Booz Misses the Boat

Over the weekend, I had the chance to read what I thought was a good piece on low cost country sourcing written by Booz Allen Hamilton. Eminently readable and well constructed, it appeared on first glance that Booz had taken a lesson from The McKinsey Quarterly in crafting a piece with a succinct argument and a good lesson for executives. But when I dug into it a bit further and got past the well constructed prose, it occurred to me that what Booz had in fact written was a China sourcing primer for the consultant-set. Not that I have any issue with a consulting firm wanting to cover Spend Management and low cost country sourcing trends. It’s a good thing. But Booz clearly misses the boat (or container ship) on a number of Spend Management issues in their write-up that a true China practitioner – who has not only “sourced” from the region, but actually moved cargo and imported on their own account or for a client – would have mentioned. All of these issues revolve around total landed cost. For example, in their suggested cost model, the authors do not go into detail about the increase in inventory carrying costs that are necessary to factor in when taking into account China sourcing (this could amount to several percentage points of total cost). Nor is there any mention about duty or import taxes in the piece. In most cases, duty and import usually account for at least a few percentage points, depending on what you’re buying from China or other Asian countries. The authors also fail to fully explore the finance and banking implications of low cost country sourcing. What about the impact of stricter payment terms – which global suppliers often require – versus the net 60 or net 45 US firms receive today? What about the cost – and hassle – of establishing letters of credit? And what about factoring in the cost of capital to the equation while you’re at it? Currency hedging also costs money and might be a risk that an American buyer can not afford to ignore. I also take issue with the notion of moving spend to China if you can identify 15% gross savings (their suggested savings break). A better rule of thumb is 25%, especially when you factor in the total cost issues I’ve outlined above. But enough of the beating up on Booz. They mean well. And they’re highlighting an issue which deserves further exploration. But I think that there are more in-depth pieces to look at when researching low-cost country sourcing. AMR Research recently wrote a short brief on the topic that I like. If you’re a subscriber, you can read it here. Aberdeen Group has also written extensively about global sourcing. I also like what Ariba has to say as well on their whitepaper on the subject. You can find it in their learning center. And if FreeMarkets’ WorldSource event is any past indication, I’d also wager that Ariba Live will provide a few useful sessions examining low-cost country sourcing. I’ve mentioned a number of places about where to go to learn more about low cost country sourcing. But what’s as interesting is that many of the companies who are best-in-class at low cost country sourcing prefer to keep their success a secret. We’ve heard from various sources that Emerson Electric is rumored to be one of the organizations that is furthest ahead in developing their Chinese supply base. But they intentionally keep their success close to the chest, lest they give away their secrets to the market. Let’s wrap-up by getting back to the article at hand. All said, the authors’ analytical framework is useful and a solid start to thinking about some of the implications of low cost country sourcing, but it lacks operational insight. It’s the type of thing that I would expect from someone with strong consulting credentials, but with limited on-the-ground Spend Management and import / trading experience. What do you think? Let me know by posting a comment or dropping a line: -Jason Busch

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