Why Companies Struggle with Global Sourcing
Over the past month I have found myself asking the question: what is the difference between an organization who is successful when Global Sourcing and one who fails? How is it possible that two companies could get opposite results while striving for similar goals? Today we will take a deeper dive and try to answer just that question.
Whether it’s baby milk treated with melamine, toys sprayed with lead paint, asbestos in car parts or countless other smaller examples where suppliers provide unusable products to their customers. The common factor remains the same. Offshore factories who supply faulty goods perpetuate the poorly made label.
To the laymen, this adds up perfectly. To them, Asia (a very popular offshoring continent) is known to supply cheap quality goods, so when a product fails, or a recall is necessary, they will tell anyone who will listen how they were right, and offshoring can’t be trusted.
However, to an experienced importer, whose job it is to source quality products for themselves or others, they will know that quality can be found and supplied anywhere, it just requires the proper management to do so.
Majority of Global Sourcing Failures Are Attributed To:
- Breakdown in Communication
- Failure in Contingency Planning
- Lowest Cost Search
- Failure to Engage with Third Party Assistance
Quality and Quantity of Communications
The single largest obstacle to your company in global sourcing success is the quality and quantity of communications. Sounds simple doesn’t it – well, let me frame it like this for you: it is up to the organization to determine what is and isn’t important for your supplier to know, it is also up to you to build the processes in order to transfer that knowledge to your supplier and confirm their understanding.
Communicating and getting consensus tends to be a lot easier the closer distance you are physically and culturally. In the case of sourcing from Asia (as is very common), you must manage the increased risk from both distance and cultural difference as mentioned in The Advantages of Global Sourcing. This communication issue becomes compounded by possible time difference, language barriers, and increased lead times. As your supply chain effectively gets longer, you must become adept in communicating with your suppliers well before the issues come up or structure your process so that if issues come up, there will be enough leeway to still meet expectations of customers.
Failure in Contingency Planning
Another large part of this communication is between your organization and your customers. Being the importer, it is your duty to educate and inform your customers of your requirements and “rules” as you have created them with your supplier.
These “Rules” might come in the form of lead-times, ongoing communications of real or potential delays, rerouting or expediting shipments with outlined cost increases, etc. Essentially this is anything you provide your customers with that gives them insight into framework they are ordering from. If done correctly, your customers will have a better strategic understanding of order frequency, timing, responsibilities and expedition options for shipment.
In addition, it is the duty of the importer to establish a path of escalation for both customers and suppliers should things go awry. These contingency plans will answer questions such as: who is responsible for defective products after they have left the factory? Should there be an unplanned factory delay, who is responsible for covering potential expedited shipments as a result of said delay? Are you able to expedite a shipment from your supplier’s location? Is it financially viable to do the above-mentioned options given your organizations obligations and current margin?
That’s just the tip of the iceberg… and you’ll quickly find out that the best place to establish these answers is before you’ve even begun production.
As discussed in How to Ensure Quality When Importing from China, clarifying the capabilities and responsibilities from both organizations, including contingency planning, before beginning full-scale production will help remedy and avoid the above issues.
Lowest Cost Searching
Another very common mistake to Global Sourcing is evaluating supplier options based solely on cost of production.
Cost without-a-doubt is an important factor, but there is an overestimation on how strong the correlation is between cost of production and quality of goods produced. In fact, in many cases the higher-cost option may have be of less quality.
It is common practice to price for uncertainty, and in the case of manufacturers with high-defect rates that uncertainty rises – thus so does the cost. The whole higher cost equals higher quality does not always apply when sourcing internationally.
Another area where we have found many stumbles is focusing on finding ‘the lowest cost producer.’
If your only goal is to bring your supplier’s costs down, they will likely abide, but they may accomplish this in a counter-intuitive way. They may use cheaper input materials and they may not conduct enough quality inspections (or any at all). In many cases when factories do not have a sustainable margin, they will practice what is known as “Quality Fade.” This involves reducing input costs slowly over time to cheapen the product and increase margin. This results in having an increasing product defect-rate and is not a situation you want to find yourself in.
Our research has shown that a 1% quality defect rate can cost up to 2-3% in reduced margin. More so as the quality issue gets beyond a 5% defect rate, you’re looking at over 10-15% margin reduction due to lost time, foregone orders and damaged reputation from customers losing faith in your product’s quality.
Failure to Engage with Third Party Assistance
The last major hurdle with international sourcing initiatives is failing to know which third party resources are available to utilize should it become necessary.
The first step of this is understanding the major threats affecting your sourcing initiative and knowing the strengths and weaknesses of the supplier relationship.
By understanding where you are likely to go awry you can establish procedures with third parties to help reduce your risk.
Knowing the cost that poor quality can bring on your business and relationship, it’s important to focus on reducing said risk as much as possible. The best option is to have a full-time staff member physically checking shipments on a regular interval, implying a foreign office/market presence. If this isn’t feasible for your organization the next best is utilizing a third-party inspection agency.
It is important to understand that third party inspection agencies are not fool-proof. These organizations require a solid understanding of what constitutes good quality in each given context, as well can make mistakes. In our experience having full-time staff able to physically inspect the product shipments has always paid for itself, and as such this would apply to the third-party inspection agencies as well.
A single quality issue will more than likely pay for any third-party inspection, so just consider that when evaluating your options.
There is a multitude of things that could go less than ideal when opening yourself to sourcing in the global market. In our experience the biggest issues pertain to a breakdown in communication with your suppliers/customers, failing to contingency plan, searching for the lowest-cost producer and failing to understand what third-party offerings can help reduce your quality risk. By managing these aspects, you can better position your offshoring initiatives for success in both the near and long term.