Shippers combine technology, strategy in overseas sourcing
David Hannon, News and Transportation Editor -- Purchasing, 10/21/2004 2:00:00 AM
The globalization trend is everywhere. Every conference session with the word China in it is filled to capacity. Buyers looking to cut costs cannot resist the lure of moving to suppliers in low-cost regions today. But at the same time, buyers are learning there is a right way and a wrong way to go about moving to suppliers in low-cost regions, particularly when it comes to logistics issues. The recent spike in freight rates in the Pacific has brought the cost issue to the forefront, as some companies have seen only a fraction of the cost savings they had forecast in their jump across the pond.
In their efforts to accurately calculate the logistics costs and implications of moving to overseas suppliers, sourcing organizations are relying heavily on two assets: first, their logistics brethren to include freight and logistics costs in their analysis; second, a growing list of niche technologies aimed at optimizing sourcing decisions based on various logistics factors.
Getting techie
Technology is supporting the total cost of ownership analysis for shippers today. From niche software and service providers to major logistics firms to in-house tools, buyers are uncovering more options to run the numbers before sourcing overseas.
"Logistics professionals are being leveraged in different ways in large organizations because of the impact that logistics can have on both procurement price and delivered price of products when going global," says Greg Johnsen, vice president of products at GT Nexus of Alameda, Calif., a provider of technology and service for global logistics. "At the same time, the technology supporting this role has increased to connect the dots between logistics and procurement in the supply chain."
Johnsen says new data collection and analysis technology is helping shippers continually evaluate the benefits of overseas sourcing decisions from a logistics perspective, not just before they make them. Buyers make the original sourcing decision based on a host of supply chain costs, but with access to the right data and tools, they can track how suppliers are performing against the original plan in a variety of areas including logistics costs.
And it's not just niche providers that are now offering decision-support technology in these areas. Global shipping giant DHL recently unveiled new technology to automate the evaluation of shipping options. In addition to providing a repository of customs documents to help shippers avoid customs snafus, DHL's new Trade Automation Service also lets shippers compare costs of using suppliers in as many as five different countries and alerts buyers if certain suppliers appear on any government watch lists.
Efficiency of supply chains becomes a bigger cost issue when more supply is coming from overseas suppliers and technology is emerging to answer the call in those areas. Frank Cirimele, vice president of global supply strategy at technology and service provider Xporta in Santa Clara, Calif., says when the percentage of supply coming in from offshore is low, logistics inefficiencies do not have a very big impact on supply chain costs. But when companies move a large percentage of supply offshore in a short period of time, small inefficiencies can become big ones very quickly. In fact, Cirimele says that is typically the condition of companies that come to Xporta for help.
"I'd like to say there are a lot of forward-thinking companies out there that come to us first, but we're not seeing that," says Cirimele. "The companies we have experience with have typically moved more spend offshore in a big push and then realized they are losing control and need to analyze those moves more efficiently. They may still want to go offshore as part of a bigger strategy or a deal with a supplier, but at least they are able to identify that they are not making the 30% they thought, they are only making 5% or 10% in this move. Now they can forecast that accurately for the end of the year and explain to the CFO or board why there is only 10%."
Technology like Xporta's allows buyers to optimize their mix of suppliers based on a variety of logistics issues and costs. Cirimele says some leading-edge buyers are moving to a more regional approach, with suppliers in several global regions. When logistics or other costs increase in one region, the buyer can increase the amount of supply coming out of another region where costs are not so high. While the strategy is not earth shattering, the technology to continually monitor these trends and optimize the amount divided between the regions is finding its place in the market today.
"One of the more dramatic examples was a company that found their Canadian supplier was actually a better fit to supply their South American plants than the existing Argentina-based supplier because the Canadian plant was more efficient in manufacturing and logistics." says Cirimele. "That was a big surprise. No one had even looked at that scenario."
Teaming up at Thomson
French electronics firm Thomson Multimedia, which owns RCA, has extensive experience in working with overseas suppliers. David Blackburn, general manager of logistics in Thomson's consumer solutions business, says the company has been using Asian suppliers for nearly 30 years for everything from components to fully manufactured consumer electronics products. Over the years, Thomson has realized the importance of involving logistics professionals and strategies in global sourcing decisions. The logistics organization does not get the final say in the decision, but is closely involved in putting together the costs and considering the network affects of sourcing decisions.
