By Jim Tompkins, CEO, Tompkins Associates
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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 our second segment in our second series of this Global Supply Chain podcast. On our last podcast, Gene Tyndall helped us establish the context of the supply chain within today's terrible economic climate.
Given this backdrop, we understand now more than ever the importance of assuring that our supply chain is a global-competitive advantage. So now, with the next five segments, what we will be doing is digging into the five steps of the supply chain; BUY, MAKE, MOVE, STORE, SELL.
It is appropriate as well that at this time of year, with Black Friday behind us, and the holiday season approaching, we really grasp the "buy" component of the supply chain.
To this end, I am very pleased to welcome back to our podcast, Steve Ganster, the CEO of Technomic Asia and Tompkins Asia and a Global expert on the "buy" element of the supply chain. Welcome Steve, glad to have you back.
As you know we are pursuing more discussion on the buy-make-move-store-sell supply chain process. What do you consider as a part of "buy"?
Steve:
Jim, it's great to be back and to drill down further on key steps in the global supply chain. When we talk about "buy" we consider the full array of goods and materials needed to support the "make" and "sell" components of the supply chain.
For those companies who manufacture or assemble, the "buy" process is the key to their manufacturing competitiveness, considering costs, speed to market and quality. The same is true if you don't make anything, but simply buy and resell. The first element of the "buy" process, as it is with make - move - store and sell, is planning.
Planning or strategy should permeate the entire supply chain process, with a sound strategy developed for each step, as well as the integrated whole. The resultant supply chain should be aligned with the company's overall strategy for growth and profitability. As we frequently remind our clients, your supply chain should be used as an offensive weapon to differentiate yourself from competition.
Jim:
So, in the "buy" element we include planning to "buy". What are the key topics of planning that we need to look into?
Steve:
In the "buy" phase, strategy comes into play at multiple levels. First, do I buy, or make, or do some combination? Over the last 10-15 years, many US companies have abandoned much of their manufacturing activity in favor of sourcing from a third party. Countries like China have had a great impact on this decision.
As a result, companies have seen their core competencies change from manufacturing being a fundamental skill. Now supply chain effectiveness is their key to success.
Second point, from whom do I buy? The answer to this question of course considers where you can get low cost, but also must consider the proprietariness or intellectual property level of your product, its technical complexity or design intensity. How will the geographic location of the best suppliers affect my "buy" decision in terms of transport costs, complexity, speed and security? That's another key question.
Once you have answered these types of issues, you need to determine what relationships you will have with your suppliers. And the list goes on. All of these "buy" elements need to be thought through carefully, considering both your own company's strategy, its resource base, and culture, as well as dynamics in the marketplace in which you compete. If you get the "buy" phase wrong in your supply chain strategy, make-move-store and sell are going to be much tougher to execute well.
Jim:
Steve, how are buying decisions made today?
Steve:
In general, Jim, I think buying decisions are being made much more strategically today. The global environment has gotten more complex, dynamic and uncertain all at the same time, and now economic chaos has thrown another variable into the equation.
This has moved companies to go from what I would call vendor based sourcing to strategic sourcing. It is no longer enough to simply buy from the cheapest source, and switch suppliers randomly to get a lower price. Some companies, like Mattel last year, have paid a dear price for hammering their suppliers for low prices without attention to their capability to provide it and still meet good quality standards. We need to balance low cost with product quality, consistency and safety, with speed to market, and especially now, volume flexibility as our customers' demand becomes more unpredictable.
Successful companies are also integrating their sourcing decision process between procurement, logistics and merchandising/design to achieve the best mix of low cost, speed and quality. At the risk of being redundant, I can't stress enough the importance of strategic thinking when making the "buy" decision. Companies which over-react to market changes, such as the recent spike in oil prices and appreciation in China's currency, are too short-term in their thinking. You need to carefully think through your options, work with real time market intelligence, and consider the longer term.
Jim:
Steve, I know that after having many conversations with you that buying is much more than a purchasing transaction. Help us understand the whole relationship piece of buying.
Steve:
The market turbulence we are now experiencing is putting significant strain on buyer-supplier relationships. Stressful times will reveal the cracks in any relationship, and we are seeing this today. A buying relationship built only on commercial terms is a bit like a marriage based only on a sexual relationship. By the way, Jim, I assume these podcasts are PG-13 rated?! Over time, the relationship needs something more or infidelity is sure to occur as we can always find a better price somewhere else. Thus, relationship management has never been more important. Transparency, trust and open communication can provide the needed ingredients to work through the market's turbulence.
For instance, in order to optimize costs, working more closely with the supplier on his processes can be of great help. Making sure shipments occur on time requires transparency in demand planning and forecasting. All of these issues are driving buyers and suppliers closer together, even to the point of formal partnerships. Many see more strategic relationships as the best way to strive or even survive in today's marketplace.
Jim:
Let me shift gears a bit here and focus in on China. Goodness knows, China is a big source of goods bought from all around the world. From a buying perspective, what are your thoughts, Steve, on the evolution of buying?
Steve:
Given the change in China's cost base as a result of an appreciating currency, reduction in VAT export rebates, rising land and labor costs, Chinese suppliers have to take it to the next level. Low quality, cheap goods are no longer the focal point of China's manufacturing, and even the government is willing to let some of this low value-add business go to other countries.
Even in the last few months, thousands of small Chinese suppliers have gone out of business. In the toy sector alone, over half the country's producers went out of business in the first eight months of 2008. Those that survive will move up the scale in terms of production efficiencies and even automation. Some of the rising costs in China stem from the tougher quality standards imposed as a result of some of the problems last year. So just as we need to evolve in our buying processes, we see suppliers in China and other countries doing the same thing. This makes working with the right suppliers in the right locations even more important.
Jim:
So China really matters?
Steve:
Yes, Jim, China really does matter. Some have forecasted China's demise as the factory of the world due to the recent spike of costs, but we don't see it that way at all. China has and will continue to respond to these challenges, and we see most foreign companies (over 90% in a recent Amcham-Shanghai survey) intend to stay in China, and many will invest even more.
China's government is also taking an active role through more expansionary monetary and fiscal policies coupled with a massive investment in further infrastructure development. The government has put back some of the available export rebates and some observers even think the renmimbi could be devalued next year. There is significant latent potential to improve manufacturing efficiencies and we see local companies aggressively pursuing this end. To be sure, China's market will continue to change and evolve, and we must tune our "buy" strategies accordingly.
Jim:
Well thank you Steve, I really appreciate you spending time with us today.
In two weeks, we will pursuing further the Global Supply Chain discussion when we turn to the CEO of ROI, a supply chain partner of Tompkins from Germany that excels in the "make" component of the supply chain.
Thanks for being with Steve and I today, look forward to speaking to you again real soon.
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