Hello, my name is Jim Tompkins. I'm the CEO of Tompkins Associates and Tompkins International. I am pleased to be with you today to present the 2nd part of our 3rd series of the Global Supply Chain podcast.
In today's podcast I am pleased to welcome back Steve Ganster, the CEO of Technomic Asia and the Executive Vice President of Tompkins Asia, to discuss the cost reduction opportunity in Asian sourcing.
In this podcast, we'll take a look at some of the changes in the market environment, which are opening the door to opportunities for improving your supply chain costs, as well as some tactics to consider to exploit them.
Steve, welcome. We all know the US economy has continued to dwindle, and the word "recession" has become a part of our daily conversation. But some of our listeners may not have been paying attention to the China economy. How is their economy being affected by the global meltdown?
Steve:
Jim, there's been lots of noise on this issue in the media lately. Despite that many expect China to grow GDP by 8% in 2009, and that the UN estimates China will comprise 50% of overall global GDP growth this year, China's economy has not been immune to the economic recession. China recorded its lowest annual GPD growth in 8 years at 9% in 2008 ( although this still isn't bad), with 4th quarter GDP registering a paltry 6.8% by China standards.
As we look into this year, trade stats for January, while still showing a sizeable surplus, are down dramatically from last year, with both exports and imports falling significantly. Much of China's economic pain is the direct result of the slowdown in its export engine which has had a ripple effect throughout its whole supply chain.
Jim:
So what does this mean to the western buyers of Chinese goods?
Steve:
Well, it is in this pain that western buyers of Chinese products can find opportunity. Now is the time to explore the possibilities for low-hanging fruit in cost reduction in China's supply chain as well as consider some potential disruptive strategies that can substantially enhance competitive advantage.
Many companies are battening down the hatches, just trying to make it through the next quarter. With some focused and clever actions, you can take advantage of their preoccupation with this survival. In the end, you can not only soften the negative impact of this economic turmoil, but also emerge stronger and leaner when the market rebounds.
Jim:
I assume Chinese export companies are having similar challenges?
Steve:
You bet! In the last 6 months, literally thousands of Chinese suppliers have gone out of business in a number of industry sectors, especially in South China, which has spearheaded China's export industry for the last two decades. Many of those still in business are scrambling to stay alive as their order book has dropped precipitously from just a year ago, especially those serving the retail markets in the West and Japan.
Adding to this stress are recently released new standards on quality and materials in products, such as toys. These standards require much more testing, which has added significant cost burden to an already weakened supply base.
Jim:
Do you see the opportunity to take advantage of this situation?
Steve:
Absolutely. This tough environment has created an excellent opportunity for disruptive sourcing strategies, which can quickly improve your bottom line and position you more competitively for the longer term.
Taking a fresh look at your sourcing structure, given the recent dynamics in the global marketplace, as well as within China, can help realign your sourcing strategy to today’s procurement realties. This realignment can have multiple benefits, such as:
Immediate cost reduction
Improved sourcing performance in quality, consistency and speed
A more robust but leaner organization to ensure longer term stability
And stronger and more effective supplier relationships
Jim:
Great, Steve. What are some areas that our listeners need to consider as they are rethinking their sourcing approach?
Steve:
Good question Jim, let me answer this by using an acronym that will help our listeners remember: COST.
C for Countries - Make sure you are in the right places.
Asia's landscape has changed dramatically in the last two years in terms of currencies, economics, regulation and infrastructure. Moving product to the right countries, especially if you have not aggressively developed your international sourcing program, can yield immediate benefits of 20-30% on first cost.
During 2008, many companies, disenchanted with changes in China's relative competitiveness as a result of reduction in VAT rebates, currency appreciation, rising oil costs and increases in labor costs, scrambled to look at other Asian markets such as Vietnam, and even considered bringing back supply to North America.
But in the last year, oil costs went back down, China's currency stabilized against the dollar and some tax incentives for exporters were put back in play. Further, companies realized that markets like Vietnam are not as competitive as first thought, and also present many operational challenges.
In the end, China's competitive advantages, significant scale and ever improving infrastructure have been validated. Couple this with a hungry supply base, and opportunities to reduce costs in China become very real indeed.
