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0262 1762/04 © 2004 Elsevier Ltd. All rights reserved WORLD PUMPS March 200434
Five to ten years ago, manydeveloping countries wereirrelevant to sourcing decisions.
They had no infrastructure, no qualitycontrol and no understanding of therequirements of sophisticated buyers.According to Anand Sharma, an experton manufacturing and head of TBMConsulting Group: “NAFTA opened upMexico, an open mind did it for EasternEurope and now China and India arebecoming very aggressive in marketingthemselves to US manufacturers.”
There is, quite literally, a whole newworld opening up. Global sourcing hasallowed many manufacturers to seedramatic bottom-line savings,enabling them to stay competitive in atough economy. However, there aremany manufacturers that are stuck onthe outside looking in, unsure ofwhere to start or how to begindeveloping a global sourcing program.
First Steps
Global sourcing is the kind of endeavourthat involves a good deal of preparatorywork. You do not want to find out thatthe most critical component is not on itsway to your facility just as you aregearing up for production.
According to Christine Kelly, an analystwith SAS, a software and businesssolutions company, manufacturers mustfirst scrutinize their currentprocurement strategies and evaluatetheir suppliers. The process, called‘supplier relationship management’(SRM) is relatively new.
A company that does not havedetailed procurement data cannoteven begin to think about the globalsourcing question.
“Today you need electronic data,” saysKelly. “We couldn’t really help some ofthe smaller companies with which Ihave come into contact, because alltheir purchase orders were still infiling cabinets. If you want to beviable, gather your data, or at leaststart to track current dataelectronically so you can do someanalysis on it.”
For global sourcing decision-making,the analysis is a five-step process(Figure 1).
Discover
Decide which products you cansource. Kelly suggests thatmanufacturers categorize theirsuppliers by deciding which ones theywant to or need to have a tightrelationship with.
Identify which commodity groups areimportant and consider carefully theconsequences of changing yourcurrent supplier relationship. If youhave to lose a supplier or somecatastrophe has hit a country and youare unable to get your order shipped,what does that mean to your business?The key has to be in deciding what is aprofile of a supplier that you reallywant to have a close relationship with,
and what is a profile of a supplier thatis really more than just getting you acommodity.
Analyze
Out of those commodity categories,which ones play the biggest roles in yoursupply chain? Which ones wouldactually give you the most savings? Justbecause it is your highest pricedcommodity doesn’t mean it gives youthe highest price return. SASrecommends carrying out price variancereports. Companies have found thatdifferent buyers in different divisions arebuying the same product at differentprices from the same supplier.
Strategize and execute
Once you have determined what thosecommodity groups should be, decideon a strategy for choosing a supplier.
“In analytic SRM,” Kelly says, “wepreach the concept of optimizingsuppliers. Always make sure thatsuppliers have your business goals. If,for example, quality has to be within acertain system or obtain a certainscore, communicate that. Whateveryour business rules are, you need toadhere to them when you choose yoursuppliers. Everyone needs to adhere tothose bigger rules.”
Monitor
Follow up on the execution of allcontracts. Make sure that you reallyare getting what you agreed upon andcheck that you obtained your costsavings as promised.
This four-step process is the samewhether a company sources locally,nationally or globally. Determinecommodity categories where you have
Making global sourcing a successWhen it comes to procuring components, pump manufacturers have more choices than everbefore. In an effort to help pump manufacturers get started, or improve existing programs,Susan L. Schaibly turned to several procurement and supply chain experts, as well as severalpump companies that are already reaping the benefits of established programs.
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Figure 1. Analyticsupplier relationshipmanagement (SRM)requires thatcompanyprocurement data beelectronic. The abovefive steps arefollowed whenmaking sourcingdecisions, regardlessof company size orpurchasing power.
WORLD PUMPS March 2004 www.worldpumps.com 35
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some leverage, decide that you cantake the risk of outsourcing to anothercountry and then choose the sourcingprocess you want to use.
