The Intricacies of Global Retail Sourcing

A few major (and often conflicting) objectives have been driving retailers to turn to information technology (IT) to streamline their sourcing and logistics processes. One objective is the pursuit of lower prices, which often involves excessively extended supply chains to remote, lower cost regions. The other is the quest to shorten cycle times, which is essential—but so is having quality control to ensure that companies get their merchandise on time and according to the exact specifications. With suppliers on the other side of the globe, it can be hard to check to see how things are going, and one typically finds out about problems after the fact, when the goods arrive. Therefore, although some vendor relationships are smooth and run on "automatic pilot" (for example, companies might simply casually monitor purveyors of office supplies for best prices and basic service requirements), a much deeper and more involved relationship is essential for strategic vendors such as retail goods suppliers, who must deliver to specifications, on time, and at the right cost. These vendors might be evaluated on many key performance indicators (KPIs) in a holistic scorecard-based fashion, such as on-time delivery, quality, innovation (organizational health and technology), responsiveness and customer service, security, social compliance, and so on.

Part Two of the series The Gain and Pain of Global Retail Sourcing.

Certainly, even without IT deployment, retailers must become more agile, efficient, and timely with product development, planning, procurement, manufacturing, and execution (logistics and transportation) if they are to maximize benefits from their private-label strategy and opportunistic buying. While technology plays a major role, organizations must better coordinate activities and bridge handoffs among product design, sourcing, and logistics groups to shorten lead times and ensure that "hot item" goods are on the shelf exactly when the customer wants them. Still, global sourcing is substantially more complex than domestic sourcing, and should not be attempted without adequate technological support and business process controls. Executive global sourcing mandates that are not supported with such tools to execute typically either fail or do not meet expectations. For further discussion, see The Gain and Pain of Global Retail Sourcing.

The ideal situation would be for a retailer to establish a collaborative trade platform that offers the tools, content, community, and business infrastructure to support global commerce communities and a transparent trade process. Yet, many realities typically entail the politicization of global sourcing by polarized functional and infrastructure camps inside the organization, which hampers the ability of the organization to produce necessary strategic changes. There is also little opportunity to train buyers, partners, and suppliers across an extended supply chain within such infrastructures. Ironically, control over the extended supply chain should be driven by the common need to impact delivery before the production begins, since on the tactical level, a lack of visibility results in costs becoming multiple times higher to fix problems onshore (when the goods have already arriived) than offshore.

Come with Some Inevitable Pains

Yet, the savings from global sourcing come with possible steep expenses elsewhere, since a company must find qualified factories, solicit bids, place purchase orders, inspect the factories, monitor quality, handle logistics, customs, and duties, and so on, all on its own, which is not a small feat. Any merchant nowadays has to manage numerous details on how private label brands are sourced, produced, and delivered, which can be quite daunting to deal with, especially when trading partners are scattered all over the world. The momentum of private labels in the retail industry (from grocery stores to major apparel stores) is driving even more opportunistic contracting with small and unknown suppliers in remote countries, which requires buyers to really take a chance when ordering from unfamiliar suppliers in the hopes of keeping total landed costs to a minimum.

This requires a timing mindset change, given that most issues with domestic suppliers can be resolved right away (or at least within a week, in the worst case scenario). Internationally, though, even for bordering countries, it might take a more particular purchase order even several weeks to be confirmed, let alone processed and delivered over oceans and through customs and duties. With global sourcing, the challenge has become how to communicate from a swanky domestic office in a Group of Eight (G8) country with a factory as far away as Africa or the Far East. The challenge is also how to assimilate and communicate multiple data points effectively into a unified operation on a single screen. After all, in the manufacturing process, communication necessarily takes place among retailers, manufacturers, brand managers, contractors, agents, brokers, and logistics providers. Many still share product information over the phone, or via email and faxes, or through physical communication, and the difficulty is thus to consolidate all these diverse data points.

In a more sophisticated scenario, though, all the members of the supply chain communicate through a Web-based system, which means that when a vendor makes a change in the status of a product, for example, everyone in the supply chain will see the change too. The key in global sourcing today is to minimize the overall cycle and disruptions, and the most important way to do that is to have live, accurate, immediate information. New Internet-native sourcing software applications should give users visibility throughout the world of current product or order status at any point in time, and eliminate almost all duplication of information, thereby allowing all trading parties to collaborate on more rewarding issues, rather than constantly fighting fires.

For instance, prior to implementing a contemporary Web-based automated solution, contacting multiple vendors at once for pricing would be a tedious and pedestrian manual process for the sourcing group. On the other hand, by using a Web-enabled infrastructure, user enterprises should be able to better integrate globally with their supply base, and broaden the scope of vendors they can locate. Such technology has lately streamlined the ability of many retail firms to get estimated pricing from several vendors simultaneously. Also, when the design team comes up with a new fashion concept and wants to get a sample of that concept, such a system allows the information that they have designed to flow into the sourcing organization, which then allows the sourcing team to start getting estimated costs, as well as time-and-action (meaning normalized or synchronized calendars within the entire production cycle) information. Then the team can better determine where it wants to place the production, depending on volume—possibly also integrating with the merchant organization to give them a feel for how much product the firm will be sourcing of a given style, so that they can look at capacity constraints. The next step could be to use the software tools to break style data down by more variables, in preparation for placing the purchase or production order. For instance, this might provide suppliers with answers to several questions: How much does the retailer want to order by color and by size? What is the final pricing? What is the final time-and-action calendar?

Increasingly, the standard order confirmation and customary advance ship notice (ASN) procurement practices cannot provide sufficient guarantee that everything is going smoothly with any placed order. This is particularly the case for the internationally sourced, custom-made purchases that are common in the consumer goods manufacturing and distribution industries. Here, the difficulty of communicating across time zones, along with long lead times, make for lengthy recuperation periods (if it is even possible to recover) when problems occur. That is why buyers should benefit from visibility and event management systems that would inform (or alert) them that, say, their orders were (not) started on time, or were (not) placed on the boat on schedule; or whether the design team has meanwhile (yet again) changed specs on color or fabric for a paarticular planned merchandise; or that the order was (not) properly documented to clear customs without a glitch.

Potential Global Sourcing Gains

In a nutshell, companies source globally to differentiate their products, gain competitive advantage with reduced price points, and realize margin improvements. On average, many contemporary analyst studies, surveys, benchmarking reports, and so on, have concluded that a well-devised and well-executed sourcing strategy can produce margin improvements up to 2 percent (through a more efficient trading partner collaboration); reduced cycle times by up to 30 percent; up to 5 percent in reduction to the cost of goods sold (COGS); and up to a 15 percent increase in gross margin (through increased international sourcing on low labor and supply costs from East and Southeast Asia, Eastern Europe, and South America). Sure, expectations are usually much higher than these figures, since initial savings may provide false gains. And with many costs and risks being hidden (such as logistics complexity and increased lead time ramifications), one should always take a long-term view and analysis. For more information, see Understanding the True Cost of Sourcing.

What also contributes to the popularity of global sourcing today might be the fact that for years, only larger companies had the wherewithal to operate complex and pricey import/export software systems. Today's technology, conversely, has leveled the playing field for international trade, given that inexpensive Web-based systems—designed for simplicity and more easily deployed—can now enable much smaller companies to engage in global sourcing with a wide range of suppliers. The unstoppable march of the Internet and the growth of online shopping and other transactions mean that we are all operating in a new electronic real-time world (the global village), with inherent visibility into important events. These new systems make it possible for a small retail company to engage even just once—opportunistically if needed (as in a "one and done" manner)—with a supplier, to still record a profitable and efficient transaction. This has brought about what some experts call the "great leap" in global sourcing: it is no longer the privilege of only a few humongous and mighty companies, but is becoming a viable strategy for almost any company.

In addition, trading quotas and other barriers have been disappearing (or are being reduced) globally, while the expansion of the European Union (EU) eastwards opens up potential new sourcing countries along with new potential markets. With the end of apparel import quotas, this sector is growing rapidly in India and the Far East, while the passage of the Central American Free Trade Agreement (CAFTA) promises to bring additional activity into Central America as well. Today, on average, retailers are consequently following the top executive mandates to increase imports (of both raw materials and finished goods), even up to a quarter of total purchases (from a current level of 5 to 12 percent).