Not only have we seen companies return to China, but we have witnessed enhanced interest in bringing additional SKUs to China. Those remaining off-shore in the less developed countries like Vietnam tend to be in very labor intensive, low value-add products. Second...
O for Organization - You need the right team doing the right functions in the right locations.
Having the wrong people in the wrong places using poor processes is a common deficiency among firms sourcing from Asia today. If you are currently working through a middleman, you may be leaving a lot of money on the table and are not in complete control of your sourcing process.
Companies can often realize rapid benefits when they get their own team on the ground in Asia that can work seamlessly with corporate resources to optimize cost and speed to market, and with full transparency. There has been a general discontent with 3PL performance that is leading management to explore doing more themselves in China, such as putting in their own warehouse or consolidation center. Third...
S for Suppliers - The right supplier mix has never been more important.
Too many companies today are stuck with an Asian supplier matrix that does not effectively leverage their order book. The wrong suppliers are supplying the wrong products at less than optimal prices and terms. Many Asian suppliers are hurting these days and are willing to find creative ways of working with both existing and new customers.
Some firms have been caught off guard by disruptions in their supply base, as Chinese companies have, even without warning, gone out of business. Your sourcing structure can be energized through finding new suppliers and implementing effective relationship management with existing suppliers to improve quality, consistency and speed ... and this leads to the last point ...
T for Terms - Supplier relationships are changing and need to be managed more aggressively.
Supplier partnerships are becoming more popular, and can benefit both parties through effective communication and transfer of knowledge and process.
Supplier terms are changing as companies move from traditional and ineffective vendor purchasing to more strategic sourcing. Significant short-term benefits can be realized by taking these agreements apart and putting them back together in more advantageous and executable terms. Western companies are evaluating their supplier base to see who the long-term players should be and then re-assessing their relationships with them to optimize cost and performance.
At Tompkins we constantly emphasize the importance of supplier relationship management (see our articles and podcasts on this topic). Given this turbulent and precarious environment, true partnering with the right suppliers can make all the difference in your short and long-term sourcing performance.
So remember, "C" for being in the right countries with the right product mix; "O" having the right organization on the ground doing the right array of functions that exploit China's cost competitiveness; "S," working with the right supplier mix and balance of internal and third party execution. ... and "T," working with your core suppliers utilizing the right terms and underlying relationship structure.
Jim:
Cut, cut, cut is what we hear about most often when companies are looking at strategies for cost reduction. But Steve, what is your take on this approach?
Steve:
Jim, I have a different view here. While freezing any new initiatives that cost money is the prevalent thinking today, focused investment in assessing opportunities in your sourcing structure can yield both attractive and near-term returns. Expending some energy to evaluate a few key areas which have emerged as a result of these tough economic times warrants immediate consideration. Here are just a few areas that make sense to probe for opportunity...
First: Review your total "basket" of products and commodities to identify those that can be competitively sourced from Asia. There is often more opportunity here than initially meets the eye. Remember, the world economics have changed quite a bit in the last 6 months.
Second: Bring transparency to your overall supply chain. Many companies do not have enough visibility at all levels of the chain. There is often fat or inefficiency in the process that can be trimmed to lower costs.
Third: Assess your current supplier mix and benchmark performance on all key touch points. Look for new suppliers who might have emerged during this crisis and make sure your core suppliers are financially sound.
Fourth: Design and implement a proactive Supplier Relationship Management system to improve performance of existing suppliers. Exploit your supplier base, taking advantage of their current pain.
And lastly: Consider "going direct" in select opportunities, utilizing in-house resources over "middlemen." Look to shift more supply chain activity off-shore where costs are likely better.
Jim:
These are just a few of the insights which I hope will get your juices flowing. I encourage our listeners to be proactive in assessing their supply structures, given the current dynamics in the global supply chain. It seems highly unlikely to me that old supply structures are ideal in this economic landscape. Putting some resources and attention to these areas can make a tangible difference in their performance and relative competitiveness.
Thank you so much Steve for joining us. I am really excited about this series, and I look forward to our next segment in this Global Supply Chain series on Transportation Cost Reduction. We look forward to speaking to you again real soon.
