As the world flattens, global sourcing invariably becomes more dynamic. Sophisticated technologies and an emerging crop of offshore suitors are forcing today’s intrepid explorers to balance reason with instinct.
Managing offshore supply chains has become a matter of balancing reason with instinct: comparing actual demand against forecasted demand; total landed cost versus lowest unit cost; leading-edge sourcing with over-the-edge exploration.
Supply chain executives often find themselves suspended somewhere in between as they try to narrow the gap between concrete and circumspect knowledge—with the ultimate goal of better matching inventory to customer demand.
Technology can help manage that balancing act by creating an interface for supply chain partners to communicate and share information across cultural and economic divides.
As continental gaps converge, countries large and small are manipulating this free flow of information to tap economic development opportunities—linking available material resources, labor, manufacturing expertise, and transportation capabilities with global demand for products and services.
This “flattening effect” has otherwise created a more dynamic trade environment as companies leverage their supply chains to compete for market share in new places. Global sourcing today is considerably less static than it was five years ago; and five years hence, it will likely be even less predictable.
Such caprice has compelled businesses to take a more scientific approach to capturing demand, monitoring demand variability, calculating total logistics costs, and integrating all this information to buttress strategic offshore expansion or contraction.
“Instead of taking a snapshot approach and freezing supply chain information frame by frame, businesses have to continuously monitor this stream of information,” says Greg Johnson, executive vice president of sales and marketing at GT Nexus, an Alameda, Calif., supply chain software provider.
Johnson believes that technology has evolved to the point where businesses have a much deeper understanding of supply chain costs, more accurate data, and the capacity to act on this information intuitively and quickly.
In turn, they are using strategic outsourcing and offshoring measures to rationalize spend with speed and service—routinely and as needed.
“Shippers not only have visibility into the cost of sourcing in different regions, they also have the ability to compare and analyze these locations. Because they have deeper corporate memory to hold cost data, they can make more informed decisions on where to source from,” he explains.
China: The Perfect Footprint
In 2003, R.G. Barry Corp., a Pickerington, Ohio-headquartered accessory footwear developer, made the strategic decision to completely exit Mexico and shift outsourcing production to Asia.
Confronted by increasing pressure to turn around its corporate financials, the company, famous for its Dearfoam slippers, opted to jettison company-owned manufacturing facilities in favor of less- expensive Chinese suppliers.
R.G. Barry is by no means an exception. In the footwear industry, nearly 80 percent of product sold in the United States is manufactured in China, says Glenn Evans, vice president of marketing and product development, R.G. Barry.
And the writing was on an already cluttered wall. Over the company’s 60-year history it has shifted production from the Midwest to the Sun Belt, then to Mexico, and now China.
“In our industry, customers want new products. Forecasting demand is highly volatile and demand is highly seasonal,” explains Evans. “We needed a business model that could more accurately match supply with demand—especially seasonal fourth-quarter demand. We wanted a flexible sourcing model that could align both curves.”
The China move proved to be an important stimulus in R.G. Barry’s rebound. In 2007, it reported $25.1 million in net income and predicts revenue growth of four percent to six percent in 2008.
Last year it also became Wal-Mart’s exclusive year-round supplier of slippers, a move that should give it more traction in the marketplace.
Currently, R.G. Barry sources from six to eight factories in China. During peak season it expands to 20 facilities. The advantages of using multiple in-country suppliers run the gamut from greater flexibility in scaling production to more rational use of labor.
“Sourcing from multiple vendors gives us the flexibility to increase and decrease capacity and supply to keep in line with demand,” says Evans. “We are a highly seasonal business and need multiple vendors to handle peak demand.
“We also utilize many factories to minimize risk due to natural disasters, local labor issues, and financial difficulties. This approach improves our contingency planning so we can move production quickly without interrupting the supply of goods.”
R.G. Barry also produces multiple SKUs of products with different construction methods. So by sourcing from several suppliers, it can align product types with factories that have expertise manufacturing specific footwear.
The Next Generation
To help augment visibility within its China supply network, the company recently partnered with New Generation Computing (NGC), a software company that focuses on apparel, footwear, and retail solutions, to use its e-SPS software platform to manage suppliers.
The Miami, Fla.-based software developer has firsthand experience and knowledge of the challenges companies such as R.G. Barry face when they source abroad.
“Our Web platform transforms the ability to execute—from design through sourcing to manufacturing,” says Fred Isenberg, vice president of sales, NGC.