The Gain and Pain of Global Retail Sourcing

For anyone who has not spent the last several years hibernating or stranded on a remote island, it has become apparent that supply-side control is more important than ever for overall business success. This is due to globalization (meaning new potential markets, but at the price of growing competition too), low-cost country sourcing (and even outsourcing of some, if not most, manufacturing or service operations), continuous cost pressures (shrinking margins), and other driving forces which have combined into a "perfect storm." Global sourcing (the process of identifying appropriate domestic and far- or near-shore suppliers of goods and services—preferably from countries with significantly lower cost bases—and then ordering the goods and arranging for payment and delivery) has thus become a way to go for many. In fact, this has lately become an increasingly important corporate strategy (and often an executive mandate for buying departments) that is rapidly becoming a survival strategy too, in sharp contrast to the stepchild and "ugly duckling" perception of supply-side control in previous decades.

Part One of the series The Gain and Pain of Global Retail Sourcing.

In fact, there is today a growing imperative within organizations to source directly from an ever-expanding global universe of prospective vendors. Indeed, according to the World Trade Organization (WTO), about 55 percent of all raw materials for American manufacturing are now being sourced outside the US, which compares to about only 12 percent in the 1980s. As another example, the Wall Street Journal last year reported huge volume increases of Far East imports through the port of Savannah, Georgia (US), where the cargo container volume of 1.7 million per year has tripled over a decade ago, as an US east coast alternative to the clogged and constrained (in terms of labor and capacity) west coast ports (which are the logical, shortest-path destination for Far East goods).

Example of Supply Modulation towards Demand

A high product volume/mix CPG company in the southern United States had chronic problems with perfect order rates and operating cost overruns, typically caused by constant changes to the master production schedule, which in turn trickled down to an increased number of production changeovers and labor material mismatch. After years of running segmented processes and focusing on pushing volume out the door (without being able to deliver on the above critical objectives), the company started to look beyond its walls, and formed cross-functional sales-manufacturing teams to realign the supply process.

The team focused on two fronts. The first was tracking and understanding true consumer demand patterns of core products across all channels. This was followed by restructuring batch sizes to develop additional flexibility and minimize impact due to demand variation. By partnering and proactively communicating with retailers and other distributors, the sales team started funneling demand intelligence such as in-store promotion plans and (in some cases) POS information. Additionally, order fulfillment metrics were redesigned and customized across all channels to measure exactly what was important to these customers.

On the manufacturing side, the batch sizes of random medium- to low-volume products were reasonably increased to prevent schedule changes, and the batch sizes of steady high-volume products were reduced and sequenced back-to-back in tune with actual demand, so that batches could be added or removed quickly without causing major changeovers. This raised the short-term quantitative capacity flexibility, and hence responsiveness. Initial results of this process redesign was a sustained 9 percent increase in perfect order rates and a 20 percent setup time reduction due to a lower number of changeovers. Additionally, by slowly gaining trust, the company even began to influence the replenishment plans of large retailers.

Characteristics of the Demand-focused Approach

This approach encourages holistic design of all supply processes and information flows, in order to take care of end consumer demand rather than only the upstream requirements of factories or distribution systems.

Instead of asset-focused supply chains, the demand-focused approach fosters constant communication and correction of deviations between demand, supply, and product processes.

It requires change management and significant rethinking of the way process execution happens, in order to address continuous improvement of business-critical objectives like perfect order rates, operational efficiencies, and overall cost control. Table 1 depicts the differences between the two approaches.

Traditional	Demand-focused
Excessive focus on cost	Balanced multiple objectives
Continuous replenishment	As-needed on-time replenishment
Big batch, high-volume manufacturing	Flexible shorter batches in tune with demand
Information gaps or segmented processes	Fully integrated for complete demand visibility

Table 1. Traditional versus demand-focused approach within linear supply chains.

Using Demand to Drive Supply Networks

Until recently, CPG companies have adopted ad hoc initiatives to control costs and improve service levels, and over time many of these initiatives have been exhausted. Now is the right time to look beyond traditional practices and transform existing supply chains into illuminated and informed supply networks. Companies must start focusing on all forms of demand inputs from retailers, distributors, channel partners, and even end consumers, and use these as a guiding light to steer supply in the right direction and to enlighten its entire supply network with timely information.
In any dynamic system like a supply chain, variability is inherent. Sensing the variability in time and formulating strategies, innovative processes (and the technology to respond quickly to these variations) sets progressive companies apart from the competition. Using demand to regularly modulate the supply process is the new generation of SCM that integrates demand, supply, and product processes across the network of customers and suppliers to balance revenue against cost. It is a system of tightly linked processes and technologies, which not only responds to demand, but which can also reshape demand through solid collaboration with value chain partners in the market place.

Limitations of Traditional CPG Supply Chains

As explained above, CPG companies continue to face pressure on multiple fronts, and are not able to deliver efficiently and flexibly, due to the inherent limitations of the existing supply chains.

Internal silos and closed-loop activity
Instead of taking a holistic view of the supply chain, most companies are more concerned about local metrics and local departments; they lack of broader participation and commitment during critical phases such as forecasting and sales and operations planning. The mind-set is still of firefighting and knee-jerk reactions. Typical examples include manufacturing pushing for volume to keep their metrics of cost per unit and capacity use in control; and sales going out independently and striking promotion deals with retailers and distributors, without properly understanding the supply constraints. The infamous hockey stick effect (see figure 1) is prevalent in many CPG companies, and indicates low supply orientation and disparate management within their own supply chains.

Figure 1. The hockey stick effect.

Lack of flexible processes for dealing rapidly with change
Typically, traditional supply chain management (SCM) strategies and systems work best during steady states, but respond poorly during new product ramp-ups, surge demands, or a short lead time promotion. With shrinking product lifetimes and increasing product mix and distribution channels, traditional supply chains are slow to match the requirements of dynamic product portfolios. Excessive focus on asset or labor use, along with a lack of proactive constraint management practices and dynamic information feedback, combine to slow response times to the inevitable changes in the market place as well as with internal processes.

Traditional supply chains do not consider essential demand signals
The traditional demand indicator of forecasts frozen ahead of time can be too distorted, and does not take into account recent changes in actual demand. This practice, in conjunction with inherent uncertainty in forecasts, can add costs and unwanted inventory for manufacturers.

Increasing power of retailers

By leveraging geographical spread and strong consumer relations, retailers are able to demand more and more from suppliers in terms of lower costs and higher service levels. As with the CPG companies, the retailers are also chasing the twin priorities of constant shelf availability (by synchronizing stock flows to the store) and reduction of excessive in-store stocks and labor, in order to cut total retail supply costs. In spite of a strong focus on reducing out-of-stocks at the shelf, the numbers below indicate an opportunity to bring this metric up, without which both retailers and CPG companies stand to lose business. Channel- and account-specific requirements such as new labels and pallet size, diverse ways of sharing point of sale (POS) data, and (most recently) radio frequency identification (RFID) of products mean extra time, resource, and cost pressures which the CPG companies cannot resist.

Rising inventory
Consumer fragmentation has also driven CPG manufacturers to have wide assortments within categories. With higher service level expectations, most manufacturers have a tendency to build finished goods inventory to be able to respond better. Combined with a "make to plan" business process, inventories of raw materials and work in progress are also at higher levels. While most industry segments have reduced inventory levels gradually with improved supply chain processes, the CPG industry is still saddled with higher inventory and the associated inefficiencies.

Using Demand to Modulate Consumer Packaged Goods Supply Networks

The success of consumer packaged goods (CPG) supply chains in profitably delivering the right products, to the right place, at the right time, has largely remained theoretical. The focus is still to make planned products at the right times, as opposed to just the right products. This implies a "push" culture, and constitutes excessive focus on volume and capacity use. For too long, linear supply chains have fallen short—in many ways—in terms of delivering the flexibility and customer response needed to achieve superior bottom line results.

CPG companies have also realized that branding strategy alone is not enough, as consumers are more concerned about cost and quality in many categories (particularly for commodity products) than brand. Superstore retailers have developed strong consumer relations, and with their purchasing power are compelling suppliers to deliver higher levels of service. Additionally, the proliferation of store brands is cutting into the sales of traditional brands: gone are the days of the trade-offs where CPG companies sacrificed cost for service, as the need now is to balance and hit the multiple yet important objectives of cost, service, inventories, and quality.

A key area that has the potential to boost enterprise performance, as well as dynamically support new product introduction for customer retention, is the way the company supplies its customers. Gaining visibility and agility across supply channels is vital. Other survival requirements in today's competitive market place include knocking down internal silos; transforming closed-loop supply chains into illuminated open-loop supply networks through unflinching focus on demand; and fostering collaboration with consumers as well as with value chain partners.

