Much has been written about the flat world. About how technology and communications have harnessed the immense potential of large corporations in buying standardized products and unleashing tremendous cost advantages. Global sourcing simplistically is that critical mass where a Corporation assumes that it is big enough to power its buying strategy with the volumes and as a consequence browbeat the suppliers with a carrot of large volumes into submission, thereby giving sharpest prices and most favourable terms. Before this, the Corporation goes about dispensing favours to a chosen few (euphemistically called VENDOR CERTIFICATION). The criteria being a customized sieve of Quality/packaging/certification/ specifications through which only a few pass. Having chosen this list, the Corporation begins the exercise of calling court with communiqué informing the select group of their intent to buy certain volumes, in the following year or years.
The first pitfall, on a more intangible level in this process, is that a decision to global source by a corporation is an announcement of its entering the big league in a divine moment of revelation (a potentially false sense of ego). This process was primarily started by the likes of Wal-Mart whose size is equivalent of the economies of large countries. Whilst the strategy of Wal-Mart has been cloned, no one is even close to cloning its size. Thus what works for Wal-Mart because of its sheer size may not reap the same benefits for others.
In a global sourcing system the needs of all the subsidiary units of a multi National Corporation are consolidated and routed through a single buying centre. Consequently, one holds all the functions relating to sourcing, buying and logistics for the whole Corporation. Simply put Global Sourcing aims at leveraging volumes to realize the cheapest source available globally thus burgeoning nation. With communications it was believed to be the ultimate succour of buying where ease of communication and the internet would provide a Corporation the best buying option for its units worldwide.
This article seeks to unravel the downside of this strategy. Whilst a lot has been documented about the benefits, very little has been said about the downside.
STANDARDIZATION-THE ART OF UNHOMOLOGATION
The only way a large corporation can do volume buying is by standardizing its product specifications, packaging, and other parameters.
And we thought MARKETING BEGINS WITH IDENTIFYING THE CUSTOMER NEEDS. Does it not presuppose that when a Corporation makes a product all customers should have the same needs?
It is but obvious that with a relatively small number of suppliers and a need for consistent product standardization is essential. However excessive standardization, in effect, serves as a deterrent in homologating to a country’s specific needs. It is also counter intuitive to global expansion, which in itself requires customization to be successful. To elaborate let look at Mc Donalds in India. This is one of the first few country’s where Mc Donalds has completely redrafted its USP – eg Food on the Go and has offered Home Delivery. It’s product mix has been changed to offer a Mutton Burger instead of a beef burger. Could there have been a centralized buying for Mutton Burgers?
CONSOLIDATED BUYING – THE ART OF PUTTING ALL THE EGGS IN A FEW BASKETS
A major problem with Global Sourcing is that consolidated buying, or buying a basket of products from a single supplier is practically removed from the equation. It is well nigh impossible that at a high volume level, a single supplier can have the required efficiency in more than a few products. While this fits in the industrial super sizing culture it precludes the possibility of leveraging the advantage of a supplier supplying more than one product. In a blinkered approach such as this one supplier could be marginally or relatively uncompetitive in a particular product that is being Globally Sourced. But his combined product offering of all the products that the Corporation uses, may be much more competitive. However since the other products being smaller in volumes/value are not in the Global crosswire, their worth is not combined with the sourced product. The Buyer sourcing Globally comes out with feathers in the cap and the Corporation loses out.
FINANCE-NO ROOM FOR DAVIDS
The driving force behind Global Sourcing is the desire to achieve maximum cost benefits. These translate to huge capital requirements on the supplier side. Add to this the ruthless payment terms forged in contracts and we have a situation in which only the high and mighty play. The playing field is not level any more; rather it is not even global anymore. While it may be pointed out that financial muscle is a pre requisite to ensure reliability, the fact is that small producers might in fact be the more cost effective with the with same quality parameters. The Davids that they are do not have the financial ability to buy material for long terms contracts. In effect the Corporation is sanitizing itself and propping up the Goliaths. The argument propagated is that if a small manufacturer does not have the financial ability, he is not worthy of consideration as there is no assurance of reliability.
Whereas there is truth in the argument, it is once again a blinkered approach. A small manufacturer with lower overheads may come out to be much more competitive, but unable to expose himself to the huge financial commitment for a long-term contract. Once again the Corporation loses in absolute terms. A little handholding can actually ensure that the small manufacturer get a slightly less inclined plane if not a flat field.
It is true that a small supplier cannot by himself fulfill a global need, but then again Global Sourcing is not our aim. The aim is to realize the most cost efficient process, which may be deriving from any source. A viable alternative for multinationals could be to identify small to medium size producers who can cater to the requirements of their own country products and if possible of the surrounding areas. The exclusion of small manufacturers completely from the equation would only give rise to monopolies and arbitrary price fixing.
