Low Cost Country Sourcing has evolved from an option to an imperative. LCCS can be done in two ways, First company manufacturing complete product and shipping globally from low cost countries(like apparel, toys etc) or Second organizations sourcing only parts and subassemblies from low cost countries and produce the finished goods at different locations (like automobiles, heavy machinery etc). Although LCCS started with low value goods being manufactured in LCCS but the trend of finding the best cost supplier of parts and subassemblies have now become an integral part of every organizations supply chain.
Organizations have adopted two ways to achieve part / subassemblies sourcing from low cost countries.
1. Setting up their International Purchasing Offices (IPO) at different low cost countries to develop parts and supplier base.
In the last few years, it also has become clear that international procurement offices (IPOs) are an exceptional way to manage and optimize a company's global sourcing effort. The purpose of establishing an IPO for most companies is to maintain a staff of local buyers and quality engineers near the sources of supply. Obvious advantages include local language capability, knowledge of local markets, reduced travel costs, and potential for greater leverage of the corporate purchases for a given commodity. Additional benefits can include local supplier development programs, enhanced quality oversight and frequency of audits, identification of potential suppliers for other commodities, and support for expansion of internal manufacturing capability in the region.
The major roles of an IPO are:
ü Performing supplier selection and maintaining a data base of top suppliers.
ü Doing detail capability study of supplier (quality, capacity and export capability).
ü Doing supplier quality improvement work.
ü Be a part of sourcing cycle and help suppliers win global business.
ü Manage contract compliance and quality issues.
ü Helping with local customs and norms of doing business.
2. Take the help of Business Outsourcing Expert Groups (BOEG). These are third party expert groups which help the organizations identify the kind of suppliers’ organizations can approach and help them achieve their cost savings targets. Prime examples of BOEG are IBM, Accenture, and Ariba.
Both approach’s have their Advantages and Disadvantages:
IPO approach help organizations to understand the country supplier base and to make long term and effective business relations while BOEG approach is used by organizations who wants to quickly achieve their LCCS goals.
Second critical point in deciding whether to have an IPO or BOEG is companies overall spend. If spend is low(less than $10 Million) it is better to approach BOEG while IPO are better for big corporations looking for long term presence and higher savings target.
Wednesday, April 15, 2009
Monday, April 13, 2009
LG saves money through Centralized Purchasing
I recently read a case study on LG Electronics strategy on centralize its purchasing function. The case study LG Electronics centralizes purchasing to save was published by Purchasing.com and talks about LG’s Transformation from de-centralized purchasing to a centralized structure.
LG has 120 operations Globally Comprising of four business units-Mobile Communications, Digital Appliance, Digital Display, and Digital Media. With such a wide operations in such different fields and regions, it was very important for LG to have visibility into it’s spend. Once the visibility is achieved, LG has started to effectively use its leverage among the suppliers. The result are there to see, since January 2008 about 50% of purchasing is now centralized in LG and has led to a reduction in 16% of material cost.
LG Procurement transformations results show the positive effect of spend consolidation and leverage buying in large OEM.
The case study re-emphasis on following three points:
1. For a large OEM with multiple divisions, centralizing purchasing is needed if a company is going to leverage its buys and reduce materials costs.
2. Procurement engineers can help reduce costs by suggesting changes in materials, suppliers or processes.
3. Suppliers will devote resources to OEM companies that are growing.
LG has 120 operations Globally Comprising of four business units-Mobile Communications, Digital Appliance, Digital Display, and Digital Media. With such a wide operations in such different fields and regions, it was very important for LG to have visibility into it’s spend. Once the visibility is achieved, LG has started to effectively use its leverage among the suppliers. The result are there to see, since January 2008 about 50% of purchasing is now centralized in LG and has led to a reduction in 16% of material cost.
LG Procurement transformations results show the positive effect of spend consolidation and leverage buying in large OEM.
The case study re-emphasis on following three points:
1. For a large OEM with multiple divisions, centralizing purchasing is needed if a company is going to leverage its buys and reduce materials costs.
2. Procurement engineers can help reduce costs by suggesting changes in materials, suppliers or processes.
3. Suppliers will devote resources to OEM companies that are growing.
Saturday, April 11, 2009
Risks involved in Low Cost Country Sourcing
Low Cost Country Sourcing (LCCS) is a procurement strategy for organizations looking to reduce cost while benefiting from Low Labor Cost and Low Production Cost at various countries around the globe. With highly advanced communication and transportation system now organizations can manufacture any part or subassembly at multiple locations and assemble them at the best possible alternative thus manufacturing the product. LCCS concept followed this simple theory. Organizations look out for location which gave them best total cost (broadly include manufacturing cost and shipping cost).
