IFF is ahead of the curve in low-cost country sourcing
By William Atkinson -- Purchasing, 3/12/2009 2:00:00 AM
When it comes to low-cost country sourcing, New York-based International Flavors and Fragrances (IFF) was ahead of the curve—50 years ahead of the curve.
While low-cost country sourcing is a relatively new concept to a lot of companies, IFF has been routinely involved with it since the company's formation in 1958. Since those days, the company has increased its forays into this strategy even further in recent years, and has been able to do so with a vast amount of experience under its belt.
IFF manufactures and sells flavors and fragrances for beverages, dairy, fabric care, fine fragrances, healthcare, home care, sweets and toiletries. "Because of the nature of the flavor and fragrance business we're in, we have sourced from what are now called emerging or low-cost countries ever since the
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inception of our company," explains Gladys Gabriel, global director of purchasing. For example, over the years, IFF has sourced a significant amount of essential oils, spices, flowers and other natural ingredients from countries as diverse as China, India, Indonesia, Brazil and Paraguay.
But in an effort to be more competitive in recent years, IFF has been making a more concerted effort since 2003 to source more products from low-cost markets that it has not sourced from in the past. "While we always sourced natural supplies from low-cost and emerging countries, we tended to source other supplies either domestically or from other developed countries in Europe," says Gabriel. "Now, we are sourcing many of these other products, such as specialty chemicals, from low-cost and emerging countries."
The first phase of this new initiative involved doing business with suppliers in China and India. "We were able to find a lot of value being offered as a result of their access to raw material feedstocks, as well as lower labor and operational costs," she says.
There were other reasons for the transition. For one, a lot of suppliers with which IFF had been doing business over the years for these products in the U.S. and Europe had begun to move some of their own production to emerging countries for overall cost improvement. In addition, governments in a lot of low-cost countries began implementing programs to encourage investment as well as trade. "For example, we began to realize some savings due to lower duties in certain countries," Gabriel adds.
Supplier Selection. IFF's overall strategy in doing business with suppliers in emerging and low-cost countries is select suppliers based on its past experience in the region, and then put the resources in place to help these suppliers succeed. IFF has five basic expectations of suppliers, regardless of country: quality, customer focus, cost savings, innovative solutions and technology.
"In most cases, we find that, when we begin looking for new suppliers in emerging countries, they are very anxious to work with us," reports Gabriel. "Sometimes they are so enthusiastic that we have to make sure that the expectations and timelines are appropriate."
In selecting suppliers, IFF first wants to make sure they have the right criteria to become long-term partners. To determine this, they assess the supplier's financial health, technical capabilities, and access to the necessary resources and capital on a long-term basis. They also investigate whether the supplier has a good history of regulatory compliance in their specific country.
Another important determinant is how committed management is to the industry for the long term. In some low-cost supply markets, business ownership differs significantly from models seen in the U.S. "For example, one businessperson could own a chemical plant, a real estate agency, a bank or even of a car dealership," explains Gabriel. "We need to know how committed they are to the business. If a problem occurs, will the owner be willing to deal with it, or will it be easier for them to just walk away and focus on the other business or businesses that they have?"
Another important selection criteria is determining whether the supplier can deliver products to IFF that will meet its quality standards both current and long-term. "It can take a long time and a lot of dedicated resources to make sure their quality meets our requirements," she explains. "They may not meet our quality standards the first, second, or even third time. There may be a lot of interactions required along the way before they succeed."
It is also important for the supplier to have an established and reliable supply chain network, so that, when the supplier has done its work, the products can actually be delivered to IFF's plants. IFF also sets up the appropriate legal tools to prevent any misunderstandings of what is expected, what things will cost, what is involved in the cost model, who will be responsible for what, who has exclusivity, and when things will expire.
Building Business. Once suppliers are selected, the next step is to build a relationship with them based on mutual support and assistance, including the sharing of expertise and knowledge. For example, IFF doesn't want suppliers to end up wasting resources by installing unnecessary equipment or incurring unnecessary production costs. It considers its suppliers' resources to be an extension of its own, so what is good for the supplier is good for IFF, and vice versa.
IFF also works with suppliers to establish the best raw material feedstock strategy. "For example, if they have vertical integration in their country, we can set up operations around that vertical integration to make sure we end up with a low-cost competitive advantage," Gabriel says, adding that IFF also encourages cross-functional interaction. If there is a production problem with a supplier, IFF can arrange for its R&D or quality organizations to troubleshoot the problem, instead of expecting the supplier to figure the problem out on its own.
Feet on the ground. While it is theoretically possible to create and manage a successful low-cost country sourcing program remotely or via occasional overseas visits, IFF has no intention of depending on these strategies.
"The most effective way to locate, source and maintain relationships with the best suppliers in a region is by having people locally," says Gabriel. With a full understanding of the local industry and culture, these people can provide the most value in terms of information about potential suppliers, and how to approach those suppliers. "You need people that understand local requirements, whether suppliers are complying with government regulations, and so on."
Buyers on the ground can also validate supplier plans and the suppliers' progress toward these plans. Having people on the ground also eliminates language and cultural barriers which helps engage the suppliers, Gabriel points out.
Local contacts are also critical in terms of getting supplier commitments. IFF, for example, has corporate standards that it wants to put into place with suppliers. According to Gabriel, it is important that the "people on the ground" are there, so they can do this in a way that is not too heavy-handed from the perspective of the supplier, especially small suppliers. These people can create a perspective on how to prioritize the implementation of these standards, based on the situation of each supplier, so that IFF can reach the targets that it wants, but without overwhelming suppliers in the early stages.
Finally, as issues arise over time during a particular project with a supplier, these people can be there to deal with them quickly.
Continuous Evaluation. To make sure suppliers continue to meet IFF's expectations, it audits supplier plants on a regular basis. But beyond evaluating individual suppliers, IFF continually evaluates the countries in which the suppliers are located. "Over time, as market dynamics change, we re-evaluate the cost models in those markets," says Gabriel. For example, if a government increases export duty rates, the result may no longer be the right business model for IFF with just that one specific country. "We may need to diversify into another country," she states.
Results. As a result of its 50-year experience with low-cost and emerging country sourcing, IFF has continued to enjoy a number of benefits. The biggest and most important is that it has been able to establish long-term relationships with dependable suppliers while diversifying its supplier risk. "Overall, we have been able to determine where we should place our emphasis to achieve resource optimization."
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