“The system keeps a profile of sourcing capabilities, enabling businesses to benchmark factories, find good ones, and improve them. It gives businesses control over information as if they owned the facility.”
Manual no More
As a Web-based solution, e-SPS replaces manual reporting and information gathering, standardizes sourcing processes across all departments and suppliers, offers multiple data views and alerts, and features end-to-end product lifecycle management/product development and global sourcing functions.
“Companies need to manage design, sourcing, and process as one continuum. This includes tracking shipments and performing quality audits,” Isenberg adds. “By aggregating visibility, they are more agile in responding to change.”
NGC’s e-SPS platform gives R.G. Barry better visibility into managing in-country suppliers. By streamlining global sourcing and reducing product lead times, the Web platform enables it to respond faster to customer trends and more easily scale growth objectives by adding brands and managing more suppliers.
For R.G. Barry, having a technology partner such as NGC has helped bring China closer to home.
“NGC’s product provides visibility and transparency across the supply chain so we can more closely manage distance and increased variability as the supply chain becomes more complex,” Evans explains. “It will not replace due diligence in the vendor evaluation process and factory visits, but it will increase our ability to manage the process from a distance.”
While China may be facing increasing competition from other Southeast Asian markets, especially in more skill-intensive production activities, it’s still the overwhelming favorite sourcing location for the footwear industry.
“Many countries are three to five years behind China,” observes Evans. As long as the costs of outsourcing manufacturing in China remain competitive, Evans doesn’t see any reason to change R.G. Barry’s sourcing strategy.
“Freight, though a significant cost, is just a small percentage of our overall cost of goods sold,” he says. “Our product is very light and uses minimal cube, so our focus is on speed—how fast we can get goods from order date to the retail shelf. For the time being, Asia is where we need to be—and will be—as long as partners deliver in the time frames we forecast.”
While labor and production economies drive manufacturing growth in Asia, pulling companies such as R.G. Barry to China’s hinterland, Evans still keeps an eye on other locations. He acknowledges that the manufacturing model in China is shifting as production costs increase and companies look further inland to find cheaper labor.
“We’re looking at India and constantly evaluating other emerging markets. But we don’t want to be on the cutting edge. We want to be somewhere in the middle,” he adds.
If China’s economic engine continues to hum as all indications suggest, R.G. Barry will find itself in the middle of a rapidly exploding consumer market. “We’re still three to five years away from selling in China. But we have relationships with partners who can make that happen when the time is right,” Evans reports.
Building Muscle Memory
For R.G. Barry, China was the logical offshore play as it transitioned from a captive market sourcing model to a more open “plug-and-play” approach. Other industries prioritize cost, capacity, speed, and risk management factors differently.
Some businesses consolidate suppliers to aggregate control over transportation and spend; others diversify supply sources to better manage risk and create more options for pulling product to market. Inevitably, the gap between reason and instinct is shrinking.
Working with IT developers and third-party logistics providers, smart companies are developing supply chain capabilities that allow them to flex with market economics. Over time, they are developing what Johnson terms “muscle memory.”
“Those that invest around an IT platform are likely to perform evaluations more regularly,” he explains. “Companies that master sourcing in one location and create a system for handling manufacturing flows are well- positioned to look at other markets and trade lanes.”
Reason Vs. Instinct
As the world turns, businesses are increasingly sensitive to shifts in supply and demand. Whether chasing low-cost labor in emerging markets or bringing manufacturing closer to home, strategies are evolving as companies leverage their supply chains to differentiate themselves from competitors.
Control over product quality, visibility into shipments in transit, and incentive to expand are major factors for companies considering countries where regulatory oversight and transportation infrastructure are still maturing.
While cost remains a primary driver, businesses are equally attuned to risk management, labor availability, capacity, congestion, and speed.
To some degree, diversifying global source points is both a cause and an effect. As enterprises become more comfortable outsourcing and offshoring, then diversifying activities within the country, the next tendency is to expand into other markets. These hotspots are many and multiplying.
Inbound Logistics’ fourth-annual Global Logistics Guide presents a navigational beacon as you calibrate your company’s global compass with these existing and emerging coordinates.
Our scorecard provides a macro perspective of the global supply chain to help you quantify and qualify expansion opportunities with countries that best fit your logistics and supply chain needs.
This guide is not meant to give instinct reason; rather it provides circumstantial reasons to be instinctive—to look beyond the status quo and consider what lies ahead.