility] is most important where there is the greatest potential for loss, say by stopping the line – it’s not geography, it’s about risk and loss’

 

 

Steve Leng
Senior Managing Consultant, IBM UK

‘You’ve got to look at [the chain] as one set of activities. Don’t ask “Where’s my greatest pain point”, ask “Where’s my greatest opportunity”’

 

 

Dr Carlos Mena
Cranfield University
‘Most large companies have procurement operations in the sourcing regions, but smaller companies can’t afford this – trusted third parties might be a solution’