I = Interviewer C = Craig
I We keep hearing all about the globalisation of markets and supply chains and so on but why has global sourcing suddenly become so widespread?
C Well, I think there are several factors, really. I mean, as companies expand internationally their outlook becomes increasingly global. What's more, hyper-competitive domestic markets have driven companies to look further afield in their search for competitive advantage. Although I think the process has really been accelerated by rapid advances in IT and telecoms. That's been the real catalyst for change.
I And what's the great attraction? Why are companies so keen to source abroad?
C It depends on the circumstances of the company in question. It could be anything from better access to overseas markets, lower taxes, lower labor costs, quicker delivery or a combination of any of these.
I But it would be fair to say the financial benefits are the main incentive, wouldn't?
C In most cases it probably would, yes. Without them, I suppose few companies would be that interested. But there are risks involved as well, you know.
I And what are those risks?
C Well, the most common mistake companies make is they only see the savings and don't bother to think about the effect on other key criteria like quality and delivery. A clothing company that only buys from Asian suppliers at low cost, for instance, will find that as labour rates increase over time, it'll have to island hop to find new low cost sites. And this, of course, introduces uncertainty about quality and that's critical for a clothing company. There are other possible risks as well.
I Such as?
C Well, such as negative publicity as a result of poor working conditions in the supplier's country. And, of curse, there's always currency exchange risk.
I So how do you go about weighing up all these factors and choosing a supplier?
C It's crucial that companies know precisely what they're after from a supplier and that they fully understand their key selection criteria. They need to be careful to define them and make sure they're measurable and then rank them. It's dangerous selecting a particular supplier just because they happen to deliver outstanding performance in one objective such as cost or flexibility.
I So, having selected a prospective partner, what then?
C Well, then you have to negotiate how closely the two parties need to work together. If it's going to be a long-term relationship, you need to discuss how much sharing of information and resources will be necessary to extract maximum value from the collaboration. The prospective partners need to sit down and decide on the best form for the relationship to take.
I And what's the most common form of this relationship?
C Well, once again it depends on individual circumstances. The relationship can b anything, I suppose, from complete ownership through strategic alliances to buying the market.
I Buying the market? What's that?
C That's when companies just publish their specifications and ask prequalified vendors to bid for the contract. General Electric is currently doing $1bn of business this way over the Internet. It's a short-term deal with almost no interaction with the supplier and the length of the bidding process is cut by half. But most importantly for companies like GE, order processing is $5 an order as opposed to $50 when it's done on paper.
I You mentioned strategic alliances. When d they make sense?
C Well, for an aircraft manufacturer like Boeing, for example, an alliance with is engine manufacturers is logical because of the complex interaction between the body of the aircraft and its engines. And this complexity means everything has to be developed together. The arrangement also has the added bonus of reducing the financial risk of long-term development programmes.
I And how about actually owning the supplier, then? When is that preferable?
C Well, companies take over suppliers when they're vulnerable to fluctuations in the availability of key supplies. Take Du Pont, for example, the chemicals giant. Since oil is a primary ingredient of many of its products, Du Point is very much affected by the availability, and therefore cost, of oil. Du Pont reduced these uncertainties by purchasing Conoco, its main oil supplier.
I Thus keeping its costs down.
C Possibly. Owning the supplier definitely increases financial control of the supply chain. But when you take the cost of acquisition into account, there are no short-term savings.
I So, all in all, does global sourcing make sense?
C Well, there are lots of very powerful benefits but managers have to consider all the main operational factors very carefully first.