Business Challenges in the CPG Vertical

With pressure coming from diverse sources, the limitations in existing CPG supply chains can lead to severe challenges that highlight certain fundamental areas for improvement. But those are not the only difficulties. CPG companies also face specific challenges inherent to the industry.

Decreasing profitability and market share
The one-strategy-fits-all approach within linear supply chains has not been adaptable enough to meet rapid operations that switch between requirements for low-cost/high-volume commodity products and low-volume/high-cost premium products. Typical asset- and cost-focused arrangements have diverted attention from anticipating and responding to unique and niche market requirements, leading to reduced growth and profitability. Also contributing to lost market shares is the intense competition from private label products. Furthermore, some low-growth local brands became targets for acquisition by stronger regional (as well as national) brands, leading to extended supply chains and hence added complexities and cost.

Effective management of promotions and new product introductions
Lack of communication or wider collaboration with retailers and distributors (as well as with internal teams) are significant factors in the less-than-stellar performance of CPG companies with respect to promotions and new product introductions. A number of CPG companies do not have formalized internal stage-gate processes to justify and effectively drive new product demand. Also, companies tend to focus more on initial new product sales (for example, for the first two quarters) and ignore subsequent demand, which then provides only partial insights into product failure or success factors.

Added costs due to regulatory compliance requirements
Regulatory bodies, including the United States Department of Agriculture (USDA), tightly regulate the packaged food and beverage sectors on the following mandates:

* Hazard Analysis of Critical Control Points (HAACP) regulations—quality control records and manufacturing data access
* Occupational Safety and Health (OSHA) requirements—material safety data sheets (MSDS) maintenance, good manufacturing practices (GMP), and safety programs
* country of origin labeling requirements

Zooming into the Clothing Retailer Conundrum

The Idiosyncrasies of Apparel PLM

The apparel industry operates in an environment of rapidly changing consumer trends and competitive margins. The consequences of a poor product selection or late delivery can result in a lackluster selling season—it can even be truly disastrous for a retailer. Competition for product differentiation and increased profit margins mean that delays or missed communication can interrupt production, delay shipments, increase cost, and impact sales, thereby posing serious threats to the viability of the company. The design process is iterative and collaborative, with buyers and vendors working together to get the right product at the right price point, while styles, details, sizing, and palettes create the brand look over the years, as opposed to shared components, ingredients, and subassemblies in the discrete and process manufacturing markets.

Facilitating collaboration between designers, merchants, sourcing professionals, and the factories is the first step for any PLM application. Moving away from phone calls, faxes, and e-mail strings to a centralized collaboration environment can ensure that all parties are in tune with the latest requirements. The dynamics of consumer demand, consumer fickleness, and fashion trends are what make fashion retail so complex. With thousands of stock-keeping units (SKUs) containing color, size, and attribute options undergoing multiple iterations during design and development, as well as numerous quality checks, the apparel retail industry requires a specialized PLM solution. A well-devised planning refinement process should secure the right product margin.

In order to take advantage of the price differentials associated with global outsourcing, retailers need to be extra vigilant about design changes, where the tracking of components, test results, and packaging requirements, as well as quality issues, require a PLM system to promptly alert retailers to key milestone updates and results. Also, the retail environment for PLM requires quality testing to be done throughout the product life cycle, but mostly before production even starts. The system should monitor the product progress and assure quality requirements throughout the entire process. In the retail industry, component materials, works in progress (WIPs), and finished goods can undergo a battery of sampling, rigorous testing, and rework up to the last moment before in-line production starts.

To keep deliveries on schedule, a comprehensive process and alerting system is needed to capture and communicate specification changes, test results, and potential production impacts, as well as to provide the visibility to manage materials and resources effectively. The above information and quality resolution, calendaring and status alerts, and the component library (or a growing database of approved designs and configurations or components) should all keep product development and production on track and moving toward the store floor. For more information, please see Process Manufacturing: Industry Specific Requirements and Intentia: Stepping Out With Fashion and Style.
Typically, retailers try to take advantage of traditional product design management (PDM) solutions, such as Gerber's WebPDM or Freeborder's Product Manager, to organize their production specifications. But these systems were primarily designed to integrate with cutting and piecing machinery, not necessarily to track quality testing, manage sourcing activities, unite the buying process, or maintain the official transaction details. Thus, it has been difficult, if not impossible, for such systems to produce “one version of the truth” for financial reporting and compliance with the US Sarbanes-Oxley Act (SOX) and Customs-Trade Partnership Against Terrorism (C-TPAT).

Nor are PLM packages for discrete and process manufacturers the right fit for retail PLM, as they are not built for the diversity of attributes, rigors of quality testing, or the inherent relationship with global sourcing, order management, and supply chain functions. Some astute apparel PLM systems enable retailers to prequalify suppliers for a particular order based on their previous work and certifications, and they grade these suppliers on the quality of new orders received (see The Next Phase of Supplier Performance Management in the Retail Industry).

While the TradeStone PLM for Retail product was described in The Future for an E-sourcing Solutions Builder, the counterpart Eqos Product Management Suite is comprised of the following four modules that manage supplier-related processes from a product-centric perspective:

1. Eqos New Product Introduction—manages the product from the specification stage through to delivery to the retailer, automating the NPDI processes and data gathering across companies to reduce time-to-market and increase launch success rates.

2. Eqos Product Information Management (PIM)—facilitates the synchronization of information both internally and externally via a centralized repository of product data and graphics information (see The Role of PIM and PLM in the Product Information Supply Chain: Where is Your Link?). This repository is the foundation of information on quality, and provides the reference point for store-specific ranges, campaigns, promotional activities, and product performance management.

3. Eqos Promotional Event Management—automates and manages the initial planning, pre-evaluation, execution, and post-event analysis of promotions, including seasonal events, product introductions, and regular consumer offers.

4. Eqos Product Performance Management—publishes product performance data to suppliers and to internal parties. Data can include sales, stock availability, forecasts, receipts, dispatches, and store range details, and it is reported at store, region, depot, or aggregate corporate levels. This module incorporates alerts, exception, and lost opportunity reporting against any metric, including expected sales, availability, and ranging parameters.

A single view of the truth should eliminate the redundancy introduced by multiple spreadsheets in need of updates, the hunt for e-mail strings, and constant re-keying of information in multiple systems. Companies should be able to harness the Internet to ease sourcing and procurement processes and to tackle the most serious problem of sourcing—the headache caused by separate systems for domestic and international buying, and the inability of smaller companies to leverage global buying platforms.

No One Said Sourcing Overseas Would Be Easy

How to Reconcile These Conflicting Objectives?

The benefits of private label merchandise can be so large that they become crucial to retailers' strategies—to the extent that ignoring global sourcing is no longer an option for most. The issues discussed above could be particularly critical and even more complex for companies that offer their sourcing services to other independent retailers. They must also comply with those retailers' unique billing and documentation requirements as well as internal invoicing and vendor payment for goods bought on their own behalf.
Again, an astute sourcing product lifecycle management (PLM) and finance management package should be able to enumerate all the elements (line items) of an original order and, in turn, trigger the generation of other documents, such as the letter of credit (L/C), the packing list, the advance shipping notice (ASN), the bill of lading (B/L), the commercial invoice, and the service invoice. These documents—and the detailed information regarding carriers, shippers, country of origin, export country, import country, and final destination—are essential for meeting the ever more stringent global trading security standards and for clearing customs without delay. This synchronization of all participants within the supply chain would be a major performance enhancement to speed up the product-to-market time. For more information, see Globalization Has a Profound Impact on the Supply Chain and Supporting Information Technology.

A number of major, and often conflicting, objectives discussed thus far have been driving retailers to turn to IT solutions to streamline their sourcing and logistics processes. One key objective is the pursuit of lower prices, which often involves extended supply chains to remote, lower cost regions. On the other hand is the contradictory quest to shorten cycle times, which is essential, but so is having quality control that ensures companies receive their merchandise on time and according to exact specifications.

