18 Leadership
T
he first consequence of the drive for The Evolving Risk Profile 4 Valuable know-how may be given away
low cost is the core characteristic that to vendors, allowing others to enter
global sourcing is not ‘adjacent.’ Global of Global Sourcing markets and for product and engineering
chains are extended in terms of the skills to be lost. Intellectual property and
time that is locked up in the sequential Back in 1988, Markides and Berg, writing skills need to be shared to gain the
processes of ordering, provisioning, in the Harvard Business Review, identified benefits of global sourcing; this can
manufacturing and shipping. This the trends to manufacturing offshore mean organizations handing over their
extended time is a precondition of and roundly criticized it as being both sources of future competitiveness
the margin opportunities that can be unnecessary and risky. They argued that to partners.
extracted. It is therefore not value adding existing manufacturing capacity could 5 The long-term impact on supply and
— but it is essential. Work by the authors be made more competitive and that the demand is less clear and may distort
with Maersk Logistics indicates that the hidden costs of obsolescence, inventory markets both in terms of the benefits
global supply chain transaction time holding and demand unresponsiveness gained and also for the risks of secure
content contributes in the range 30–50% are risks that counter the headline supply. The risk profile for organizations
of the total time in the chain, but adds benefits. Given the date of that paper changes dramatically, managing global
just 2–5% to the transactional cost of the and the scale of the subsequent trend to supply chains can reduce transparency
article. Indicatively, the gross margin gain offshore sourcing, their warnings have of true costs and end customer demand.
is not less than 20% and is often much been over-ridden by the inexorable drive At the headline level, these factors are
more. The same work showed that there for gross margin. known and understood. How companies
could be as many as seven additional who internalize them and mitigate their
parties to executing the global sourcing However, the risks of global sourcing implications may be less consistent.
transaction, including consolidation may yet be coming into focus as the ‘first The conclusion is global sourcing is
centres, shipping lines, customs and mover advantage’ dissipates. If we set to not a consistent proxy for sustained
compliance authorities. There is therefore one side their assertion that the trend to higher profits. The volatilities of the
a time and transactional control issue global supply is unnecessary and deal business climate, consumer demand,
that greatly exceeds the supply chain with the reality, their catalogue of the risks competitive actions, fashion, quality of
execution costs. remains accurate today. execution and market dynamics,
amongst other things, all combine to
The second consequential characteristic 1 There are risks that the total acquisition make the outcome less certain than
relates to the nature of the capacity that is cost may be greater than anticipated and deterministic planning models would
being used. The investors are carrying a erode the net benefits that the initial have us believe. Boards will need to start
much higher ‘cost of capital’ and need to purchase costs imply. When all factors to focus on the complete mix.
secure a return on their investment. There including transportation, handling, duty,
are huge pressures on them to produce, obsolescence, inventory, lost sales and
such that prices will be lowered until ‘market blocking’ are factored in, the total Critical Success Factors
capacity is consumed. This determination cost may not be as attractive as the
to make investments pay has created headline advantage — labour costs are We think of global supply chains as
a platform for sustained deflationary typically as little as 7–10% of the total having three dimensions: design,
pressures on prices that our politicians product costs and even less on the planning and execution. These have
have been happy to embrace. However, selling price. decreasing horizons of impact, but often
we may now be at the point where the 2 The extended chain cannot be as the actual trading impact increases
behavioural impacts of producers and responsive to variations in demand as when risks are encountered; there is less
buyers, both fighting to maximize margin local sourcing. The reduced time to put things right before trading
at the expense of each other, creates responsiveness may result in the is impacted. Here we are dealing with
a trading environment that is highly opportunity costs of lost sales. executional/transactional risks. The
volatile. Supply chain promiscuity and 3 There may be risks with quality and measures to mitigate such risk in global
unreliability are about to become rife. execution because of the long distance supply chains require six capabilities. It
The combined characteristics of this relationships and the many hand-offs is these capabilities that are the critical
changed supply/demand dynamic with in the processes to move the product to success factors.
extended timescales work to generate its destination. Small errors and
levels of transaction risk that need to be inaccuracies occurring at hand-offs and 1. Total Acquisition Cost Management:
understood and managed in order to misunderstanding owing to long distance the ability to analyse and predict the
ensure a net benefit from the long term relationships may cause service failure … total cost-to-serve from the source of
trend to global supply. and hence cost. supply to its final point of sale.
The capability in this analysis is not to
simply build up the logistics costs by
Supply Chain Digital Launch 2007
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