Straight to the Source

Apr 01, 2006 10:30 PM  By

Keith Kaczanowski, the vice president of supply chain management for Brady Corp., took on an added job responsibility last year. He led a team of about 20 employees from various departments within the Milwaukee-based manufacturer/marketer of industrial signage and safety products to Shanghai on a sourcing mission.

Upon arrival the Brady employees broke up into three- and four-person teams to visit suppliers, with whom they discussed the best ways to source specific products. It helped that the $816 million company already had three Chinese manufacturing locations, in Beijing, Shenzhen, and Wuxi.

“Our [Asian] customers wanted to have local sources of supply in China, and we needed to establish a manufacturing base to keep business there,” Kaczanowski explains. “But our people in the field came up with the idea to do [additional] sourcing, and things evolved for us from there.”

“When we go overseas,” adds Allan Klotsche, vice president of Brady’s Asia/Pacific division, “we find higher-performing products of equal quality at a far-reduced price.”

Industrial supplies marketers are hardly the only merchants sourcing goods offshore. Jack Schmid, chairman of Mission, KS-based direct marketing agency J. Schmid & Associates, says that with so many companies fighting to retain margin, offshore sourcing could produce some strong results.

“Many smaller companies find themselves saying, ‘We can’t create a private line or label elsewhere — only the big guys can do that,’” Schmid says. “But that thinking can put your company in a bad spot. In apparel, for example, almost everything comes from somewhere else.”

Indeed, as Larry Vicini, vice president of international trade for Warren, PA-based apparel and home goods merchant Blair Corp., says, “We’re all faced with survival today. And you won’t find any companies that are not deeply committed to direct sourcing. It’s the only way to remain competitive.” Blair has buying offices in Hong Kong, India, Pakistan, Shanghai, Singapore, and Taiwan. The offices operate as liaisons between the overseas manufaturers and Blair’s U.S. team, he says.

If you’re considering sourcing overseas, the following tips can help you start or improve a program.

BE REALISTIC

As you develop your overseas sourcing strategy, Brady’s Kaczanowski recommends having tangible, realistic goals. “Don’t make your goals too ambitious. If you’re just getting started, consider establishing a pilot program in real time — not just on paper.”

“Start small, and be patient,” agrees Suzanne Young, director of sourcing and production for Portland, OR-based women’s activewear merchant Lucy. “Develop one program at a time and one country at a time. Managing multiple sourcing partners can be difficult, especially when you’re first starting out.”

Lucy, which operates 27 stores and a Website, has about 60% of its apparel merchandise made overseas. “We balance things between the U.S. and Sri Lanka because we can get the same prices and margins in the U.S., but sometimes we run into problems with flexibility in the States,” Young says. “So we need to be creative [through its connections in Sri Lanka] and meet factory minimums.”

A key element of setting realistic goals is having the necessary information at hand. “It’s critical that you look at total cost,” Kaczanowski says, “not just in terms of your net purchase savings but also at transportation costs, duties, and wages and expenses incurred by those workers outside your own organization.”

You may also need to order greater quantities, at least in the beginning, Kaczanowski adds. Because your merchandise will be traveling a greater distance to your warehouse, ordering more product less frequently should keep the flow of goods consistent and minimize the likelihood of backorders.

Young also advises establishing personal relationships with your offshore partners. Factories over there are hungry for your business, she notes, and are looking to build relationships that will last.

HIRE A PRO

To establish potential long-lasting relationships with overseas providers, you’ll need to place your own people overseas or work with an agent. “Some companies like to open offices overseas, while others use agents as middlemen,” Young says. “We prefer to hire an agent, learn the lay of the land, and then determine if we can eventually run things ourselves.”

Blair’s Vicini also endorses overseas agents when establishing an offshore presence. Blair used Hong Kong-based trading company Li & Fung, among other agents, when it began offshoring about 20 years ago. It wasn’t until 2001, by which time Blair was buying $50 million a year in goods from foreign agents, that the cataloger decided to open its own offices in Asia.

Agents typically charge 5%-10% commission on the cost of goods they source, though Vicini says most are open to negotiation. If you agree to use one agency for the bulk of your sourcing, for instance, it may reduce its commission. Also, smaller agencies are generally more willing to charge lower commission rates.

