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A Low-Cost Country Sourcing Blind Spot

RiskGlobal sourcingDisasters and UnrestGlobal RiskLow Cost Country SourcingRisk MitigationSupply Disruption+-
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In this guest post, Procurement Leaders invites GEP’s Jim Kiser to develop the theme of the latest PL Insight whitepaper on ’Combating Risk With Intelligence’ and look at some of the steps that often get missed by organisations looking to tackle risk.

 

Throughout my consulting career, working in the beginning with various client organizations, I was always of the assumption that the use of detailed due diligence, if there was any, would be started during the beginning stages of sourcing important commodities, not prior to any new supplier engagement.

Don’t get me wrong, these are great organizations with smart people, solid operations management, just occasionally very poor planning with regards to commodity risk management. Sometimes a client’s desire to save money when re-sourcing a "strategically viewed" commodity overshadows the priority to involve good due diligence and avoid risk blind spots.

Many years ago when low-cost country sourcing was relatively new and considered the "cutting edge" sourcing solution to saving direct-material dollars, an organization I was working with had the idea to look into the sourcing of the fiber-poly resin used in their main commercial product.

The company had always touted a "special" resin that was intended to seal better before chemicals were applied. Many US suppliers offered it, but they were paying a premium market price. The first correct step the client did was testing other resin fibers in their US region, eventually trial testing a batch from an overseas supplier who stated a much lower material cost. They realized the material now was a true "commoditized" product and they recognized that they should have much better control of price and supply risks.

Here were the missed due diligence steps in the front end that created their blind spots:

  • Thoroughly checking resin compound make up to match current specification, supplier just told them, here is a document saying it is "this type of material"
  • No planning discussions around contract areas needed, payment terms, exchange rates, shipping, capacity of product, quality assurance, so forth. Executives at the client wanted savings, so if it worked in testing at the facility, then the expected to push forward pressuring procurement to execute in a shorter timeframe to secure material.
  • Not understanding the supplier’s financials, this was an Asian supplier and no records were accessible, it was a privately held supplier and only there was only one location from where the product was derived.
  • Analyzing other countries for suppliers that could provide this material and a good landed cost.
  • No planning on a bonded warehouse arrangement overseas or at home for forward inventory control or capacity needs.

A structured supplier visit along with due diligence planning with internal stakeholders, drawing up checklists and develop critical questions to extract and validate information, would have helped in creating a front-end due diligence detailed assessment. It would have given them clear understanding of cost control, systems compliance, operational processes, and use of price control material contracts, financial controls, and supply management techniques.


The information gathered from supplier visits would have helped develop the basis of the supplier assessment summary that the internal stakeholder team will finalize and present to management. For the client, this would have helped them rank a selection of suppliers attributes from strongest to weakest and recognize each supplier’s competitive position and long-range business goals. It would have allowed for them to create a profit impact analysis and identify the total financial risk.

Ultimately this front-end approach would have helped them identify various risk areas in their sourcing process, avoid those nasty blind spots and allowed the engagement process to be less painful and more effective.

 

Jim Kiser is a director at GEP and manages large-scale procurement transformation engagements. He is a subject matter expert for several indirect spend categories including HR Services and Professional Services.

You can access the latest PL Insight Whitepaper on combatting risk here.

Guest Blog
Posted by Guest Blog