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Never forget that offshore sourcing is a multi-dimensional issue from a customer perspective, from a sourcing or distribution perspective, from a volume demand perspective, and from a time-to-market perspective, cautions Rick Moradian, president of Asia/Middle East with APL Logistics, a global third-party logistics provider (3PL). It's not just about finding a low-cost manufacturing site.
A number of factors enter into the offshoring equation, some under the control of logistics and some merely visible to logistics. Managing the areas that logistics controls is the expectation. Helping your organization monitor its supply chain for trouble and responding before it gets out of hand is a value-add logistics can bring to the table and to the bottom line.
Logistics Today asked global experts what risks they see for extended supply chains, and some of their answers may surprise you. Here are their recommendations for how you can protect your supply chain, your brand and your profits.
Risk 1: Cost — common thread or common threat?
With the prize of low-cost manufacturing or sourcing hanging before their eyes, some purchasing or operations types might overlook critical logistics factors that can make or break a supply chain. Emerging nations offer low-cost solutions, but at what price? A thorough logistics review can offer some clues on where problems might develop.
Basic offshoring questions include:
- Is there sufficient production capacity for current and projected needs?
- Will the facility or supplier be able to handle a surge?
- If manufacturing is interrupted or halted at another location, can the proposed venue handle additional demand?
- If this is the main sourcing site, is there an alternate site to cover contingencies?
- How will the switchover be handled?
While operations reviews some of these factors, the parallel questions on logistics capacity have to be answered. Don't stop with how many dock doors the facility has or how many order pickers or lift trucks. What's the logistics capability beyond the four walls? Is there sufficient transportation capacity for surges or contingency switch-overs? How will increased volumes affect transit times and costs? Will the infrastructure development match anticipated growth?
There are different grades of emerging nations, comments APL's Moradian. China has been getting most of the attention, and it is pouring a lot of effort into developing its manufacturing and logistics infrastructure. Capacity is there, and so is the quality, Moradian notes. “Vietnam has raised its hand and said, ‘How about me, I've got resources, I have a population of 80 million, I'm growing rapidly,'” he adds.
Don't stop with the first, and most obvious, question, “Is the infrastructure there?” Is there a commitment to develop needed infrastructure — build a road, extend a railroad, dredge a harbor? Infrastructure development is a long-term commitment. You can import technology or a talented logistics manager, but you can't import a road.
Many countries are small, nimble and very friendly towards foreign investment, but do they have the power and commitment to sustain needed infrastructure development? “If all of this is made up of long-term, time-based initiatives, will the current velocity of growth be maintained for the next seven or 10 or 15 years?” Moradian asks. Is the current degree of exuberance warranted? Will it be sustained? Or will the infrastructure development stall with an economy that doesn't continue to deliver rapid growth?
One way to evaluate infrastructure promises, suggests Moradian, is to examine whether they are “additive” or “substitutive” infrastructure. Though there are no guarantees on the continued positive political climate supporting any development, adding to existing infrastructure or upgrading current facilities can make a strong case for one area over another. On the other hand, new development can overtake expansion in providing more sophisticated or technically superior tools.
With a handle on infrastructure developments, a transit time that appears long now can show steady improvement if the infrastructure developments continue on track. An initial 21-day transit time may seem long, but if that number will improve steadily in coming years, the B choice may be more attractive than the A choice that shows no sign of forward movement.
Risk 2: It's not your domestic supply chain
First-time international buyers often use buying agents overseas, says Moradian. The quality of raw materials and manufacturing processes in developing nations may not match domestic standards. Some of these new international buyers will depend on the buying agents for logistics support in the sourcing region. In some cases, the buying agents don't have logistics capabilities comparable to their procurement or production expertise. Logistics should review those capabilities and establish benchmarks for the overseas source.
The added complexity of an international supply chain can reduce visibility for logistics and add uncertainty — and uncertainty spells inventory.
Extending supply chains also exacerbates forecast error. Forecast error translates into out-of-stock or overstock situations. Out-of-stock conditions mean missed sales. Some retailers assume 50% lost sales when they see a stock out.
The alternative is safety stock — but where do you put that buffer inventory? Most likely it will be in finished goods, close to the consumption point. That's expensive domestic inventory that has cleared customs and for which you've already paid any applicable duties.
