Going global made easier with outsourcing
Wayne Forrest -- Purchasing, 11/4/2004 2:00:00 AM
As companies move manufacturing overseas in increasing percentages, optimizing logistics and getting goods into overseas plants and out to global markets in a timely manner has become a top priority for companies like outdoor apparel designer and maker Cloudveil. (The Jackson, Wyo.-based company specializes in technical outdoor clothing and traditionally managed its supply chain—from sourcing to logistics to trade finance—internally.)
Cloudveil's main concern was that managing its increasingly complex and global logistics function with its own staff distracted the company from its primary mission to develop, design and produce its line of outdoor clothing.
Approximately 98% of Cloudveil's products are now manufactured overseas and imported into the U.S. for sale. Cloudveil has business arrangements with a half dozen suppliers in Asia and one each in India, Canada and Mexico. Only the company's hats and tee shirt lines—approximately 2% of its product line—are made domestically.
Due to the seasonality of Cloudveil's business, the company typically saw a big spike in shipments in late summer and again in January, putting a crush on its logistics infrastructure. More and more the company realized logistics was not a core competency at Cloudveil, so in mid-2004, the company decided to outsource its entire supply chain to global trade management firm Sojitz—including everything from negotiating purchase orders, communicating with Cloudveil's factories in Asia, and coordinating outbound product shipments.
"Partnering with a company like Sojitz gives us the kind of logistics infrastructure that is normally associated with a much bigger company," says Jon Boris, Cloudveil's vice president of corporate development.
First order
Sojitz's first priority was to take over Cloudveil's U.S. Customs compliance processes, a growing concern as the company increased its use of overseas manufacturing and suppliers. Handling imports into the U.S. also was more complicated by increased security and more stringent U.S. Customs Office regulations in the wake of Sept. 11, 2001. Importers today must delve deeper into their respective supply chains at the factory level and beyond to verify business partners, accurately locate containers, and ensure that there is no possibility of contamination of imported goods.
"In the past, we could handle that internally, but there is an increasingly higher degree of risk with that today," Boris says. "We are not customs brokers and the U.S. Customs Department seems to change classifications without informing shippers and importers like us."
Jeff Guettler, director of business development for Sojitz's trade management solutions, points out that if a container is left open at the factory in the middle of China, the importer is responsible for it when it arrives in the U.S. "You have to have eyes and ears on the street to deal with these additional burdens," Guettler says.
Sea change
Cloudveil also expects considerable savings by converting more shipments to ocean freight rather than air. But a modal shift is more than just a cost decision, according to Guettler. "It can change a company's whole approach to the supply chain," he says. Converting from air to ocean means a company has to adjust its product development, raw materials sourcing and shipment to the factory, and lead time to utilize the ocean trade lanes to achieve cost savings without disrupting product flow.
Cloudveil's strategy changed in time for the company to make the switch to ocean freight for its fall shipments. The bottom line incentive for Cloudveil is simple—ocean freight costs about 20% of airfreight. The company altered its product development timeline to begin earlier this year and obtain samples sooner. Subsequently, company sales people previewed product lines with dealers earlier and "have a much better feel of what the order book will look like much earlier," says Boris. "We buy an extra four to eight weeks earlier to accommodate the ocean transport. Four weeks is typical, but we always build in a little extra cushion."
Cloudveil receives a shipment log every other day from Sojitz with the location of its goods while in transit. The data includes detailed costs of the shipment.
"Once everything is received into our warehouse in California, we make sure the packing slip matches what was shipped," Boris says. "Because we use [Sojitz] as our customs broker, they are able to provide shipping costs within 48 hours."
The importing process—which cuts across several internal Cloudveil departments, including production and finance—was always "very time-consuming" when managed internally, Boris says. Not having to allocate those labor hours to the importing function has reduced costs and allowed employees to concentrate on other duties.
Recently, Sojitz began working with Cloudveil to diversify its sources for materials and manufacturing, since all of the outdoor apparel maker's overseas supplies and production is based in southeast Asia. Sojitz began looking at options in South America—where Sojitz has a presence—to determine if the region's suppliers and factories can meet Cloudveil's requirements. The judgment will be made on factors, such as samples, pricing and risk analysis of trade laws, and business guidelines in the region.
"Before you take a leap like that, there are a lot of qualification processes that need to take place," Guettler says. "There are a lot of back-and-forth negotiations, working agreements, how business is to be conducted, and the different quality aspects to be measured with the facilities. That all takes time."
If the companies can establish the right business partnerships and obtain the necessary agreements and materials, Guettler believes those South American-produced goods can be ready for the U.S. market for the fall of 2005.
Accountability
The ability to verify every invoice for every partner to ensure that they have performed to contract specifications alone can be a huge benefit in outsourcing. As Guettler describes it, "It is the finite management that people typically don't have the resources to spend on that part of the business process. If a company negotiates a new $10 million trade lane, the next question is: How are we going to manage that? How are we going to check every single invoice to make sure they are performing what they said? We help standardize all this data, perform legal and compliance checks and push that data back to the corporation. That saves a load on IT, personnel and helps ROI."
Cloudveil also plans to have Sojitz finance its purchase orders—perhaps as soon as next year—and provide Cloudveil with finance terms on its freight for fall imports. In turn, Sojitz would offer letters of credit on Cloudveil's behalf, which, in theory, would prompt overseas factories to negotiate lower and more advantageous contracts, based on Sojitz's balance sheet and creditworthiness.
"For example, if there is a 30- to 60-day term period before we have to pay for the goods, this strategy allows us to convert the majority of inventory that we bring to accounts receivable. We have an asset-based credit facility with Wells Fargo, so it allows us to borrow at that much better a rate."
Cloudveil has not yet conducted an analysis of its monetary savings since bringing Sojitz on board. However, Boris says the savings on internal labor hours alone—Cloudveil not having to perform the variety of import functions with its own staff—"would be fairly significant."
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