Common LCCS countries are China, India, Thailand, Malaysia, Ukraine, Romania, Mexico, and Brazil. These are typical developing countries benefiting from huge human resource or geographic location.
Why Organizations follow LCCS strategy:
· Low Labor Cost
· Low Production Cost
· Low Material Cost
· Pressure from customers to reduce price
· To be competitive in market
· To enter emerging markets
Risks involved in LCCS:
There are many papers published on how much cost savings organizations are doing by adopting LCCS approach. But LCCS strategy has many risks involved also:
1. Planning and Start up: Before an organization decide to pursue LCCS strategy a lot of due diligence is required in terms of identifying sourcing strategies and tactics, demand and spend analysis, market due diligence and financial business case.
2. Managing long distance and complex supply chain: Sourcing one part from China and one from India and assembling them in US is not easy task. Managing such a supply chain is challenging task not only logistically but on quality and cost front. It looks very good on paper but very difficult to implement and manage.
3. Supplier Knowledge: There is a significant variation in supplier capability and sophistication in developing markets, in specific verticals in a specific developing market, and even within individual operations and factories. Before selecting a supplier, it's important to meet with the supplier and conduct on-site visits and assessments. But it's even more important to do good research on the supplier in a pre-qualification process to make sure the supplier has a decent chance of living up to the requirements, or the organization might end up wasting a lot of time and money.
4. Quality: Most people say quality is directly proportional to cost and when you source from low cost country this is your prime problem. Organizations while doing LCCS have to make sure required infrastructure and processes are in place to counter this problem.
5. Infrastructure: The basic requirement to meet deadline is infrastructure and to be always competitive you need latest technology. Most low cost countries lack it. You could have cheapest cost to manufacture but if material cannot be delivered on port for shipment on time it is useless. China has understood this point and has worked in great deal at it but still most countries need to work on it.
6. Human Resource: Poor quality staff, lack of experience and high attrition is the most common issues faced by organizations while doing LCCS. People are backbone of any organizations and if they are inexperienced and unskilled it directly affect the quality of product and efficiency of the organization.
7. Government Policies: Each emerging market has its expertise and government policies regarding special waiver in taxes are very important factors. Although such policies are good in short term but are seen to be unsustainable in future. Even Chinese suppliers are feeling the competition now as special packages like waiver of VAT has been taken back by government.
8. Communications: Whole world doesn’t speak English. Go to China you will find people barely speak in English but better when you communicate through email. In India excellent in communication but speak with different accent. In Mexico they are more comfortable in Spanish then English. These are typical example of problem faced while communicating in some low cost countries.
9. Culture: Culture defines how aggressive people are towards task completion and conflict resolution.
Common LCCS countries are China, India, Thailand, Malaysia, Ukraine, Romania, Mexico, and Brazil. These are typical developing countries benefiting from huge human resource or geographic location.
Why Organizations follow LCCS strategy:
· Low Labor Cost
· Low Production Cost
· Low Material Cost
· Pressure from customers to reduce price
· To be competitive in market
· To enter emerging markets
Risks involved in LCCS:
There are many papers published on how much cost savings organizations are doing by adopting LCCS approach. But LCCS strategy has many risks involved also:
1. Planning and Start up: Before an organization decide to pursue LCCS strategy a lot of due diligence is required in terms of identifying sourcing strategies and tactics, demand and spend analysis, market due diligence and financial business case.
2. Managing long distance and complex supply chain: Sourcing one part from China and one from India and assembling them in US is not easy task. Managing such a supply chain is challenging task not only logistically but on quality and cost front. It looks very good on paper but very difficult to implement and manage.
3. Supplier Knowledge: There is a significant variation in supplier capability and sophistication in developing markets, in specific verticals in a specific developing market, and even within individual operations and factories. Before selecting a supplier, it's important to meet with the supplier and conduct on-site visits and assessments. But it's even more important to do good research on the supplier in a pre-qualification process to make sure the supplier has a decent chance of living up to the requirements, or the organization might end up wasting a lot of time and money.
4. Quality: Most people say quality is directly proportional to cost and when you source from low cost country this is your prime problem. Organizations while doing LCCS have to make sure required infrastructure and processes are in place to counter this problem.
5. Infrastructure: The basic requirement to meet deadline is infrastructure and to be always competitive you need latest technology. Most low cost countries lack it. You could have cheapest cost to manufacture but if material cannot be delivered on port for shipment on time it is useless. China has understood this point and has worked in great deal at it but still most countries need to work on it.