“Agility is still the primary enabler of the supply chain,” says Mike Ledyard, a partner with consulting firm Supply Chain Visions. He contends extended supply chains can still be responsive to forecasts, though he agrees that many organizations accept their inability to forecast as they watch supply chains and lead times lengthen. There are alternatives.
Ledyard uses an example where the forecast period is 60 days beyond production. Production takes 45 days (including sourcing raw materials at the offshore manufacturing site). Add a 25-day ocean voyage and five days to clear customs and move through the port to various domestic regional distribution centers (DCs). That's 130 days to get product into the DCs close to their consuming markets. But is the inventory where the demand is? What if demand shifts? A four-month-old forecast is likely to be rife with errors.
The conventional forecast method would set an aggregate demand and then allocate it as the goods are packed and shipped from the overseas manufacturer. Once they're on the water, in Ledyard's example, they have 30 days to reach the regional distribution centers where demand is anticipated. If demand has shifted, one region may be experiencing stock outs while another is swimming in product.
Ledyard suggests a transshipment or deconsolidation center near the port to put more agility back into the supply chain. Increasingly, major retailers are using deconsolidation centers to adjust forecasts at the regional distribution center level. While the goods are still 10 days from port, you can look at demand and reallocate inbound product, says Ledyard. The containers hit the port, move to the deconsolidation center, and are stripped and cross docked into truckloads bound for the various regional DCs or direct to manufacturing/retail customers. The goods move in more accurate quantities to where the demand is hottest. The additional time and handling are typically offset by reduced forecast error and less safety stock.
Risk 3: Supply chain visibility — friend or foe?
Supply chain visibility and order management allow maximum agility to fill an order, but rather than fix inventory deployment problems the systems may allow them to remain in place, says Jeff Metersky, vice president of supply chain consulting firm Chainalytics.
Metersky offers a domestic example where a Chicago distribution center is directed to fill an order for Atlanta after the Georgia distribution facility has run out of stock. The order gets filled, and the service level is intact, but it does nothing to solve the problem of why inventory wasn't in the Georgia DC in the first place (not to mention the added cost if the goods were expedited). In an extended supply chain, the problem may be visibility offshore.
If domestic visibility and responsiveness don't address the underlying problem, how will most supply chains deal with demand shifts for goods that are still inbound on an ocean container?
Ledyard's discussion of deconsolidation centers includes a review of demand when the goods are 10 days out at sea. This helps address some of the inventory allocation problem by adjusting regional replenishment to match current demand, but for optimum results, visibility has to reach beyond the U.S. port of importation.
That raises questions of information flows. If best practice and the lure of huge savings aren't enough to inspire improved information flows, security requirements are driving visibility upstream. Pre-notification on imports required by the Trade Act of 2002 is pushing importers to know more about what's in their pipeline and when it will reach the U.S.
The challenge for many U.S. companies sourcing offshore comes back to infrastructure — but this time the issue is information technology (IT). Does everyone along the extended supply chain have adequate and compatible IT capability? Shifting from domestic ground transportation to international ocean shipments involves an average of 27 different parties in the shipment, says Metersky.
A recent study by the U.S. National Institute of Standards and Technology (NIST) notes manual data entry is widespread even when machine sources are available.
“Interventions from purchasing clerks, order processors, and expediters are required to maintain supply chain information flows,” the NIST study reveals. The system, despite use of the Internet and protocol translators, is inherently inadequate in view of Metersky's comment. Many firms are using “informed estimates” rather than actual or production plan data, the NIST study continues.
Relying on private-sector efforts to develop standards that will move supply chain integration forward suffers from a weakness NIST calls the free-rider problem. Namely, users can benefit from the actions of others to develop a “public good” (in this case standards) without contributing to that effort.
The information infrastructure problem can be partly corrected by government provision of research funding, subsidies for private research and development, and agency participation in standards and infrastructure development efforts, says the NIST study.
According to NIST's estimates, the total cost to manage supplier-customer inventory and schedule information exceeds $5 billion per year in the automotive industry and almost $4 billion per year in electronics. Almost all of this cost could be eliminated if firms implemented true interoperability, the NIST study indicates.
Even with heavy investment at the company level, the promise of information technology integrating supply chains may be a long way off, according to NIST, especially considering the increasingly global nature of supply chains.
