Lisa Reisman is middle markets editor of Spend Matters and our resident direct materials and global sourcing Spend Management expert. In full disclosure, Lisa is married to the editor of Spend Matters, Jason Busch.
No, I'm not working for a branding agency for the George Foreman Grill. However, I have watched how the parent company that owns the George Foreman grill, Salton, has struggled to remain solvent. For those of you not familiar with Salton, the company, "believes its strong market position results from its well-known brand names, high quality and innovative products, strong relationships with its customer base and its focused outsourcing strategy" will make it successful.
But it isn't a given that manufacturers like Salton which deploy outsourcing strategies will do so effectively. In fact, the opportunity for waste reduction, cost reduction and streamlined global sourcing processes has never been greater. I've seen companies spend all of their China "savings" with problem-solving trips to China (mostly to resolve quality issues). With one trip costing at least $5,000, a middle market company that sends two people over five times a year is quickly throwing away savings.
Buying organizations can reduce global sourcing waste and costs by focusing in on a few key areas. The first area for cost reduction involves the structure and specific services provided by trading companies. Because many US companies rely heavily on overseas trading companies in which they have little to no visibility to the actual manufacturer, these same buyers may be paying for redundant or non-value add services. The trading company could be acting as a 4PL provider (brokering the assignment of consolidation and freight handling) which may or may not be to the benefit of the buying organization. Other functions such as quality compliance and forex functions may not be required from the trading company, particularly if the buyer "owns" the supply chain and relationship with the manufacturer. Trading companies can be great partners when the supply base is highly fragmented. However, if the annual purchases from a trading company are in excess of several million dollars, it may make sense to look for larger suppliers with whom direct and pass-through contracts can be established.
Another area for cost reduction involves the standardization of payment terms. A careful analysis of payment history and supplier payment terms could lead to the establishment of standardized payment terms and associated invoice discounts.
A third area for cost reduction includes banking and international finance charges. Letters of Credit and wire transfer charges add up quickly. Many smaller companies who have relied upon smaller local or community banks for their everyday banking needs could pay a whole lot more than necessary to these banks if they are using international trade finance services. Banks without direct relationships in overseas markets not only add banking charges (as a correspondent bank) but they also increase the risk of bank error as many of these types of transactions are still handled manually. Buying organizations can save money by identifying banks with comparable or more extensive services; and then gather and negotiate better fee structures. Finally, by reviewing the opportunity for invoice rationalization/aggregation of invoices, companies can minimize the number of transactions handled by their banks.
The fourth area for cost savings involves optimizing international logistics which includes free trade zones and shipment consolidation. Here companies should evaluate shipping terms, trading lanes and determine if other suitable alternatives exist. Buying CIF Chicago from a Chinese manufacturer cost a company $800 more per container than placing the business with a 3PL provider and buying FOB Shanghai. Multiple opportunities may exist to re-negotiate with the current 3PL/logistics providers and customs broker. Benchmarking other 3PL providers in terms of their fee structures (i.e., ocean freight charges, brokerage fees, warehouse fees) based on a company's routes, shipment frequency, volumes, etc. could yield additional opportunities. Furthermore, consolidation of shipments and use of free trade zones to hold merchandise while avoiding import/export taxes in several countries can minimize additional in-country charges.
If your shareholders are asking you to get "Lean and Mean", it's critical to re-examine your existing low cost country sourcing strategies. Otherwise, after achieving an initial KO in the first round just like Salton did with their namesake Foreman Grille, you might be left with more sizzle than steak in the subsequent bouts.
Lisa Reisman is Managing Director and Co-Founder of the Direct Materials Sourcing Advisory Firm, Aptium Global. This blog post originally appeared earlier this week in Gunpowder, an Aptium Global online publication.