6. Human Resource: Poor quality staff, lack of experience and high attrition is the most common issues faced by organizations while doing LCCS. People are backbone of any organizations and if they are inexperienced and unskilled it directly affect the quality of product and efficiency of the organization.
7. Government Policies: Each emerging market has its expertise and government policies regarding special waiver in taxes are very important factors. Although such policies are good in short term but are seen to be unsustainable in future. Even Chinese suppliers are feeling the competition now as special packages like waiver of VAT has been taken back by government.
8. Communications: Whole world doesn’t speak English. Go to China you will find people barely speak in English but better when you communicate through email. In India excellent in communication but speak with different accent. In Mexico they are more comfortable in Spanish then English. These are typical example of problem faced while communicating in some low cost countries.
9. Culture: Culture defines how aggressive people are towards task completion and conflict resolution.
Monday, April 6, 2009
Building Negotiation
The main objective for every buyer is have lowest cost for the project and supplier always try to maximize their profit while maintaining a healthy business relationship. The way to obtain this win win situation is achieved by both parties through Negotiation. Although there are various ESourcing Tools available for buyers nowadays but still One on One negotiation is best way to negotiate for any complex project.
There are no strict formulae for success in negotiation. You might get success using one methodology in one project and might have to change it again for the same supplier in different project. Still there are certain points which are used by buyers globally to build the negotiation and reach a position of strength in it.
1. Prepare, Prepare and Prepare Hard: This is the unwritten “Golden Rule” of Negotiation. More than half of the battle is won if you study each and every aspect of the project.
a) Understand the project and associated cost drivers: Before you can start negotiating buyer should know the project completely and should assess the associated cost drivers.
b) Understand your negotiation weakness and strengths. Buyers’ strength could be the business volume he will be awarding to the supplier while weakness could be very strict timeline or highly critical design which is specialty of certain suppliers only.
c) Alternate plan. You need to have different plans of negotiation ready with you before you begin. If you have one plan only and supplier came up with brilliant defense you will lose the negotiation. Always have Plan B, Plan C ready before you begin negotiation.
d) Know your supplier. Find all the information about the supplier. Visit its website, Look at its financial details, Look at his technological expertise, its Capacity, its client list, the process and procedure in place. Try to find anything and everything you know about it. This all will help in great deal during negotiation.
2. Get data internally from the organization: Data is always key for every negotiation. Most buyers look outward to find data about the suppliers and about various cost drivers but fails to gather huge amount of data available to them internally through various departments.
a) Engineering and Stake Holder: Talking to the people who are the brain of the project is best way to prepare for a negotiation. It gives a great insight about the design, cost drivers and scope of the project. It is being said that maximum savings can be negotiated if sourcing is involved right from the design stage with engineering. You can choose your bid list based on the expertise required to build the design. The latter purchasing enters the project greater is the probability that it will do only a paper job. Having a collaborative relationship with the supplier during design stage and finalization the detail scope of project gives a company greater chance to achieve success in negotiation.
b) Production: Engineering design the product, Purchasing buy it but manufacturing uses it. Ask any regular supplier the importance of a manufacturing person at the client. This data is very helpful when you have two long term competitive suppliers fighting for the business.
c) Quality: This department is always pain for any purchasing group but if you are negotiating with your existing supplier they can provide you excellent data like ppm, reloading and stoppages.
d) Logistics: A supplier is as good as his last shipment. In the world of just in time and lean manufacturing timing is the key which each supplier understands. The crucial data of timely arrival that a buyer can get from here can be used at any point during negotiation.
3. Understand the bigger picture – Total Value Approach: Negotiation is not purely data but is also based on how well you have understood the total value of the project. To understand the concept take an example of buying a machine. You source the project based on lowest quote of the machine from different supplier. However you didn’t make any agreement for the servicing of the machine or the spare parts cost. In scheduled 5 years work life of the machine the supplier will laugh all the way to the bank. Identify these hidden costs or indirect costs in the project. Suppliers usually play during negotiation to get best overall cost while buyers keep their focus on short term goal of immediate price savings. The idea is understand the total value in the project and set your goals accordingly in the negotiation table.
4. Make your learning process Incremental: Most of the time buyers are dealing with same suppliers. Talking to them on daily, weekly or monthly basis and negotiating with them on small and big projects. Understand suppliers way of working. If a buyer always negotiate hard suppliers tend to come with their first quote on higher side and gradually decrease their bid to the price they want while giving the impression that they have moved a lot. Learn from past negotiations. Learn from the rules of engagement followed by the supplier during previous negotiations. Try to be creative in your negotiation tactics. Try to build your negotiation based on your past experience with the supplier.