Until fairly recently, the Internet has been neither reliable nor ubiquitous enough to support such broad supply networks and resolution of these networks' issues. Lately though, the Internet has reached a much higher level of security, bandwidth, and connectivity, which coincides with emerging applications designed to run over the Internet and offer near real-time data and events for managing and analyzing the variables of global sourcing. For instance, Web-based supply chain visibility tools have reportedly helped many companies improve their production lead times, better manage their inventory movements, and track the production and delivery of products in near real time. Moreover, Web-based sourcing tools can help these organizations identify suppliers, negotiate contracts, ship manifests, streamline sourcing through event management, collaborate and plan with their trading partners, and ultimately increase their on-time deliveries.

Some importers might have both “big ticket,” expensive items along with high volumes of low-cost accessories sourced directly from Asia. Such a situation requires an integrated approach within the supply chain and more accurate visibility. Again, collaboration among suppliers, logistics providers, buyers, and product managers is critical throughout the entire product life cycle. An astute sourcing software suite should enable product managers and buyers to quickly develop comprehensive requests for quotes (RFQs) for their global sourcing efforts.

Such a solution should also be able to normalize disparate currencies, languages, and lead times, and automatically calculate the estimated landed costs for a clear understanding and comparison of all offers submitted by competing suppliers. For these suppliers, which are located around the globe, the suite should seamlessly unite and coordinate such details as product specifications, RFQs, quality control, packing lists, and all the invoices and customs paperwork, thus eliminating redundant data entry errors and speeding up production. Such a solution should also enable buyers and trading partners to more quickly collaborate on accommodating change orders in an effort to respond to any fluctuations in market conditions.
With suppliers on the other side of the globe, it can be hard to check to see how things are going, and one typically finds out about a problem after the fact—more specifically, when the goods arrive. Therefore, taking the above analysis of strategic sourcing, although some vendor relationships can be smooth and run on “automatic pilot” (meaning companies might occasionally monitor purveyors of office supplies for best prices and basic service requirements), a much deeper and more involved relationship is essential for strategic vendors—that is, retail goods suppliers that must deliver to specifications, on time, and at the right cost. These vendors can be evaluated on many key performance indicators (KPIs) in a holistic scorecard-based fashion. Some of these KPIs can be on-time delivery, quality, innovation (organization health and technology), responsiveness and customer service, security, social compliance, etc.

A class of vendors, including Eqos, TradeStone, i2, MatrixOne (now part of Dassault Systemes), New Generation Computing (NGC), and TXT e-Solutions, to name only some, attempt to holistically combine sourcing, PLM, and supplier management processes throughout all the following steps:

1. Concept—studying the fashion influences and trend boards
2. Specifications—design and technical information, with suppliers' approval as a matter of course
3. Selection—identifying the right product at the right price from the right supplier, entailing the issue of RFQs, response analysis, supplier creation and selection, and product or prototype testing
4. Buy—managing the purchase order (PO) process, entailing product creation, PO creation, and product sample testing
5. Produce—monitoring production and quality, including making and inspecting the product batches
6. Move—tracking shipping progress within the supply chain
7. Sell and service—monitoring and managing the product's life cycle, which entails product availability and quality

Quintessential is the underlying and omnipresent “quality, risk management, and compliance” process, which entails recruiting, managing, and monitoring suppliers as well as controlling quality and tracking compliance.

Quality Assurance Never Stops

Contrary to the harsh realities of retailers today (where processes remain heavily “silo'ed,” with no automated workflow management), the software providers listed above recommend that at least the initial sourcing stages (from concept to buy) be automated and monitored. The potential benefits can be substantial for retailers that work collaboratively with key suppliers to enhance cross-company product development processes in addition to adopting joint innovative packaging and marketing strategies. As competition becomes stronger and the pace of product introduction continues to grow, the effective scaling of product development and life cycle activities is mandatory. From facilitating collaboration with key suppliers to reducing miscommunications and errors in the early stages of a product life cycle, integrating "pre-SKU" (stock-keeping unit) with "post-SKU" information is critical.

Thus, owing to the integration with core systems for product data management (PDM) and purchasing, from the initial sourcing process steps, a one-time data entry with all pertinent information must be held in a single repository and shared with users and other stakeholders as appropriate. As for quality and risk management, supplier assessment should be managed from the earliest stages throughout the entire product life cycle. This data repository, which must be held centrally, should enable suppliers to maintain their own pertinent information (as it changes, and of course, only data that is permitted by the retailer), while automated creation of a supplier record in core business systems once that supplier has been approved should be possible.
Then, as the process extends into the produce phase, it should be led by the order management process tracking and workflow management (to control the order definition, acknowledgement, and acceptance) while the supplier performance KPIs continue to be monitored through the inspection and audit process. Control and monitoring do not stop there given the extension of tracking and workflow to manage logistics processes via integration with 3rd party logistics (3PL) providers. Ongoing assessment of supplier performance continues at the dock side (for example, ensuring that all is in accordance with the Intergovernmental Organization for International Carriage by Rail [OTIF] metrics and recommendations). Last but not least, during the sell and service phase, one should monitor the performance of in-store products. This review process is driven by KPI tracking and monitoring; performance of individual products are tracked, and KPIs are shared with suppliers as appropriate.

Most retailers are consistently striving to improve the performance of each and every supplier, while the market leaders are effectively building and managing supplier relationships and looking for ways to improve the performance of their overall global supplier network. The emergence of industry standards, more effective KPI programs, and analytic tools is enabling companies to benchmark individual suppliers against other in-network partners as well as suppliers outside the retailer's network. As the cliché goes, “change is the only constant,” but one can never underestimate the need to plan for change, from incidental and inevitable changes to significant business changes, such as executive moves, organizational restructuring, or shifts in the competitive or regulatory environment. Trading partners must also plan for the positive changes that need to occur within the alliance, since a supplier relationship can succeed only if continuous, incremental improvements are systematically built in.

The information shared between partners should enable them to work more efficiently with one another. To that end, apparel retailers find themselves in an especially dynamic environment in which suppliers appear and disappear with astonishing frequency, and in which key designers and purchasers often jump from one company to another. Their response has to therefore be multi-pronged, starting with finding ways to shift supply channels quickly when one supplier goes under. However, garment retailers must also continually look for ways to help each important supplier succeed as well as be careful to strengthen relationships with the individuals within the vendor companies, not just with the companies themselves.

For example, garment retailers must recognize that its buyers will not be the only employees directly affected by each relationship it establishes with a remote fashion manufacturer. Its marketing decision makers will want to raise issues about responsiveness and timing, whereas regional managers will want to know how flexible the supplier can be in responding to differences in local trends. The IT departments will need to design methods for real-time sharing of information at all points in the supply chain, from placing POs to tracking store deliveries and transfers of discounted goods. Other issues, such as quality control and shipping and delivery logistics, need to be considered. In each case, the people most directly responsible—and those most directly affected—need to be brought into the process as early as possible.

Even mere paperwork can account for up to 7 percent of the total cost of international trade. Retailers spend most of their time on such activities as coordination of document changes with their suppliers (for example, specification changes, work in progress [WIP] activities, delivery date revisions, shipping and labeling revisions, etc.), with delays or lengthy lead times as a result. Further, intensifying global security concerns mean that much more information is required by governments (as opposed to merely applying customary harmonized tariff schedule [HTS] codes and checking whether something has, for example, been made from an endangered species of animals), and component tracking has become essential to conducting business across borders.

The Anatomy of Retail Sourcing Processes

Another complication is the unpredictability of local markets, since what might be "hot" or “cool” in one area may not sell at all in another market. If the retail outlet guesses wrongly on a fashion piece, or if it takes too long to get items into the stores (resulting in the merchandise being considered passé by the consumer), the stock must be moved to the deeply discounted (marked down) sales racks. At best, the retail chain is wasting expensive floor space on items with little or no profit margin; at worst, the items will have to be discarded or transported to other resellers. Profit margins are tight on some lines, since price points (the price at which the young shopper with limited finances shrugs and goes somewhere cheaper to shop) dictate aggressive pricing. In spite of these challenges, competition is growing for this customer segment, and it is becoming more difficult to distinguish the value that the retailer is delivering and to remain profitable.

As depicted in the typical sequence of processes listed above, retail personnel spend up to 80 percent of their time on administrative tasks rather than on their primary job. One could only imagine the mayhem that would result should there be virtually no integration among the above processes and its participants, or even between their core business systems, given that each task has its own Microsoft Excel, Microsoft Word, or e-mail trail, with data in isolated and disparate systems. If the above processes are still heavily segregated, with no visibility and very little control, the overall process becomes painfully slow and inaccurate, with extended processing times as a result.

