There have been plenty of cautionary notes sounded about the risks inherent in global sourcing over the past year. The European Union’s imposition of retrospective textile quotas and its subsequent impounding of (mainly Chinese) goods hit the headlines – but there are myriad other traps for the unwary.
Despite this, there is no shortage of companies prepared to embrace the risks – and for good reason. Suppliers and manufacturers are lured in by the huge potential savings that are possible through sourcing in the Far East, and elsewhere in the developing world. China in particular has a long-established industrial sector, a history of government support through subsidies and low production costs driven by cheap labour. It also benefits from what many economists regard as a seriously undervalued currency – which makes cheap exported products even cheaper.
It is little wonder that many suppliers are tempted to take a global approach to sourcing, and there are several welldocumented examples of the competitive advantage to be gained. But any move towards global sourcing must be cautious and carefully planned. Enthusiasm should be tempered with a healthy dash of pragmatism and pre-planning.
‘The potential problems are all to do with the length of the supply chain,’ says TPL Logistics Management consultant Tim Knowles. ‘If you’re in the EU, even if you’re in the Czech Republic, you’re only three days away from anywhere in the UK.’
Combine these geographical factors with the associated problems of communication and the inevitable time difference, and there is a recipe for chaos. Says Knowles: ‘All of those things combined can make the supply chain much less reliable at that kind of distance than it would have been at any shorter distance.’
The most compelling reason, by far, to outsource to the Far East is to take advantage of cheaper labour costs. Those companies choosing to make the move beyond the EU should have a very high proportionate labour cost to make the inherent risks worthwhile.
‘It’s a balance,’ says Knowles. ‘There’s a trade-off between the amount of money you save on the labour and the inevitable complications you will add to your supply chain. To take an obvious example: with 13 week lead times, the emphasis you need to place on forecast accuracy is enormous. You have to get it right, or carry a very large amount of buffer stock just in case you get it wrong.’
If a company does get its forecasting wrong, planned promotions with high volumes of stock might no longer meet the requirement. As a result, business will be lost, and the firm might then find itself stuck with a great deal of unwanted stock.
Many companies don’t have good enough forecasting processes: they are not robust enough for the demands thrust upon them by global sourcing. In addition, companies tend not to enhance these processes. When sourcing outside the EU it is vital not to forget the new burdens placed upon these processes, and the fact that extended supply chains are in a continual state of flux. Adaptability and rigorous predictive forecasting is vital: any oversight in this area will later be regretted.
An obvious solution is to carry out thorough demand forecasting and supply planning checks, and to be ready to continually enhance, review and improve these processes to cope with the complex issues inevitably thrown up by global sourcing. A consultancy service can help with this. TPL Logistics Management help clients prepare and enhance the kinds of extended supply chains that are associated with global sourcing. Our TPL MANDI Strategic Thinking Group, for instance, tackles these issues in a pragmatic and meaningful way, offering a valuable insight into proven successful approaches to the issue.
‘People have problems [with global sourcing]because they prefer to ignore the importance of sales and operations planning,’ says Knowles. Importers are tempted by the value of the savings – but they often fail to install good processes before entering this potentially turbulent arena. The process of enhancing demand forecasting and supply planning requires senior people to devote time to getting it right.
Whatever happens to the EU’s new textile mountain, and even if China’s likely dominance has been exaggerated, global sourcing trends will inevitably increase the amount of goods flowing from across Asia, and other regions. India offers many of the same advantages as China, the Philippines are strong in several specialised areas, and plans are afoot to challenge Chinese production by creating a new trade area linking the newly expanded EU with the Middle East and Africa.
Global sourcing is already a reality, and the key to taking advantage is to get a jump on the competition. That can only be done if you are fully prepared for the additional demands that will be placed on your extended supply chain.
Contact: Bob Wileman, Commercial Director TPL Logistics Management
Tel:+44 (0) 1252 737939