Who needs a sourcing strategy?
So you think you've got the cheapest knickers on the planet? If they're still on the factory floor in Nanking, rather than the shopfloor in Newcastle, your customers and shareholders won't be impressed. What you need is a balanced sourcing strategy that manages the balance of cost and non-cost factors says KSA's Simon Shepheard-Walwyn.
"So who needs a sourcing strategy? With so many suppliers competing for business, why not just choose the best deal around?"
In many ways, there has never been a better time to be an apparel buyer. Not only is global trade getting easier, with tariffs and non-tariff barriers being dismantled, freight costs falling, and economic uncertainties keeping apparel prices low, but also the "Global Village" means that product can be found at acceptable quality levels in most regions of the world.
Darwin and Keynes will determine who is successful in the long run. In the meantime, why not just take advantage of the competitive environment, and keep suppliers on their toes by playing one off against the other?
"There is a superficial attraction in this approach," says Simon Shepheard-Walwyn of Kurt Salmon Associates, the management consultancy specialising in retail and consumer goods. "It does not take the most important element of the competitive equation into account, and that is the consumer.
"Although value is a higher priority than ever to consumers, we should not confuse value and price. When we take factors like quality, availability, and innovation into account, it becomes far harder to maintain a compelling offer by focusing entirely on cost."
Even when products are sourced locally and are not particularly subject to the vagaries of fashion it can be hard to achieve on-shelf availability of core lines. But consumers and the City are equally unforgiving of poor performance. Adding to this complexity by dealing with a host of unproven suppliers from around the world would be a brave decision.
"The key is to focus on what fundamental competitive advantage you are seeking to achieve from your sourcing. If it is about cost, there are more durable solutions than chasing the latest "hot" location: what proportion of your total cost is taken up by logistics? Are you shipping fabric or yarn halfway round the world? How much inventory are you sitting on? How many intermediaries are involved in the supply process?
"Equally, if innovation is important to you, how much do your internal processes get in the way of getting product to market? How many activities could your suppliers do for you - maybe better?"
Whatever the case, aligning sourcing strategy with business strategy implies managing the balance of cost and non-cost factors, says Simon Shepheard-Walwyn.
In its recent sourcing study, the sixth it has produced since 1984, KSA calculates both a labour cost per country and an index of non-cost factors. Non-cost factors include:
- Political situation
- Language/cultural barriers
- Internal transport system
- Profit transfer/investment ease
- Worker training level
- Management ability
- Shipping time to EU
- Raw material supply
Direct sourcing and quick reponse
According to KSA, two major areas of opportunity exist to make a substantial difference to the shape of sourcing in the near future: increased direct sourcing by retailers and replicating quick response and replenishment strategies from low cost locations. And in both cases managing the balance of cost and non-cost factors is central to success.
"Many retailers," believes Shepheard-Walwyn, "perceive they are sourcing direct but continue to use middlemen of one sort or another." Setting up a direct sourcing operation means focusing as closely on issues such as ease of communication, skill levels and management ability as on direct cost, because the supplier relationships that are set up and developed are as important as getting the rock-bottom price.
In many cases they will contribute to achieving best cost, by leveraging volume, stripping out duplication, cutting time to market and inventory and the hidden costs in traditional buyer/supplier relationships.
Equally, any company considering developing quick response programmes in low-cost locations will be well-served considering cultural issues as well as broader business implications. Factories in many former Soviet republics, for example, are capable of producing excellent quality, but are still managed much as they were under the Communist regime - that is, the week's volume output is the key measure. Ideas such as "urgency" or "priority" do not figure on their radar screen.
Balancing these issues gives a very different picture of "attractiveness" than pure cost:
On a cost basis, Egypt, China, Madagascar or Russia might look like winners...
Labour cost per standard attended minute ($ US)
...but they do not score well on non-cost factors
The full picture:
mid-ranking countries on cost may represent a better option when the full context is assessed
Cost and non-cost factors relative to UK
The dynamics of the sourcing environment are changing so quickly that there is no single durable answer; yet most companies cannot switch location at a moment's notice to respond to the latest event.
The only answer is to develop a sound approach to assessing and balancing the options in the light of business priorities and resources. In many cases, intermediaries will continue to play a valuable role. Equally, for some products, outright lowest cost will be the answer. The key is to make decisions on an informed and replicable basis - not just on the experience and gut feel of a buyer.
"This is why we at KSA recommend a broadly-based approach to planning sourcing strategy, encompassing scenario planning to take into account issues such as the impact of China's entry into the WTO, requirements planning to drive out the key priorities for your company, and finally cost-modelling to identify the most appropriate location that corresponds to these requirements," Simon Shepheard-Walwyn says.
Companies: TJX Companies Inc
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