Eqos cites that one major retailer calculated that it took 48,000 spreadsheets to launch just one new product line, which means lots of dreaded manual processing, re-keying, data conflicts, extended processing times, and so on. Further, nowadays, a vast majority of retailers manage inbound logistics processes across a variety of in-house enterprise resource planning (ERP) and supply chain management (SCM) systems, supplier data bases, and outsourced logistics providers' systems. They do this in an environment where it is difficult, if not impossible, to have a single view (version of the truth) of the entire sourcing and delivery process from a single vantage point.

In a more sophisticated scenario, though, all the members of the supply chain communicate through a coherent Web-based system. This means that when, for example, a vendor makes a change in the status of a product, everyone in the supply chain instantly sees the change. The key in global sourcing today is to minimize the overall cycle as well as disruptions, and the most effective way to do this is to have live, accurate, and immediate information available to all parties of the supply chain. New Internet-native sourcing software applications give users visibility of current product or order status at any point in time, anywhere in the world. These applications eliminate almost all duplication of information, thereby allowing all trading parties to collaborate on more rewarding issues rather than having to constantly put out fires.

Prior to implementing a contemporary Web-based automated solution, contacting multiple vendors at once for pricing was a tedious manual process for the sourcing group. In contrast, by using a Web-enabled infrastructure, user enterprises should be able to better integrate globally with their supply bases and broaden the scope of vendors they can locate
Lately, such technology has streamlined many retail firms' ability to obtain estimated pricing from several vendors simultaneously. Also, when the design team comes up with a new fashion concept and wants a sample of that concept, such a system allows information on the design to flow into the sourcing organization. This allows the sourcing team to acquire estimated costs as well as time-and-action (that is, normalized or synchronized calendars within the entire production cycle) information. The sourcing team can then better determine where it may want to place the production, depending on volume, possibly integrating with the merchant organization to give it a feel for how much product the firm will be sourcing of a given style so that it can review capacity constraints.

The next step is to use the software tools to break style data down by more variables in preparation for placing the purchase or production order. For instance, the software could provide suppliers with answers to questions such as the following: How much does the retailer want to order by color and by size? What is the final pricing? What is the final time-and-action calendar?

More and more, the standard order confirmation and customary ASN procurement practices cannot provide enough of a guarantee that everything is going smoothly with any order placed. This is particularly true of the internationally sourced, custom-made purchases that are common in the consumer goods manufacturing and distribution industries. Here, the difficulties of communicating across time zones as well as long lead times make for lengthy recuperation periods (if recuperation is even possible) when problems occur. That is why buyers benefit from visibility and supply chain event management (SCEM) systems that inform and alert them to the following production scenarios: orders were (not) started on time; orders were (not) placed on the boat on schedule; the design team has changed (yet again) specs on the color or fabric for a particular planned merchandise; and the order was (not) properly documented to clear customs without a glitch.

Landed Cost Calculations Add Fuel to the Fire

While many companies have either made (or are in the process of making) the transition from regional, build-and-sell business models to a global sell-anywhere, build-anywhere, and buy-anywhere model, the current, mainly manual systems still typically require information to flow via spreadsheets, phones, faxes, snail mail, and e-mails within the retailer's different groups. When it is time to place an order, the data is usually no longer current and accurate. The information then has to be revised during the ordering phase, where the vendor might respond with actions based on incorrect assumptions, and one has to go through the vicious cycle again.

Determining the true costs of these activities can also become more complex since, in addition to a nominal purchase price, one has to add freight, taxes, duties, intermediaries' fees, cost of inventory, cost of quality issues (if any), and buyers' time. Landed costs also vary tremendously depending on how the merchandise is shipped, since many supply chains today originate in countries that can provide low-cost manufacturing capabilities, often thousands of miles away from the end market.
In a regional model, companies make parts-sourcing decisions based primarily on per-piece cost and traditional supplier scorecards. In a global model, though, with lengthening supply chains and increasing risk, companies must choose suppliers based on additional factors, such as inbound lead times and associated variability, protection of supply, logistics costs and risk, and inventory expense. Only a thorough analysis of potential scenarios reveals the total landed cost, and poor sourcing decisions could turn out to be counterproductive and may result in increased costs, decreased supply chain flexibility, and customer dissatisfaction.

In other words, an apparent bargain price on paper may not be quite as attractive in reality, since there may be hidden costs to consider in addition to the purchase price of components or per-hour wage rates. Landed cost refers to the total price that the importing company has paid for a resource once it "lands" at its appointed location, such as the incoming dock at the production facility. Imagine the possible, startling differences that might be brought to light with a thorough comparison of the prices of raw materials available in several regional markets around the world.

Again, while the landed cost of domestic items includes the component price plus domestic freight, the landed cost of the same or similar components in a foreign market may include all of the following: purchase price; import duty; international freight; special packaging, travel, and other communications costs involved in acquiring the component; fees and commissions for intermediaries (typically not necessary in domestic purchases); currency exchange and interest costs; costs of hiring or training personnel to deal with export-import complexities, and so on.

Further, determining the relative costs of manufacture and assembly in different markets can be as complex as comparing landed costs for goods. To that end, some vendors provide tools to help companies uncover the true costs of global sourcing to better manage this new business environment. The most recently unveiled i2 Total Landed Cost Sourcing software tool by i2 Technologies is designed to help companies analyze and determine sources of supply for parts, components, and finished products based on all conceivable factors that might contribute to cost and risk. Leveraging this solution with the closed-loop capability to capture all relevant cost elements, represent them in a model, compute and analyze multiple what-if scenarios, and make the best decision, businesses can drive the process with a complete picture of the factors impacting the total cost of a product. Total Landed Cost Sourcing delivers the following capabilities:

* analysis and decision making;
* definitions of cost targets and sourcing constraints;
* automated data management and cleansing of cost, transportation, lead time, inventory, service variability, and network data;
* the ability to make informed sourcing decisions based on supply chain modeling and corporate objectives;
* solid reporting and analytics capabilities for continuous learning and ongoing compliance management;
* supply chain network optimization to calculate variable supply chain costs through strategic network design and inventory optimization;
* the ability to issue RFQs and collect supplier-quoted costs; and
* estimation of total landed costs for all sourcing scenarios while considering optimal transportation routes.

Like its i2 CTO counterpart mentioned previously in The Promise (and Complexities) of Private Labels, i2 Total Landed Cost Sourcing will be available in the i2 Business Content Library, a repository of process and technology solutions based on i2's extensive supply chain domain expertise. The idea here is for organizations to use these solutions without modification and to help accelerate the customization and deployment of composite solutions when necessary.

The Promise (and Complexities) of Private Labels

And Now, the Complexities

Certainly, the retail landscape is changing, and the market is looking to differentiate through better tailoring the customer shopping experience and introducing private label products exclusive to their retail chains. However, bringing private label goods into the mix adds supply chain complexity, as retailers struggle to shorten the product life cycles in order to react faster to the latest fashion trends. The so-called retail balancing act of creating a superior consumer shopping experience (through better assortment, freshness, and relevance, and without stockouts) while simultaneously improving inventory productivity (optimized inventory levels to support profitable sales and lower supply chain costs) has only been aggravated.

As mentioned earlier, supply chains are getting longer. They need solutions that provide visibility from the early manufacturing process to the store shelf, with the ability to track merchandise throughout its entire life cycle and to reduce time-to-shelf, thus enabling better decision making capabilities during the selling season. In other words, the size and complexity of sourcing projects are increasing because such undertakings involve, in some cases, large teams operating at different remote sites. Moreover, the information itself that is involved in this process is more important than ever, comes in larger amounts than ever, and is more difficult than ever to manage manually with the speed and accuracy that is required.

Some retailers looking to gain a competitive edge in this area have been implementing the cycle time optimization solutions from certain savvy software vendors. Most recently, during its i2 Planet annual user conference in May of 2007, i2 Technologies (NASDAQ:ITWO), a prominent provider of supply chain management (SCM) solutions and services to various industries, announced the i2 Cycle Time Optimization (CTO) product, which was designed to reduce concept-to-store cycle time. The solution aims at creating capacity-constrained product plans to synchronize with in-store assortment plans; prepositioning key raw materials and optimizing inventory (finished and raw material) throughout the value chain; and reducing distribution and handling costs. The entire value chain becomes connected through the CTO solution using an integrated retail and supply chain planning (SCP) process.