RELATIONSHIPS – A LOST WORD
In the race to procure globally, large corporations often forget that there are indeed factors other than cost that can make a relationship beneficial. A small innovative firm that worked with a global major to develop a new product suddenly finds itself in a global race with competitors it cannot measure with. While research might be a function of the company’s own skill the final product price is not within its control. This automatically hampers any incentive the manufacturer would have had for further collaborative research. In fact the word collaborative loses meaning, a successful product once it achieves a critical mass would again form a part of the Globally sourced basket, eliminating the developer and effectively killing his willingness for development. This is akin to the small developer asked to develop a ball which has a good bounce, as the amplitude increases, it suddenly SPINS to a different orbit leaving its developer only glossing on his creation. At a short-term level, this situation would not make a dent, but innovation always starts at the grassroots and unless the producers are confident development will be stifled.
LOGISTICS/CURRENCY-The X Factors
Whilst there is a lot of lip sync on the Global Village we live in, the ground reality is that we live in a world of nations still zealously guarding their currencies. Currency has now become a sign of the wealth of nations and thus most countries keep the exchange rates beneficial to themselves. Most Global contracts are done on what is mistakenly called the world currency THE US DOLLAR. Once again whereas this could swing either way, at least the contracts should incorporate the local exchange rates in their contracts.
Neither is the Logistics well thought of. Most of the times, the contracts are done on FOB (Manufacturing country) basis. For price comparison the Cost and Freight (CNF) price is taken for the destination where the maximum product goes. Vendors routinely load a disproportional cost to lesser destinations. This gives the smaller units of the Corporation a very loaded product
Again we return to a basket of products. A consolidated shipment would obviously incur less freight, but since the individual suppliers are not in anyway coordinating to that end we are left with no option but to treat each shipment as isolated.
ACCREDITED VENDORS-The art of propagating Cartels
A hypothesis about Global sourcing is that since having many suppliers takes up enormous amount of resources, reducing the number of suppliers would reduce the consumption of resources proportionately. It is possible, but at a cost of being susceptible to the problems inherent to limited options. Firstly, a small number of suppliers, all financially strong at that, are more likely to form a cartel, leaving the entire chain a hostage. While this may be an extreme example it has certainly been seen before.
Another perspective is that this strategy does not insulate the Corporation from sudden spurts in demand or force mature situations. In such a situation the Corporation either has to put blinds on and buy whatever is available or go through the whole process of certifying new vendors. It might be argued that what difference could a large number of suppliers make in the scenario, probably not much, but an open-ended policy is tailor made for this crisis. Instead of looking at your approved suppliers for help you look at the market and buy from the open sources. The distinction between a few suppliers and an open market, while subtle, requires a change in mindset.
EMPATHY-WHAT’S THAT?
A small number of suppliers mean better relationship and understanding. Makes sense doesn’t it? Unfortunately something quite to the contrary happens in Global Purchasing. The apparent mechanized system takes precedence over the earlier personalized model. The interaction in most cases is between two people with huge geographical distances separating them. While this might not hamper communication it sure does cramp personal relationships. Again with all contracts forged and written on paper there is not a lot to talk about other than following up. In the earlier model constant buyer-supplier interaction made sure of two things. Firstly, there was empathy on both sides; a desire to help emanated which ensured smooth sailing. Secondly and most importantly there was a free flow of ideas, knowledge and market news. For Buyers sitting in large Corporations information is key to sound decision-making. Talking to people, and developing faith and trust builds strong companies. A company that relies only on its consultants for up to date news is losing out on a very potent source, the people who are actually sitting in the war zone.
GLOBAL CONTRACTS – The art of turning variable into fixed costs
In giving the entire buying options to one unit the company is forcing a fixed cost on all other units while asking them to be individual profit centres. This rigidity brings forth a factor on which the units have no control. Extending this argument, if all products bought by a Corporation are sourced by this strategy, then effectively for individual units these become fixed costs they are saddled with, and yet asked to perform better on profits. Their only recourse to costs is labour and administration. Taxation being very different in countries, a unit in a highly taxed country can become a non-performer in the eyes of the Corporation for no fault of the unit itself. There is consequently one less option on which they can improve efficiency. In the best-case scenario of the global sourcing unit operating at peak efficiency the effects are probably only stifled innovation and lack of control, in the worst case. On the other hand, where the Sourcing unit is not operating at peak efficiency we get a disastrous situation where the problem is not only beyond control but even invisible to the majority of participants.
Global Sourcing brings with it a lot of benefits and certainly needs to be kept in mind while planning operations. This article does not purport to claim that the strategy per say is fraught with disasters, instead it seeks to draw attention to certain aspects which are flawed in the buying of products globally. It seeks to question the logic of electronic buying providing all the answers. Certain old practices of personal meetings have been relegated to history for their importance in decision-making. Buying, as much as any other activity is a people business, and people, emotions, personal chemistry, relationships cannot be substituted.
