China Sourcing: The Future Ain't What it Used to Be (Post 6)

This morning, I'd like to welcome CombineNet's Paul Martyn to Spend Matters. I asked Paul if he'd mine sharing a few word on the use of advance sourcing techniques to better quantify and understand total cost, evaluate options and determine the best overall sourcing strategy in the context of what's been happening in China of late.

Global Sourcing: The Optimization Advantage

Global Sourcing is a very complex process with qualitative and quantitative factors sharing importance. Global sourcing creates a large number of options for sourcing professionals to consider during their supplier selection and supply allocation decision making process. In specific categories, the current situation in China has created an opportunity for other emerging countries -- more options, in other words. For example, chemical suppliers have been licking their chops as the elimination of environmental incentives to Chinese firms has made Chinese products more expensive (10+ %).

The current situation in China has made sourcing organizations re-evaluate their global sourcing strategies. What used to be a "slam-dunk" no longer holds true. This does not the mean the "death" of global sourcing or a return to the "made in USA" movement. Historical global “hot spots” have always been dynamic and have shifted their centers of production depending on access to sources of inexpensive labor, raw material and geo-political advantages. Point is, sourcing professionals have more options to sort through. In our world, the old adage 'you can’t go wrong with selecting IBM' used to be 'you can't go wrong with sourcing from China' has certainty been called into question by recent events.

Optimization can help with this dynamic decision making process by making sure every option has been considered, every stone turned. Sourcing professionals are addressing complex sourcing problems by using optimization technologies to seize the opportunity to gain a competitive advantage. First, it is important to understand the complexities (quantitative and qualitative) before venturing into global sourcing. The trade off analysis of qualitative and quantitative factors is a complex process -- much too complex to address with simple spreadsheets and what may have worked for another company may not work for yours.

Quantitative cost analysis includes labor cost, raw material cost, multi-modal transportation options, exchange rate volatility, importation costs (duties & fees), inventory carrying costs (supplier, transit, buyer-held), lead time, working capital impact and of course travel and management costs. These costs are expressed with all sorts of supply 'creativity' such as volume discounts, tiered pricings, yields, payment terms, lead time, etc.

The global sourcing game is not strictly cost driven or quantitative. You must balance cost factors with the qualitative measurements which include factors such as production errors, skill sets impact on productivity and the scaling of production, delivery times, inventory turns/size, risk of damage, communication and IT and other risks associated with the introduction of new vendors and ongoing relationships with incumbents. Scenario analysis, powered by optimization can do the 'leg work' for sourcing professionals by identifying the short list of options from all that are possible and bridging the gap between a sourcing strategy (people led) and its execution (computer led). Optimization based scenario analysis says 'tell me your strategy and I’ll show you its optimized execution plan'.

It is clear that this new geo-political reality is challenging global sourcing managers from supplier selection and supply allocation process. Furthermore, this challenge extends to executives as they design their supply chain strategies. These decisions are strategic in nature and require a lot of "what-if" scenario analysis on different time dimensions. Supply chain strategy (design, in particular) benefits greatly from the use of combinatorial-based optimization -- that is, optimize based on looking at ALL the combinations, not just what consultants think are 'best practices'. This dedication to letting technology sort through ALL of the combinations and bring back the optimized options (balancing qualitative with quantitative factors) provides strategic insights as well as tactical decision making support that guides the execution of an optimal plan. What would take a person or a team many months, if not years, to build and solve, is, today, being solved in seconds by computers.

A good example is a large furniture company who has built a central, global transportation model addressing its global multi-modal logistic challenges for their inbound and outbound products ... as this is enough for one post already, contact me for more details!

Paul Martyn serves as Chief Marketing Officer of CombineNet. He can be reached by email: pmartyn[@]combinenet[dot]com

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