Retailers can use i2 CTO to become more customer-centric by making assortment decisions (this is, reacting to fashion trends) closer to the selling season and keeping their private label products in tune with the latest global fashion trends. The idea is to reduce the risk in selection of style and quantity of purchase as well as to reduce inventory, distribution, and handling cost risks through cycle time reduction from store to store—all without sacrificing customer service levels. In addition to shortening lead times, by leveraging this solution, retailers also have the opportunity to optimize and manage spending across the supplier base by analyzing the sourcing spend, negotiating and selecting strategic sourcing partners, and allocating purchase orders to deserving suppliers accordingly. Further, the solution offers the capabilities of contract management to track consumption against contracts and associated SPM.
Can Information Technology Help, Then?

Many companies that have successfully deployed supplier relationship management (SRM) software tools have also discovered certain benefits related to the sourcing process itself, starting with reduced cycle times on sourcing projects. Instead of going through piles of request for proposal (RFP) documents and comparing a wide array of quotes, the software can actually help with bringing all of this data together into a simplified and unified selection process. Another way that SRM software can cut down on the time spent on sourcing is that sourcing projects can be saved and reused at a later time. Meaning, if the enterprise's needs recur frequently or come with small variations, this “copy from and to” capability can save a great deal of time.

SRM software tools also make it easier for companies to select suppliers, since not only can prices be compared quickly, but the software also allows buyers to add the past performance of vendors to the equation. For example, it may be enticing to instinctively choose a certain vendor on the basis of its lower price to deliver raw materials, but since that vendor's last shipment was delayed and of bad quality (which necessitated scrapping most of the parts), the buyer may want to change his or her mind this time around.

Another often-cited benefit is that SRM software makes it easier to standardize purchasing decisions and to instill the structure into the entire sourcing process. Again, most organizations do not have a clear basis for choosing their suppliers, but the software can make the selection criteria more readily apparent. Also, instead of having to deal with hundreds of separate suppliers personally, the software does most of the legwork for the buyers. SRM technology also accelerates communication between the buyer and the seller. Since the transfer of information can be done in real time, the vendor can check the buyer's inventory to determine whether new shipments are needed, and the buyer can instantly submit orders over the Internet without reducing overall productivity. Similarly, questions related to orders can be answered by checking details via the Internet, so no human interaction or human-related delays have to interfere with the work.

In summary, the purpose of SRM technology is to streamline the processes between an organization and its suppliers, and to make these processes more effective. Such software tools have automated many of the business processes that structure supply chains, and with this automation typically comes cost reduction and increased efficiencies. To that end, various SRM products are available from a number of vendors, and a review of the descriptions of SRM products offers a broad spectrum, but not quite a clear consensus yet.

Many vendors refer to themselves as SRM providers merely because of their solutions' Web-based sourcing and e-procurement (over the Internet or intranet) capabilities. While these are significant components, some other common SRM software capabilities include catalog management; service procurement; strategic sourcing; supplier rating and performance management; supply analytics; contract management; collaborative supply management and collaborative planning, forecasting, and replenishment (CPFR); vendor managed inventory (VMI); etc. According to the APICS Dictionary (11th edition), CPFR is a process through which supply chain trading partners can jointly plan key supply chain activities from production and delivery of raw materials to production and delivery of final products to end customers. VMI is a means of optimizing supply chain performance in which the supplier has access to the customer's inventory data and is responsible for maintaining the inventory level required by the customer.

Indeed, by better managing interaction with suppliers, an enterprise can have greater control and visibility of the supply chain, improve product and service quality, and drive additional savings through more effective and streamlined processes.
TradeStone Software, a provider of unified sourcing and PLM solutions for retailers, reports many midsized and large North American, European, and Asian companies that have adopted the strategic sourcing approach suggest that a business can reduce expenses by 10 to 30 percent. Eqos touts similar responses from many supply chain managers at the largest North American and European retailers, which indicates that the use of foreign suppliers will nearly double in the next five years. Offshore suppliers are expected to account for nearly a third of the typical company's total supply base by 2008. Most companies have been able to reduce material and service costs up to 35 percent (and thus improve profit margins accordingly) by sourcing from low cost country suppliers.

With strategic sourcing, major manufacturers, retailers, governments, and financial institutions can achieve significant savings while strengthening ties with suppliers that offer the best quality products and customer service. When approached properly and executed meticulously, global sourcing can also result in improvements in time-to-market, customer value, and innovation (via private labels and direct imports), as well as reductions in inventory, stockouts, etc. Last but not least, strategic sourcing can also allow small and medium-sized businesses to compete against larger companies for major contracts.

The Allure Comes with Some Inevitable Hurdles

Competing in supply networks that cross borders inevitably adds many problems when compared to doing business in a single, local market where competitors have to play by the same rules, invoice and pay in the same currency, communicate in the same language, and pay about the same rates for labor wages, indirect supplies, and direct materials. For one, the savings from global sourcing comes with the possibility of steep expenses elsewhere, since a company must prospect regulatory climates; find qualified factories; solicit bids; place purchase orders; inspect factories; monitor quality; handle logistics, customs, and duties; and so on, all on its own—which is no small feat.

All merchants nowadays have to manage numerous details on how private label brands are sourced, produced, and delivered, which can be quite a daunting task, especially when trading partners are scattered all over the world. The momentum of private labels in the retail industry (from grocery stores to major apparel stores) is driving even more opportunistic contracting with small and unknown suppliers in remote countries. This type of contracting is contrary to the concepts of strategic sourcing, as it requires buyers to take their chances when ordering from unfamiliar suppliers, with the hope of keeping total landed costs to a minimum.

What is also required with global sourcing is a mindset change with regards to timing given that most issues with domestic suppliers can be resolved right away (or at least within a week in a worst case scenario). Internationally, though, even with bordering countries, it might take a more special purchase order up to several weeks to be confirmed, let alone be processed and delivered over the ocean and through customs and duties, and multiple intermediaries.

With global sourcing, the challenge has become how to communicate with a factory that is in the wilderness of the Far East or Africa (though we by no means want to sound derogatory toward any third-world region) from a swanky, domestic office in a G8 country, and how to assimilate and communicate multiple data points effectively into a unified operation on a single screen. In the manufacturing process, communication must take place among retailers, manufacturers, brand managers, contractors, agents, brokers, and logistics providers—and many still share product information either over the telephone, via e-mail or faxes, or by other means of physical communication.

Indeed, it is all too often true that sourcing supporting systems are still hodgepodges of point solutions that separately handle the complex issues and challenges of global trade regulations, logistics, timing, supplier relationships, and general SCM. Until a unified sourcing suite becomes readily available for smaller companies, such organizations will likely continue to use disparate sourcing and e-procurement solutions, not so much for low-cost country sourcing (LCCS), but within the context of a known, mostly domestic supply base.

Distinctions and Benefits of Strategic Sourcing

Global sourcing, despite its inherent risks, offers numerous benefits to enterprises in terms of lower costs for materials and labor. It also requires a much closer integration among the supply chain partners. Supplier relationship management (SRM), a methodology designed to structure and support the relationships between buyers and suppliers, becomes essential when a supply chain recognizes the benefits of strategic sourcing. For more background, please see The Blessing and Curse of Global Sourcing and Supplier Management.

Bundled with the notion of SRM, strategic sourcing (as opposed to traditional sourcing) involves finding and building ongoing relationships with trading partners that will account for the majority of an enterprise's purchasing funds (spend). These close relationships will also provide materials or services that are key constituents in the final product or service, or that can help the buyer meet its profitability and customer satisfaction goals.

Strategic sourcing differs in its focus and execution from traditional purchasing and offers several obvious benefits. For one, traditional purchasing focuses on purchase price, whereas strategic sourcing focuses on the true cost to the customer. One should note the distinction between price and cost, since choosing a component based on the lowest nominal price may not necessarily translate into low cost if, for instance, the low-priced components are not reliable and fail early.

Further, the initial savings in producing the finished goods will be negatively impacted by the costs of reverse logistics (the process of shipping the failed goods back and repairing or disposing of them) and the loss of potential business from a prospective lifetime customer. At the same time, strategic sourcing can reduce costs by consolidating purchases with a limited number of suppliers and by allowing the centralized purchasing departments negotiating leverage via a purchase of increased volumes (economies of scale). By the same token, strategic sourcing can also help reduce the frequency (ordering costs) of purchasing orders (which are often maverick, or “on the spot” in nature), and thus reduce inventory handling costs.