5. Make a relationship and harness from it: Dealing with same set of supplier’s day in day out helps in making a relationship with the supplier, harness this relationship during negotiation. Leverage using additional products and service offered by the supplier. Offer them long term contracts. Make them part of the product development cycle. Make them equal business partner. A supplier always wants more business and when he smells the coffee he brings the cookies himself.
There are no strict formulae for success in negotiation. You might get success using one methodology in one project and might have to change it again for the same supplier in different project. Still there are certain points which are used by buyers globally to build the negotiation and reach a position of strength in it.
1. Prepare, Prepare and Prepare Hard: This is the unwritten “Golden Rule” of Negotiation. More than half of the battle is won if you study each and every aspect of the project.
a) Understand the project and associated cost drivers: Before you can start negotiating buyer should know the project completely and should assess the associated cost drivers.
b) Understand your negotiation weakness and strengths. Buyers’ strength could be the business volume he will be awarding to the supplier while weakness could be very strict timeline or highly critical design which is specialty of certain suppliers only.
c) Alternate plan. You need to have different plans of negotiation ready with you before you begin. If you have one plan only and supplier came up with brilliant defense you will lose the negotiation. Always have Plan B, Plan C ready before you begin negotiation.
d) Know your supplier. Find all the information about the supplier. Visit its website, Look at its financial details, Look at his technological expertise, its Capacity, its client list, the process and procedure in place. Try to find anything and everything you know about it. This all will help in great deal during negotiation.
2. Get data internally from the organization: Data is always key for every negotiation. Most buyers look outward to find data about the suppliers and about various cost drivers but fails to gather huge amount of data available to them internally through various departments.
a) Engineering and Stake Holder: Talking to the people who are the brain of the project is best way to prepare for a negotiation. It gives a great insight about the design, cost drivers and scope of the project. It is being said that maximum savings can be negotiated if sourcing is involved right from the design stage with engineering. You can choose your bid list based on the expertise required to build the design. The latter purchasing enters the project greater is the probability that it will do only a paper job. Having a collaborative relationship with the supplier during design stage and finalization the detail scope of project gives a company greater chance to achieve success in negotiation.
b) Production: Engineering design the product, Purchasing buy it but manufacturing uses it. Ask any regular supplier the importance of a manufacturing person at the client. This data is very helpful when you have two long term competitive suppliers fighting for the business.
c) Quality: This department is always pain for any purchasing group but if you are negotiating with your existing supplier they can provide you excellent data like ppm, reloading and stoppages.
d) Logistics: A supplier is as good as his last shipment. In the world of just in time and lean manufacturing timing is the key which each supplier understands. The crucial data of timely arrival that a buyer can get from here can be used at any point during negotiation.
3. Understand the bigger picture – Total Value Approach: Negotiation is not purely data but is also based on how well you have understood the total value of the project. To understand the concept take an example of buying a machine. You source the project based on lowest quote of the machine from different supplier. However you didn’t make any agreement for the servicing of the machine or the spare parts cost. In scheduled 5 years work life of the machine the supplier will laugh all the way to the bank. Identify these hidden costs or indirect costs in the project. Suppliers usually play during negotiation to get best overall cost while buyers keep their focus on short term goal of immediate price savings. The idea is understand the total value in the project and set your goals accordingly in the negotiation table.
4. Make your learning process Incremental: Most of the time buyers are dealing with same suppliers. Talking to them on daily, weekly or monthly basis and negotiating with them on small and big projects. Understand suppliers way of working. If a buyer always negotiate hard suppliers tend to come with their first quote on higher side and gradually decrease their bid to the price they want while giving the impression that they have moved a lot. Learn from past negotiations. Learn from the rules of engagement followed by the supplier during previous negotiations. Try to be creative in your negotiation tactics. Try to build your negotiation based on your past experience with the supplier.
5. Make a relationship and harness from it: Dealing with same set of supplier’s day in day out helps in making a relationship with the supplier, harness this relationship during negotiation. Leverage using additional products and service offered by the supplier. Offer them long term contracts. Make them part of the product development cycle. Make them equal business partner. A supplier always wants more business and when he smells the coffee he brings the cookies himself.
Thursday, April 2, 2009
Procurement Outsourcing
Organizations have been searching hard to find ways to reduce cost in every sphere of business including procurement. In recent past it has been identified as a major service that can be outsourced. Though companies are not outsourcing all the functions of procurement but non strategic, low volume, low spend and non value added activities are being outsourced quiet aggressively now.