Dennis K. Williams, CEO of Idex,which produces pumps, meteringproducts and dispensing equipmentvia its eleven divisions, is a firmbeliever in the global sourcing process.“We try to leverage sourcing ofcommon commodity-like items acrossthe Company,” Williams said in arecent webcast. “ Take cast iron, forexample. We have a commodity leaderthat aggregates the purchase, so everymonth we have an RFQ package thatgoes out covering probably fivedifferent business units. Every businessunit has its own opportunities that wedo our best to leverage.”
The challenges ofglobal sourcing
Once you have completed the aboveprocess and decided whichcommodities to source globally, awhole new set of challenges emerges.Whether a manufacturer wants to buyone if its thousands of parts fromChina or source hundreds ofcomponents from around the world,many of the hurdles to success are thesame. According to a benchmarkreport on global sourcing by AberdeenGroup, a leading consultant andanalyst group, there are six majorchallenges to global sourcing:
• Identifying foreign sources ofsupply
• Qualifying foreign sources of supply• Collaborating and negotiating
with foreign suppliers• On-site evaluations/assessments of
foreign suppliers• Formalizing strategies across
regions, divisions, and sites• Managing the development and
training for foreign suppliers1
Dealing with foreignsuppliers
If you are involved in procurementand purchasing, you have probably
received at least one e-mail messagetoday expounding on the wonders ofmanufacturing overseas. Thepromised savings are hard to resist.Michael L. Hetzel, vicepresident/Americas for Pro QCInternational, who has more than 20years of manufacturing experience andhas piloted numerous global sourcingprojects, suggests the following processfor US pump manufacturers to usewhen qualifying foreign suppliers.2
1. Identify the source countries that aremost effective within your industry.
2. Contact the trade mission orconsulate from that country in thenearest major US city to your location.
3. Contact the potential suppliers witha structured enquiry regarding theirservices, technology and equipment.Send the same enquiry to allprospective suppliers. This process willestablish two important requirementsfor moving forward; firstly that thecandidate company has the equipmentand infrastructure needed to supportyour projects, and secondly that theyare able to communicate effectively.Eliminate those without the technicalcapacities, and also eliminate thosewith communications problems.
Send at least three (or more asneeded) blind test RFQs representingthe range of projects that you intendto source to the finalists and get themsubmit quotations. Do not tell themthat these are tests, or you may receivelow price levels that you may never seeagain. Compare price positions andselect the finalists for further dialogue.
5. Communicate your qualityexpectations, procedures and metrics.
6. Negotiate terms and conditions anddevelop the communicationsprotocols needed to work in a timelyfashion, after which you will need tovisit the suppliers to examine theiroperations and begin the personalphase of the relationship. You canthen build the commitment neededon both sides for the longer supplychain to be managed effectively.
7. Find an international bank withexperience and a presence in thecountry or countries you’ve selected.
8. Consider engaging an internationallaw practice with experience in yoursource country. Many companiesconduct successful offshore sourcingoperations over many years withoutlegal assistance.
9. Start your first order with a projectthat will not damage your company orclient if it’s delayed. This allows you todebug the communications andworkmanship aspects of therelationship then build from there.
Avoiding commonmistakes and pitfalls
Following these guidelines should helpto eliminate some of the commonpitfalls of global sourcing.
Quality control
Most pump manufacturers in the USthat source globally also instituterigorous quality control systems thatare designed to catch any flaws beforedistribution.
Regional – 14%
Enterprisewide – 39%
Business unit/division – 31%
Site by site – 16%
Figure 2. The dynamic of supplier relationship management (SRM)
Figure 3. Global sourcing decisions require cross-geographycoordination. Manufacturers reported making most sourcingdecisions in the following breakdown. (Source: Aberdeen Group,June 2003)
www.worldpumps.com WORLD PUMPS March 200436
“We have a rigorous ISO 9001-monitored quality check process,”reports Andrew Warrington, vicepresident of engineering and Marketingfor Peerless Pump, which has beensourcing globally for more than twodecades. “We use a range oftechnologies, including CMM, dyepenetrant, hydrostatic and performancetesting, as well as more traditionalinspection methods. We try to do this ineach country, so that all problems can besolved immediately.”