Traditional purchasing is sporadic and transactional (not ongoing), and treats each purchase as a discrete transaction. Communication typically entails haggling over prices, complaining about late shipments, or disputing the quality of products. To be fair, there may be some exchange of information via electronic communication between parties, if only of a tactical nature (billing or change orders, for example).

Also referred to as "buy on the market," a traditional approach to purchasing is opportunistic in that organizations buy in response to immediate needs, choosing freely from among all the suppliers that can supposedly meet those needs. There is some sharing of technical purchasing requirements (such as specifications, proposal components, certification processes, etc.) between parties, but not strategies or plans. The relationship is transactional, and it is certainly not exclusive; the buyer may be buying from competing suppliers either simultaneously or sequentially.

In contrast to traditional sourcing, strategic sourcing involves ongoing relationships, so an opportunity exists for mutually beneficial collaboration between the buyer and the suppliers. This can result in improved profitability for each partner throughout the entire supply chain, and added value to the final product or service. Under the SRM and strategic sourcing concepts and methodologies, a company shares information with its suppliers in real time (or close to it) with the aim of cutting the cost of materials, minimizing inventory, reducing shortages, and expediting deliveries. More importantly, the suppliers can participate in improving the system, which should result in better products, higher customer satisfaction, and greater customer retention.
Furthermore, while traditional purchasing hardly ever crosses the boundaries that demarcate the two business entities, strategic sourcing allows opportunities for realigned (meaning improved and redesigned) and collaborative business processes, information flows, and workflows to eliminate redundancies and non-value added work. Collaborative design and execution of plans for forecasting and replenishment allow supply chain partners to coordinate work and purchasing plans with customer demands. This helps in avoiding unpredictability in stock levels (the so-called bullwhip effect) upstream. The bullwhip effect, as defined by the APICS Dictionary (11th edition), is as an extreme change in the supply position upstream, generated by a small change in demand downstream in the supply chain. When this happens, inventory can quickly move from being backordered to being excess. This is caused by the serial nature of communicating orders up the chain with the inherent transportation delays of moving product down the chain.

This coordination of work and purchasing plans by supply chain partners also results in improved service to distributors, retailers, and customers; lower cost; and optimized use of capacity on the downstream side of the supply chain.

Strategic Sourcing

According to the APICS Dictionary (11th edition), a strategic alliance is “a relationship between two or more organizations that share information, participate in joint investment, and develop linked and common processes to increase the performance of all the organizations.” Many companies form strategic alliances to increase the performance of their common supply chains, and these alliances can entail interaction among many counterpart functional departments, such as engineering, marketing, production planning, inventory, or quality management. Goals for these relationships may include cost reduction, quality improvement, better delivery performance, increased flexibility, or faster introduction of new product. Alliances need to be flexible, and each partner must bring value to the relationship relative to the scope of collaboration.

Even from a simple, knee-jerk (reactive) standpoint, companies with certain types of supply situations may be able to manage risk better in close alliance with their strategically valuable suppliers. The most obvious alliance to form is with a supplier offering an expertise that undoubtedly lies outside the company's core competencies. Also, if only a sole supplier (or a few at best) is available in the market to provide the valuable component or service, the enterprise may need to maintain a close relationship with that supplier to ensure availability and opportunities for developing customized components that could provide competitive differentiation.

Complexity (whether referring to the relationship between the bought component and the final product, or to the supply chain itself) and uncertainty are also factors that should compel a company to develop a close relationship with a crucial supplier. The more complex the relationship is between the component and the final product, the more value there will be in collaborative design. On the other hand, more value-added points in the supply channel vouches for greater opportunities for more efficient management of supply and demand. The uncertainty is in terms of changes in raw material or component cost, quality, or availability that can obstruct a business from meeting its goals.

Web-based Systems Expand Strategic Global Sourcing

What also contributes to today's popularity of strategic global sourcing might be the fact that, for years, many larger companies have had the wherewithal to operate complex and pricey import and export software systems. Conversely, today's technology has leveled the playing field for international trade, given that inexpensive Web-based systems, designed for simplicity and easier deployment, can now enable much smaller companies to engage in global sourcing with a wide range of suppliers.
The unstoppable march of the Internet and growth of online shopping mean that we are all operating in a new, electronic, real-time world (that is, the global village), with inherent visibility into important events. These new systems make it possible for a small retail company to engage, even if just once, with a supplier and still record a profitable and efficient transaction. This has brought about what some experts call "the great leap" in global sourcing—it is no longer the privilege of only a few giant companies; it is becoming a viable strategy for almost any company.

More and more organizations are using affordable and intuitive Web-based applications for a variety of supply chain activities, including procurement, order processing and financial flow coordination, and new product design. Businesses are also using such applications to manage transactions and inventory. The advent of Web-based technologies has given cross-channel teams the ability to interweave common and specialized knowledge, making collaboration easier and more seamless, and optimizing productivity.

Furthermore, data warehousing and analytical applications allow the information gleaned by one application within one company to be used productively by other applications or partnering organizations. These tools can go beyond information sharing to enable information analysis and decision making, and they can increasingly do so across platforms. This means that one department's or organization's choice of hardware, database, and operating system (OS) is no longer an impediment when these tools' outputs can be used by another department, which might run on a disparate system. This cross-functional sharing of knowledge and analysis makes true collaboration much more possible.

Coming back to the benefits of strategic sourcing, while traditional purchasing may benefit from information technology (IT) in terms of effectiveness, it cannot really leverage IT to the same degree that strategic sourcing does. Neither can traditional purchasing increase the visibility of the entire supply chain the way strategic sourcing can via true collaboration.

Historically, the purchasing department's ability to work with suppliers, communicate requirements, and negotiate pricing, quality, and delivery of goods and services has been driven by crude technology tools such as the telephone, the fax machine and, more recently, e-mails and enterprise applications (to a limited degree). But the use of the Internet and compatible software systems, backed by the commitment and trust among strategic partners, allows buyers and suppliers to share information and synchronize demand and supply from virtually any point in the supply chain network, and at any time. Again, potential benefits of this include shorter cycle times, increased inventory turns, and the enabling of purchasing personnel to eliminate low-value, mundane activities so that they can focus on more strategic issues.

Collaboration reveals more information about all the critical points in the supply chain given that when information from suppliers, manufacturers, distributors, retailers, and customers is available for analysis, visibility of the supply chain and opportunities for improvement is enhanced. Demand information, inventory status, capacity status, capacity plans, production schedules, promotion plans, shipment forecasts, and demand forecasts can all be shared and, ideally, accessed by all parties on a real-time, online basis. Expanded information sharing can lessen the upstream bullwhip effect and provide early problem detection, faster response, better contingency planning, and stronger relationships, all because of increased trust. In short, the need for supply chain integration is here, and the means now exist to address that need much more efficiently and cost-effectively.

In fact, collaborative supply chain networks may benefit their participants in many ways. For one, by identifying common goals shared by all participants in the supply chain, and by increasing their ability to efficiently reach those common goals, a company's own (and often conflicting) goals can also be pinpointed and resolved. It is needless to say that information sharing initiatives can increase profitability throughout the supply chain through cost reduction, demand augmentation, and better ability to respond quickly and accurately to market changes.

The Blessing and Curse of Global Sourcing and Supplier Management

As discussed in The Gain and Pain of Global Retail Sourcing, for anyone who has not spent the last several years in hibernation or stranded on a remote island, it has become apparent that several market-driving forces have come together to create a “perfect storm,” one that makes control of the supply side more important to overall business success than ever before. Some of these driving forces include globalization (the prospect of new potential markets, but at the price of growing competition), sourcing in low-price and low-wage countries (and even outsourcing of some, if not most, manufacturing or service operations), and continuous cost pressures (that is, ever shrinking margins).

Although global strategic sourcing might be as old as sailing ships and riding on camels, there has been much talk these days about globalization and its effects on business, and there is no doubt that competing corporations are increasingly butting heads in the global playing field. But the same globalization of sourcing, manufacturing, and delivery processes is also making supply chains far longer and more complex than ever before; they require more coordination and collaboration amid trading partners. Indeed, many manufacturers and retail chains have expanded both nationally and globally, creating the need for more formal and structured mechanisms to coordinate supply chain activities.

What's more, market demands are becoming more volatile and harder to predict due to the increasing power and speed of information available to both comparison-shopping consumers and competitors. Global sourcing can be defined as the process of identifying appropriate domestic and far- or near-shore suppliers of goods and services (preferably from countries with significantly lower cost bases), ordering the goods, and arranging for their payment and delivery. Global sourcing has become a standard practice for many businesses. In fact, global sourcing has become increasingly important as a corporate strategy, and is rapidly developing into a survival strategy too—a sharp contrast to its stepchild and “ugly duckling” treatment of previous decades in procurement departments.