The most common example of Procurement Outsourcing are issuing of PO or sending RFQs and receiving and compiling quotes from the suppliers. There are numerous companies providing strategic procurement systems wherein even the strategic procurement is also being outsourced using radical new technologies. The prime example is the whole procurement processes being driven by third party using e auction process.
Benefits of Procurement Outsourcing
The benefits of doing outsourcing of procurement are many like:
1. Manpower Reduction.
2. Better spend visibility
3. More savings using better negotiation tools and global supplier base( finding supplier base in Low cost countries)
4. Lower Procurement costs.
5. Low Investment and Better Flexibility in Procurement process.
Increased global competition is forcing various organizations to move towards new and better technologies in procurement. During recent times companies are cutting manpower and focusing their resources on key value added strategic work. Wherein the key decisions are taken by the company employees and data compilation and data mining activities are outsourced. Another point in this regard is the transaction cost. Through outsourcing of non core activities this cost can be reduced in great deal.
Steps to follow to achieve Procurement Outsourcing
The benefits are huge but taking a decision to outsource has to be taken after due deliberation.
1. The whole process starts with gathering of data regarding current procurement practice. A detail spend analysis report is to be formed to determine low volume and non strategic commodities. The next step is to analyze the data to determine savings opportunities which can be direct or indirect savings. A clear and visible long term saving targets should be formed.
2. Organizations need to be clear about the scope of the contract agreement. Contract should define how the responsibilities will be divided between the client and the service provider.
3. The most important aspect is the relationship as procurement function is very important, it is very important to have a strong healthy relationship between client and service provider.
4. Finally to oversee that required goals are met a key person from parent company should be with the service provider to oversee implementation and smooth achievement of companies goals.
Two aspects should be kept in mind before embarking on Procurement Outsourcing. First the data used to identify the function to be outsourced has to be very discrete and detail i.e. The right commodities should be outsourced and the other aspect is the fact that procurement is very process orientated operation. Slight deviation could make a very serious problem for the organization hence sufficient safeguards should be placed in the Outsourcing process to achieve the desired results.
Summary
Procurement Outsourcing is basically about generating value in the procurement function. It is not only about headcount reduction or passing your non strategical operations to third party but is about bringing expertise, newer technology and highly efficient processes into your business model thus making your company fit to take challenges of future (and current recession).
The most common example of Procurement Outsourcing are issuing of PO or sending RFQs and receiving and compiling quotes from the suppliers. There are numerous companies providing strategic procurement systems wherein even the strategic procurement is also being outsourced using radical new technologies. The prime example is the whole procurement processes being driven by third party using e auction process.
Benefits of Procurement Outsourcing
The benefits of doing outsourcing of procurement are many like:
1. Manpower Reduction.
2. Better spend visibility
3. More savings using better negotiation tools and global supplier base( finding supplier base in Low cost countries)
4. Lower Procurement costs.
5. Low Investment and Better Flexibility in Procurement process.
Increased global competition is forcing various organizations to move towards new and better technologies in procurement. During recent times companies are cutting manpower and focusing their resources on key value added strategic work. Wherein the key decisions are taken by the company employees and data compilation and data mining activities are outsourced. Another point in this regard is the transaction cost. Through outsourcing of non core activities this cost can be reduced in great deal.
Steps to follow to achieve Procurement Outsourcing
The benefits are huge but taking a decision to outsource has to be taken after due deliberation.
1. The whole process starts with gathering of data regarding current procurement practice. A detail spend analysis report is to be formed to determine low volume and non strategic commodities. The next step is to analyze the data to determine savings opportunities which can be direct or indirect savings. A clear and visible long term saving targets should be formed.
2. Organizations need to be clear about the scope of the contract agreement. Contract should define how the responsibilities will be divided between the client and the service provider.
3. The most important aspect is the relationship as procurement function is very important, it is very important to have a strong healthy relationship between client and service provider.
4. Finally to oversee that required goals are met a key person from parent company should be with the service provider to oversee implementation and smooth achievement of companies goals.
Two aspects should be kept in mind before embarking on Procurement Outsourcing. First the data used to identify the function to be outsourced has to be very discrete and detail i.e. The right commodities should be outsourced and the other aspect is the fact that procurement is very process orientated operation. Slight deviation could make a very serious problem for the organization hence sufficient safeguards should be placed in the Outsourcing process to achieve the desired results.
Summary
Procurement Outsourcing is basically about generating value in the procurement function. It is not only about headcount reduction or passing your non strategical operations to third party but is about bringing expertise, newer technology and highly efficient processes into your business model thus making your company fit to take challenges of future (and current recession).
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