Efficiency is key to global sourcing
Buyers, shippers realize the impact of overseas sourcing on logistics
By David Hannon -- Purchasing, 7/14/2005 2:00:00 AM
The continuing trend towards low-cost country sourcing is putting more stress on logistics networks and transportation infrastructure than ever before. As sources of supply extend supply chains, purchasing organizations are learning (often the hard way) that the best materials prices in the world can be undone with delays and inefficient and overly costly logistics operations. In fact, half of the freight buyers and shippers polled in a recent PURCHASING magazine survey said their companies are increasing the amount of overseas sourcing they are doing; a move that 61% of those said has impacted their organization's approach to logistics.
For the most part, shippers' concerns about the impact of global sourcing on supply chains and logistics fall into several categories: increased freight rates, reduced capacity, longer shipment times and lower service levels from carriers and service providers.
"We have had to re-think our global-sourcing strategy in light of the logistics impact," said the purchasing director at a manufacturer in the South. "The volume of goods we source globally has rapidly increased in the past 12 months. I have alleviated most of our concerns about delayed shipments by increasing our inventory minimums and our carrying costs are still lower with the imported goods, even with our increased inventory levels."
He went on to say that his company has focused its buying in China to one region that has a good reputation for both exporting goods to North America and manufacturing the type of products required.
Another buyer in the survey said, "We are looking for closer suppliers to minimize the risk of higher logistics costs and unpredictable price fluctuations."
Smokey Aumand, a 25-year procurement manager working for Water Wonders in Santa Maria, Calif. says the decorative-waterfall maker is increasing its overseas sourcing by 50% because the "domestic market's costs are forcing us to go overseas." But with increased security issues slowing overseas shipments, Aumand says ocean containers have faced delays of up to two months in some cases. "If we didn't have enough safety stock or inventory available we might have had to close our doors," he says.
As the volumes overseas grew, at one point Water Wonders decided to give its freight to a larger multinational logistics firm, expecting better service and rates. While the service was satisfactory in the beginning, Aumand says it was not long before his company—a relatively small shipper—was ignored and service levels dropped. In the end, Water Wonders went back to its original provider.
A materials manager at the European manufacturing plant for a U.S.-based automotive supplier says his company has focused much of its sourcing efforts in Asia lately and has seen the rates in the China to Europe freight lanes increase in the past couple of years. He says the global-sourcing strategy only works if the right logistics providers are involved to maximize the product cost savings.
"We are only able to see inventory reduction benefits through global sourcing if our logistics partners are reliable and predictable," he says, adding that some logistics providers have a stronger presence in certain regions than others. "We usually start by getting quotes from global logistics providers and then follow-up with our material suppliers locally to find out which logistics firms have the strongest presence in that region."
Total cost
The increasing amount of global sourcing activity has put a greater emphasis on total cost considerations as well as an increasing focus on regulatory issues. For example, when shipping to China, using wooden pallets requires a certification from the U.S. Department of Agriculture, which costs $25. At the same time, many ports are instituting a security surcharge for container and break-bulk shipments imported into the U.S. All of those costs are rolled up into the total cost of an overseas shipment today, offsetting some of the cost benefits of sourcing overseas.
"We are currently focused on reducing the add-on charges at the overseas end of the chain today," said one buyer in the survey.
Gary Lozowski, global commodity manager for logistics at Invensys in Foxboro, Mass. says global sourcing increases the need to participate in programs like the Customs and Trade Partnership Against Terrorism (C-TPAT) because in the event of a major infrastructure shut-down like Sept. 11, shippers that are certified under such programs will be more likely to get freight moving.
At the same time, sourcing the same product from two different regions can provide a backup in the event of a problem in the global supply chain. Like most companies, Invensys is sourcing more of its high-volume, low-tech materials from low-cost countries. "We have affiliate facilities in Reynosa, Mexico and Shanghai, China and we're doing co-sourcing on certain products to ensure an ongoing continuous supply of raw materials," Lozowski says. "We are a global company with facilities worldwide and at each facility, I have a logistics counterpart. Each has its own set of logistics requirements and governmental issues."
Another survey respondent points out that when working with overseas suppliers, the logistics organization needs to consider local holidays and customs that might slow the shipments coming out of a certain region. Having logistics contacts on the ground in overseas countries is another way of ensuring that shipments will get out of low-cost regions more consistently.
As he put it, "If a shipment gets stuck coming out of China, I'm going to have a much harder time getting to it from my office on the East Coast than someone on the ground in Shanghai."
Rates floating up
The increasing demand for freight services globally and domestically fueled in part by the increased global sourcing is keeping rates up. In fact, freight rates are far and away the biggest concern for logistics buyers and managers right now, with more than half of survey respondents putting this at the top of their priority list. More than 90% of respondents said they have seen price increases in their freight and logistics contracts in the past year, with trucking (LTL and truckload) showing the most cause for concern.
In an effort to control rate increases, the purchasing organization is taking more control of the logistics spend at 60% of companies polled. Survey respondents said closer collaboration with both logistics service providers and with material suppliers ranked as the most effective strategies to deal with increased impact on logistics costs. Other high-ranking strategies include putting contracts out to bid more often, leveraging longer supply lines to work with larger providers and consolidation of service providers, and spot market pricing optimization.
One survey respondent said his company has consolidated its materials- supply base to increase volume with the existing suppliers. "This provides us with more leverage when shipments get clogged," he says. "There are a finite number of containers available; I want my goods on the first one available."
More shippers are looking toward e-sourcing of freight and logistics as a way to offset rate increases. Thirty-eight percent of logistics buyers and managers polled in the PURCHASING survey said they have used e-sourcing in logistics and 17% said they are sourcing more freight online.
Invensys recently e-sourced air freight and ocean lanes from China to the U.S. online. "For a market that is supposedly at capacity we were still able to reduce our costs by 16%," says Lozowski. He says one of the advantages to e-sourcing the freight is that he can set specific parameters up front and set the starting price, as well as advise suppliers what charges his company is or is not willing to pay. For example, shipping from Asia may mean dealing with seasonal price fluctuations, so setting the ground rules before the bid can avoid some uncertainty in global markets.
"All potential suppliers must accept our terms and conditions before they can participate in the bid," he says.
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