LCCS is Alive and Well in the Middle Market

Lisa Reisman is Spend Matters' Middle Markets Guru. As an unofficial Editor -- nothing is overly formal around here -- she contributes her thoughts on the middle market a couple of times each month.

Two weeks ago, I posted my first blog that analyzed and critiqued Aberdeen’s mid-market Spend Management study from a real-world perspective. Today I'll continue on the pragmatic front, by sharing a story about how a $7m industrial products manufacturer is managing to save $250k (total landed cost) with a single direct materials LCCS program, despite a myriad of problems with the first shipment from their Chinese supplier.

I wish that I could get into the details -- the industry, the products, the company, etc., but at this point I can't. So instead, I'll share with you some of the real global sourcing obstacles this company faced and how these obstacles were overcome. But first, four background tidbits: 1) This company had never sourced a thing from abroad; 2) For a company their size, they were sourcing surprisingly well in the domestic market; 3) They were buying one category from a manufacturer's rep who was buying from an importer who was buying from China; and 4) The incumbent supplier for this category (we'll call it metals) staged a massive propaganda campaign designed to scare this company from "going it alone".

Luckily the owner/operator maintained an open attitude toward exploring global sourcing and made the change based on a detailed supplier qualification process, walk-through and first article testing. To help mitigate risk, the company hired an external sourcing company to help them through the process and had received a more detailed analysis of the new global supplier than they ever had for any domestic supplier that they worked with.

But all did not go smoothly at first. So what were the problems they encountered? The usual stuff:

Packing Issues -- The unloading of the container took about 4 hours. Every bundle that they pulled off resulted in the one behind it falling forward. Oh joy!

Size Tolerances -- The company did not specify a tolerance for each of the sizes so a good portion of the load was not to specification.

Oil vs. Rust -- To prevent rust damage, the supplier applied oil which was much heavier than the company had previously been accustomed to. However, there were no complaints on the shop floor and in fact, the incumbent supplier's material was coming in rusty adding a whole production step to the process of spraying down the products before they could be used on the line.

So needless to say, the first shipment wasn't what we would call a global sourcing success story.

But instead of screaming "that's it, we reject the whole thing". The company decided to work with the supplier. They provided the supplier with a five measurement score-card for the first shipment covering the following topics: The % of receipts that were rejected by the company via Non Conforming Product Tickets (NPT), the % of Receipts that were received by the company without Quantity or Price Discrepancies, the percentage of receipts that were received by the company on time, Average number of days to respond to CAR's (Corrective Action Requests), The % of bundles that arrived in perfect condition etc.

The supplier was so shocked to receive such a detailed report (they had never received such a report from any other export client) that they went out and hired a QA English speaking employee to more closely monitor production and final packaging. Instead of being told "we don't want anymore", the company placed an order for several more containers.

And when that second container arrived, the supplier achieved a perfect 100% score -- far better than the supplier they replaced. The work isn't over, but this small company is on its way to a good start on its Low Cost Country Sourcing Journey. Who says that a small organization can't benefit from global sourcing just like the big guys? I'd argue that any company who can save what amounts to 4% of their annual revenues on a single category thanks to LCCS is doing just fine.

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