Mike Bjorkman, marketing managerfor BJM Pumps, says his companyfollows a similar procedure.“Everything that we receive isinspected upon delivery (pumps, partsand accessories). Pre-assembled pumpsare tested at the factory beforeshipping, and then they are re-testedat BJM before being shipped,” he says.
Long-Term vs. short-termagreements
Whether a manufacturer enters into ashort- or long-term agreementdepends on both the companyphilosophy and the nature of thecomponent being sourced.
BJM Pumps, for example, only useslong-term agreements. “We want tobuild upon our relationships withsuppliers just as much as we do ourcustomers,” says Bjorkman. Othermanufacturers use deal-by-dealagreements only as a way to protect theirproduct and intellectual propertysecurity, according to Mike Dillon,president of Seepex Inc. Both are viablemethods, but consider the consequencesof each before you make a decision.
Sourcing critical parts
Working in the global economy requiresthinking differently. Events around theworld, such as diseases, natural disastersetc., that in the past may have goneunnoticed by US manufacturers are acritical part of the equation.
Christine Kelly, from SAS, has seensome dramatic changes in the past fewyears.
“More important,” she says, “how doesit affect your business if suddenlyimports shut down for two months?When sourcing globally, you need toconsider the worst case scenario andthen decide if you can live with it,especially if you sole source aparticular item offshore.”
Use the right tools
Global sourcing requires high-technology tools. Not only must yourdata be electronic, you must be able toperform the right analysis on yourdata. Material costs, shipping costs,tariffs, lead times, and risks must all betaken into consideration whenmaking global sourcing decisions.
As noted by Tim Minahan, VicePresident and Managing Director ofSupply Chain Research for AberdeenGroup, “The multitude of factors andscenarios that require evaluation inglobal sourcing projects often outstripthe capabilities of basic spreadsheetapplications and the skills of thetypical user.” Companies that can takeadvantage of advanced tools such asonline analytical processing (OLAP)or multidimensional analysis (MDA)tools, can generate additional savings(as much as 6% according toAberdeen research) above and beyondthe standard savings expected fromglobal sourcing.1
Pump manufacturers that utilize toolssuch as the Internet have reported ahigh satisfaction rate. “Overall.technology has made global sourcingmuch easier,” says AndrewWarrington of Peerless Pump. “It iseasier to locate, qualify and interactwith partners. Technology also makesthose essential trips that cement therelationships and make the requiredin-depth quality certification, muchmore productive. We have even web-enabled our purchasing, so we are afull-time operation for customers andsuppliers alike.”
Calculate the real savings
One of the common pitfalls of globalsourcing is overestimating the
monetary savings. Just because animpeller costs 30% less to machine inChina for instance, does not meanthat a company will save 30% overhaving the impeller made in the US.The purchase price may be the initialdraw to sourcing from aninternational supplier, but thepurchase price is only part of the totallanded cost of the item. The totallanded cost includes material,transportation, duties, taxes, handlingfees, and other related costs.
Ingersoll-Rand, for example, reportedto Aberdeen that: “Transportation,duties, taxes, and other ‘hidden’ costsof cross-border logistics ranged from13% to 24% of the basic price ofimported materials and parts.”1
Conclusions
Global sourcing is a reality for pumpmanufacturers in the USA. Economictrends, both in the USA and overseas,are forcing companies to look for thelowest cost components andmanufacturing services. There arerisks, but every business strategy hasrisks. Adequate research, analysis andplanning can result in tremendouscost savings and, for some companies,it is not just competitiveness, it issurvival. ■
References
[1] The Global Sourcing BenchmarkReport: Balancing Supply Cost,Performance, and Risks in an UncertainEconomy © June 2003, AberdeenGroup, Inc.
[2] Hetzel, Michael L. TransformingYour Company for Global Success: Part2 – The Basics of Global TradeOriginally published in the April,2003 issue of Die Casting IndustryLinks, the monthly publication of theNorth American Die CastingAssociation. Used with the author’spermission. For further questions,contact Michael Hetzel [email protected]; 708-710-5935.
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