Risk 4: Control and protect your product and your brand
Counterfeit products may account for $400 billion in losses worldwide, says Stanley Hart, president and CEO of supply chain security consulting firm S.G. Hart & Associates. “We've seen single companies losing $200 million or more on counterfeiting,” Hart says. Product diversions may be costing companies as much or more than counterfeiting, he continues.
Moving production offshore reduces the amount of direct supervision a company has over its product and its brand. Hart notes that in some cases, a factory will shut down at 5 o'clock and then the lights come back on at 5:15. The counterfeit product produced on those same manufacturing lines won't contain the same ingredients or match the quality of the legitimate product, yet it will compete in the same markets and cannibalize sales.
Diversions involve legitimate product that is being shifted to a different market. Counterfeiting is a criminal activity; diversion is a contractual violation.
A popular brand that commands a premium price is a good target for counterfeiters, but diversions occur on items as simple as tea bags, according to Hart's examples. Counterfeiting is better known and easier to understand. Where logistics can enter the picture is in covert tagging of products to distinguish authentic items from counterfeits. This can also help track diverted product because it can identify the intended channel the product should have used in distribution.
Counterfeiters are difficult to track because they operate outside your legitimate supply chain, says Hart. Diverters operate inside your channels and circumvent those distribution channels for their own gain. For instance, one company paid very high commissions to distributors which led to the distributors overbuying. The distributors then shifted product to a nearby market where they could sell for a discount and protect their commission and profits.
Another related problem can occur when a company has a liberal return policy. Distributors buy for the volume discount and then return unsold product for a liberal credit. Counterfeit product can creep into this reverse channel as well, says Hart, so returns should be authenticated.
Another area for diverters is special promotions. A company may offer a special promotional price to develop a new market — Korea, for instance. The distributor buys large quantities of product it knows it can sell in the lucrative Japanese market and diverts some of that product to Japan where it makes a hefty profit. Your Japanese distributors will be the first clue of a problem when they see discounted product competing with them. The first step is to authenticate the product and, if it is legitimate, track down the source.
One difficulty with managing brand protection is the covert tagging methods. Diverters who know a product carries an identifying mark will remove the tag by cutting away a label or even using solvent to remove identifiers printed on plastic packaging like bottles. The process is called skinning, says Hart. Though he wouldn't discuss specific methods, Hart says things like invisible bar codes can be printed or etched into products and packaging during production. Here again, there is a question of control. If the method is employed at an overseas plant, is there sufficient control to keep the method from becoming known or from falling into the hands of counterfeiters?
In one unusual example of supply chain risk, Hart discovered a client had decided to simplify its bidding process by sending the blueprints for its product directly to the suppliers bidding on the contract. This amounted to an open invitation to counterfeiting.
Logistics will know the legitimate channels, accurate volumes, authorized carriers, and any exceptions (like a change of carrier or ship-to address). The logistics operation can also be enlisted to handle covert tagging and authentication along the supply chain.
With new, untested markets competing for offshore manufacturing and distribution, due diligence in assessing short- and long-term risks can help avoid costly mistakes. Lowest cost may not be lowest risk, but a good balance of cost and risk factors can ensure profit goals are met when sourcing or distributing offshore. LT
Navigating sourcing risks
Don't let a focus on low-cost manufacturing or sourcing opportunities blind you to reality. There may be unpalatable risks associated with the low-cost choice.
- Low cost is the common goal of manufacturing and distribution. It's also the common thread connecting sourcing alternatives. Carefully evaluate the full range of options and project future developments to determine which is the best, long-term choice.
- Offshore sourcing isn't merely a lengthening of the supply line — it's a new model. Take care to understand where the differences lie and how your strategy and network must adapt to offer the best long-term solution from both a cost and efficiency standpoint.
- Gazing into a cloudy crystal ball gives you fuzzy forecasts, but you can recover if you can put product where demand is hottest. Make sure you have the right network model and good information flows to keep inventories in line and in the right place.
- Stretching supply lines can reduce your control and oversight of process and product. Take steps to avoid competing with your own diverted product and identify and pursue counterfeiting problems.
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Copyright© 2004 Penton Media, Inc.
at a glance
This article examines four high-risk areas in extended supply chains and offers guidance to avoid trouble.