"When there is a potential new supplier or a new product with an existing supplier and our company is looking at cost and pricing decisions, that is when our logistics group usually gets involved," says Blackburn. "Or if there is a location analysis study for a manufactured product, we can help in deciding which location makes the most sense based on various logistics costs and issues."
One potential cost issue to surface recently in sourcing from China, according to Blackburn, is the later peak demand season in electronics driven by companies leveraging low inventory models and more just-in-time shipments from suppliers. Those issues require advance planning to ensure there is the shipping capacity to meet demand and may involve an additional logistics cost to secure freight during a peak crunch.
When it comes to customs and tariffs issues, Thomson does not use software, but relies on the expertise of its internal customs group. At the same time, Thomson leverages its relationship with third-party logistics provider TNT Logistics to help streamline international shipments.
Blackburn's primary advice to shippers looking to keep a close eye on local logistics issues for international sourcing: "Having resources on the ground abroad helps. If you think you can manage everything from an office in the U.S. you are mistaken."
Here comes Sun
Another company that is highly outsourced in global regions is high-tech giant Sun Microsystems, also in Santa Clara, which has sent most of its manufacturing to contractors in overseas markets.
"In terms of migration to low-cost regions, the predominant driver is the cost of products or materials we buy," says Joe McGrath, director of procurement and operations strategy at Sun. "At the same time, we also have to consider the total cost equation, which includes taking a close look at how our demand is dispersed across all geographies to understand the impact of landed costs into areas where we have customer density. If we neglect that in our sourcing decisions, we could expose ourselves to a model that just moves costs from one bucket to the next."
Sun uses internally developed software to analyze its total landed costs for products sourced overseas. Historically that analysis was done separately by product line, but Sun is now looking to leverage more of the efficiencies across its entire supply network and is working with tier one suppliers to improve logistics costs. With that in mind, in 2004 Sun moved to a strategy of having more components and products shipped directly from suppliers or contract manufacturers to customers and avoided the cost of warehousing and inventory altogether. Instead of using costly distribution centers in the U.S., Sun wanted to cross-dock shipments or put the burden on the supplier to ship direct.
"That move requires a huge amount of interaction between our supply management and logistics teams in terms of capabilities deployed, signaling, business processes, business practices to synchronize supply into those facilities and back out again," says McGrath.
Despite the increased rates and capacity issues in the Pacific this year, McGrath says Sun has never rethought its decision to go to China in such a big way, only the best way to get in and out of China. "There is no question that from a total landed cost perspective, all of our moves to Asia have been beneficial and improved our cost profile. We look at logistics costs as a percent of cost of goods sold and look at them both in terms of what's in the inbound element of our product cost and what's outside of our product cost. There were some issues this year when freight rates crept up, but even in that situation, they are not encroaching on the benefits of our manufacturing product in China vs. domestically. However, that may not be true if we manufactured here versus Taiwan or another part of the world."
Sun takes a risk management strategy to its logistics issues and costs when sourcing overseas. For example, McGrath says lean supply chain strategies provide benefits in certain cases, but do not always make the most sense. It does not make sense to be totally lean on a low-value part because the risk of supply interruptions may be too high.
"We have to be rational about it and not just pursue JIT ideology where it does not make sense," McGrath says. "If you are heavily outsourced, you need to build as robust a supply chain as possible but you cannot predict where it will fail. In the past couple years there were issues like SARS, Iraq, the West Coast port strike, and even going back to Sept. 11. You can't anticipate what will happen and the cost impacts, you just have to figure out how to minimize the risk."
What's out there?
Below is a listing of some of the total landedcost calculators currently available.
| Provider | Product name |
| Open Harbor | Global Brokerage solution |
| SSA Global/Arzoon | Total Landed Cost Calculator |
| NextLinx | Trade Import Solution |
| Vastera | Landed cost module on its Import Management software |
| GT Nexus | Global Intelligence and Global Transportation Control |
| Xporta | Global Sourcing Optimization |
| FedEx Trade Networks | WorldTariff |
| DHL | Trade Automation Service |
| Vastera | TradeSphere landed cost module |
| SAP | Global Trade Services |
| G-Log | GC3 |
| Precision Software | Function in its Export & Import Management module |
| TradeBeam | Landed Cost module of its Global Trade Management suite |
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