Contrary to yesteryears, today there is a growing imperative within organizations to source directly from an ever-expanding global universe of prospective vendors. According to the World Trade Organization (WTO), about 55 percent of all raw materials for American manufacturing are now sourced outside the United States (US) compared to the approximate 12 percent in the 1980s. As another example, not that long ago, the Wall Street Journal reported huge increases in the volume of Far East imports through the port of Savannah, Georgia (US), where the cargo container volume of 1.7 million shipment units per year of a decade ago has tripled.

The Global Sourcing Allure

In a nutshell, companies source globally for three main reasons: to differentiate their products (in terms of affordability, quality, availability, etc.), to gain competitive advantages through reduced price points, and to realize margin improvements. Many recent studies, surveys, and benchmarking reports have concluded that a well-devised and well-executed sourcing strategy can produce up to a 2 percent improvement in margin (through more efficient trading partner collaboration), reduce cycle times by up to 30 percent, reduce cost of goods sold (COGS) by up to 5 percent, and increase gross margins by up to 15 percent.

The above percentages are achieved through increased international sourcing of low-cost labor and supplies from East and Southeast Asia, Eastern Europe, and South America, with Africa slowly showing signs of becoming the next potential frontier. Sure, expectations are usually much higher than the above figures, since initial savings might provide false gains, but with many costs and risks being hidden (such as logistics complexity and increased lead time ramifications), businesses should always take a long-term view and make the appropriate analysis (but more about the impediments later on).
What's more, trading quotas and other barriers have been disappearing (or are being significantly reduced) globally, while the expansion of the European Union (EU) eastward opens up new potential countries to source from as well new potential markets in which to sell. With the end of apparel import quotas, this sector is growing rapidly in India and the Far East, while the passage of the Central America Free Trade Agreement (CAFTA) promises to bring additional activity into Central America as well. Today, consequently, retailers are, on average, following the top executive mandates to increase imports of both raw materials and finished goods to up to a quarter of total purchases (a substantial increase from the current level of 5 to 12 percent).

Additionally, there has been an increasing awareness of suppliers having more strategic importance; retailers and manufacturers are trying to nurture long-term collaborative partnerships with their trading partners and to leverage the suppliers' strengths and savvy, all with the idea of forging win-win relationships (as opposed to the traditional price- and transaction-based, “buy on the market” encounters that only benefit one side—usually a large channel master). For instance, many organizations have realized significant benefits when they involve suppliers in the early stages of product life cycles. Taking the conceptual design process (new product idea or old product enhancement) as an example, such benefits can include lower costs for development, purchased material, and manufacturing; shorter development times; and better quality of purchased material and in final product feature levels.

Similarly, a strategy for mass customization (also known as postponement or delayed differentiation) should give organizations a competitive advantage, but this requires the quick and efficient delivery of a wide variety of customized goods or services at a low cost. Again, early supplier involvement (as opposed to after the product has already been designed and “thrown over the wall”) is critical to maximizing the potential of the postponement strategy. In this respect, a supplier's involvement typically adds value and improves time to market (that is, getting products into the hands of customers more quickly) while helping to ensure quality, and ultimately increases customer satisfaction and loyalty.

Furthermore, in some industries and markets (pharmaceuticals, for example), strategic alliances, joint ventures, or ongoing partnerships may enable organizations to combine resources and share the burden as a way of overcoming barriers to entry into the market, as well as in searching for and developing new opportunities. In other industries, such as home improvement and appliance design and manufacturing, partnerships between retailers and manufacturers that lead to better advertising or increased access to new market channels are certainly mutually beneficial.

According to the 2004 report from sourcing consultants A.T. Kearney titled Making Procurement a Priority, true market leaders are collaborating more than ever with suppliers—and in a true win-win manner. This collaboration is occurring mostly in the areas of product design (development), supply chain (logistics), merchandising strategy, and strategic and tactical buying. The rapidly changing face of global supply emphasizes the importance of strategic partner collaboration (that is, strategic relationships, differentiated primarily by deeper levels of planning and workflow integration, and sharing of information) and supplier performance measurement in enabling top-notch sourcing operations.

Backed by more recent data from analysts Aberdeen Group and strategic consultants McKinsey & Company, there are many indications that leading retailers gain from working collaboratively with their suppliers to facilitate visibility across the entire supply chain, starting from product concept stage to product delivery—even to the supplier's shop floor. Also, today's leading retailers increasingly try to ensure that their corporate social responsibility (CSR) policies and practices are integral parts of their supply chains, and they are therefore adhering to ever more responsible sourcing practices by harnessing conscientious trading partners' expertise (for example, those that abide by the US Fair Labor Standards Act [FLSA]). For more information, see Global Trade and the Role of Governance, Risk Management, and Compliance Software.
Because of the rise in global competition, mass customization, customer expectations, and price and margin pressures, enterprises are relying more heavily on external suppliers to contribute ever larger portions of parts and components, materials, ingredients, and (sub)assemblies to finished products. Businesses also need reliable suppliers to manage a growing number of processes and functions that were once controlled internally (albeit this change has the potential to create many risks, which will be addressed later on).

While market consolidation has greatly affected both sides of the supply chain, its effects can especially be seen on the supply side (upstream). Namely, producers of raw materials and manufacturers of parts or materials may now have much larger, yet fewer, customers that control a greater portion of the market and that may be better able to mandate terms that will lower their own costs. However, at the same time, these high-and-mighty retailer-customers may have fewer suppliers to choose from and less flexibility in the terms they are able to negotiate. Sure, the expansion of global markets may mitigate some of this pressure, but those benefits must always be weighed against increased transportation costs and the risks stemming from the morass of political instability, currency fluctuations, language barriers, trading quotas, labor laws, regulations, time zones, intermediaries, etc.

In addition to a greater focus on the customer and the downstream side of the supply chain, another major shift in today's business culture is the pervading integration that occurs both internally and externally. To be clear, “focusing on the customer” includes both internal customers (the recipients of another person's or department's output within the enterprise) and external customers (recipients of goods, services, or information who are not part of the company supplying it), and helps to reach the ultimate goal of creating so-called “customers for life.” Internal integration occurs within an enterprise, and is aimed at increasing communication and collaboration among all departments or areas involved in producing what is sold. External integration involves greater sharing of information and processes between parallel departments of supply chain partners.

Pressure on price and profit margins is also conducive to greater integration of manufacturers with suppliers, since one way to respond to a trend toward commodity pricing is to distinguish one's product by adding value to it, and this can be done at many points in the supply chain. Conversely, in the case of commodity products (where hardly any value can be added within the supply chain), the company must compete on price and availability, where cost-effective performance becomes critical. Achieving and maintaining that performance nonetheless requires close integration among the supply chain partners, from planning and goal setting through to order tracking and inventory replenishment.

As partnerships tend to use long-term contracts, the length of the relationship creates opportunity for increased understanding of each other's organizations and increased efficiencies through greater communication. Given that demand increase can be achieved by satisfying unmet customer needs or by allowing changing price premiums for the higher value products delivered to the marketplace, all trading partners sharing their knowledge about the market and consumers is necessary for a successful demand enhancement strategy. For example, retailers are often better able to gauge the preferences of consumers because of their close contact with them, whereas manufacturers and suppliers might have a broader perspective thanks to the multiple markets they serve. When manufacturers and retailers collaborate and share information, they can develop products that are better able to meet the needs of the end customer, and they are also better able to communicate the benefits to those customers.

Supplier relationship management (SRM), which is a methodology (and an enterprise software category per se) to structure and support relationships with suppliers, comes into play when a supply chain recognizes the benefits of strategic sourcing. The APICS Dictionary (11th edition) defines strategic sourcing as “the development and management of supplier relationships to acquire goods and services in a way that aids in achieving the immediate needs of a business.” Yet, although collaboration has become a popular buzzword in today's supply chains, it has proven to be much easier said than done, since the relationship between retailers (customers) and manufacturers (suppliers) remains largely transactional and “at an arm's length” (distant) at best—and adversarial at worst. Indeed, in many cases, customers will still place orders in a one-way form of communication (with little or no feedback), whereas two-way communication typically only kicks in when something goes wrong (and is possibly beyond repair).