Best Cost Country Sourcing: The next phase to capture savings

Bonn, July 19th, 2007
by Alexander Voigt, BrainNet Management Consultants GmbH

Companies that are facing the challenge of globalization are nowadays seeing unexpected changes in the market. All of a sudden there are not only so-called ‘industry countries’ moving volumes but emerging countries as well. Actually, there is a certain shift from Asia to Eastern Europe as production may move nearer to the consumer who is still located for the most part in Europe and the US. Even Africa comes into play as certain countries in Africa are being used as a so called ‘Low Cost Country’ for Asia, in particular China. The investment of China in Africa is increasing day by day and politicians are worried about the market coverage that China is getting in strategic regions.

It turns out that the trend of producing in countries with lower labor costs is not a one way street. The booming economy has not eased the need and challenge of globalization or the need to source in Asia, mid-America and Eastern Europe but even more astonishing it seems, is that an unexpected dimension and dynamic has changed the situation. Today, as most organizations have only scratched the surface of the possibilities for saving money by looking for good but price attractive suppliers, the gap between expectations and achieved results is bigger than ever.

Cultural difficulties are still one of the blocking points for most organizations. Often it starts with a classical miscommunication and misperception of western companies who still tend to rely on the behavior of the good old days when suppliers were very grateful if a good, brand-named customer offered a big volume to be delivered. Some suppliers may prefer not to spoil their reputation with a high quality, demanding western company that has the attitude of never really being satisfied or of listening to their questions. That request for information may lay unanswered on a desk for many weeks as nobody wants to take the responsibility to understand the content in detail. The western company however, often does react unpleasantly and can interpret the missing response as unprofessional and a sign of the often explained missing customer focus. At the end of the day, both parties won’t ever enter into a commercial relationship and believe that their perception about the other one has been confirmed.

Another good example of how things can go wrong simply because of miscommunication is the valuable skill of listening to each other, or rather lack of. In other words, the challenges of Global Sourcing are changing continuously. Given the changing markets, companies and decision makers in purchasing organizations really do feel that the first wave of savings for most organizations is over. However, in a period of healthy growth rates the pressure of savings has not really changed that much. The main question of how to capture the next wave of savings is not an easy one.

The first savings wave can be viewed as getting the low hanging fruits by building up new suppliers in China, India or Eastern Europe. This has been proven to be the
main region for European organizations to focus on. The process to do so has been approached in different ways and there may be no golden rule of what the best way may be. Some companies have decided to implement sourcing software, others go for implementing a central, organizational function. Looking at the results, the uncertainty about the real potential is immense. A classical ‘Management by Objectives’ approach may offer guidelines on what the Board is really after but are their expectations in line with realistic potentials?

Many companies drive savings in purchasing as if they were driving a car into a deep fog. Either staying at the sideline and moving forward slowly or staying close behind
another car and hoping he will go the right way. Both approaches are not satisfying even if you do achieve a few results with them. The really important question is not whether you get any savings but how good your organization is compared with what could have been achieved. The truth of the matter is, you don’t know what kind of savings potential is in front of you, therefore you also probably don’t know if you’ve been really successful in your achievement.

A structured approach to calculating a validated business case on what the real savings potential is and to define the total costs associated in capturing this savings would be a good way forward and a good way to lift the fog. Some people may argue that management would not start the project once they have transparency on the total cost. Well, if the decision is to use the fuel of your car to drive somewhere else instead of using Best Cost Country Sourcing than this is at least a decision based on facts and investigations. What often happens though is that decisions are made without a valid and agreed process but based on feelings and political reasons.

A typical underestimation of investments to drive savings in purchasing goes hand in hand with an underestimation of the savings potential itself. Even worse, Best Cost
Country Sourcing is mostly only seen as a shift from old suppliers to new ones. A holistic approach is needed which includes a validated business case, organizational
alignments and purchasing strategies. It may sound strange but strategic sourcing is often done today without a strategy. All of this can be done in a pretty short timeframe and successful purchasing organizations know only too well that they will lose the valuable momentum in their company if a program start is under investigation for too long or postponed too often.

What we do see in the market is a first achievement of savings in certain commodities and categories. The next step is not known. The CPOs of the world often ask themselves: “well, we did great with low cost country sourcing, so what is the new wave?” It is quite easy to say that Supplier Risk Management and Compliance Management need to be done but the real, hard, bottom line savings will only come out of a structured validated strategic Best Cost Country Sourcing program. A smart CPO will therefore say: “yes, we managed to get some savings, now let’s do it right and go for the real thing”.

About BrainNet
BrainNet is one of the leading international brands in supply chain consulting and – qualification. With over 100 consultants worldwide, BrainNet develops customised solutions for blue chips, midcap companies and public service organizations. BrainNet services the needs of about 220 innovative companies and organizations including Bertelsmann, CLAAS, Deutsche Post World Net, Deutsche Rente, Miele, RWE, SAP and Vattenfall. BrainNet has offices in Bonn, Boston, Budapest, Chicago, Hong Kong, Shanghai, Tampa, Wroclaw and Zurich.

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