“There are many established and reputable middlemen, both in the U.S. and China,” says Brady’s Klotsche. “They can help you get started, make introductions, and handle logistics. Once you work with these guys for a year or so, you can become more bold and branch out on your own. And once you start making personal trips overseas, your contacts begin to multiply exponentially.”

HIT THE ROAD

This brings us to our next piece of advice: while you can certainly start a sourcing initiative using only foreign agents, you’ll probably need to reevaluate things down the road. “You can get by for a while relying on e-mail and leaning on the reputation of those overseas who you may have worked with before, but the larger your operation over there, the bigger the risks,” Young says. “Eventually you’ll want to be more directly involved.”

Kaczanowski is even more adamant: If you are committed to developing an overseas presence, you can’t rely exclusively on e-mail, the Internet, and the phone. “You can’t just talk about it; you need to do it,” he says. “You need to go overseas, visit the factories,” and see what’s going on with your own eyes.

If you are looking for a manufacturer, Klotsche notes that some of the trade fairs in China, such as the China Sourcing Fairs in Hong Kong, provide opportunities to see several hundred suppliers in just a few days. “It’s amazing in the course of just a week the number of contacts you can reach,” he says.

Taking things one step further, when it comes to planning a sourcing mission, Vicini says that the team concept tends to work better than just sending an individual. “It helps to have several people along to discuss and network and talk with agents and freight forwarders,” he says.

ESTABLISH YOUR SUPPLY CHAIN

With logistics a vital part of your overall strategy, Vicini says it’s critical to put a great deal of thought into how you will ultimately get your products out to your customers. “Establishing a supply chain details securing a worldwide freight forwarder who can transport your purchases to your designated port of entry and arrange transportation from your port to your warehouse,” he says. “From there, you’ll need to establish a letter of credit with your financial lender and then establish communications with the U.S. Customs staff at the port of entry to ensure that you know who to contact if clearance of your merchandise is delayed.”

Next, Vicini continues, you’ll need to hire an independent customs broker to file all your entries in a timely manner and who can also assist in the classification of your merchandise. “Ideally, having a licensed custom broker on your staff is beneficial,” he says. Blair, in fact, hired one five years ago.

“All of the steps mentioned, if not properly addressed, can impact and impede the flow of your merchandise from factory to your warehouse,” Vicini adds.

On the road to…where?

How do you choose which countries to consider when sourcing overseas? “If you’re a smaller company, look at what other companies in your space are doing,” says Keith Kaczanowski, vice president of supply chain management for signage and safety supplier Brady Corp. “Being a trailblazer on a limited budget could prove costly, so take the lead from others who have been in the game a while.”

For certain, says Suzanne Young, director of sourcing and production for women’s activewear cataloger/retailer Lucy, smaller mailers shouldn’t be concerned with being trendsetters and sourcing in the fringe countries. “Keep things where the big fish are for a while,” she says. “When your a small company, you’re arms aren’t long — keep your reach narrow.”

Broadly speaking, the Far East is second only to the U.S. as a source of new product, according to Multichannel Merchant’s 2005 Benchmark Report on Merchandising (November issue). Nearly two-thirds (66%) of respondents said they’d sourced product there during the previous 12 months; 97% had done the same in the U.S.

Canada was the third most popular destination, with 43% of respondents having sourced product there, followed by Western Europe (41%), Mexico (23%), India (18%), and South American and Eastern Europe (16% each).

Where the fairs are
A sampling of overseas sourcing fairs

China International Consumer Goods Fair. June 8-12. Ningbo International Convention and Exhibition Center, Ningbo, China; tradeshow.globalsources.com

HVAC Asia. July 4-7, Singapore Expo, Singapore; 65-5343588

VietTrade & Industry. Aug. 3-6. Ho Chi Minh City International Exhibition and Convention Center, Ho chi Minh City, Vietnam; 65-973-80246

Styl & Kabo (apparel). Aug. 22-24. Brno Exhibition Centre, Brno, Czech Republic; 420-541-152587

Expo Cameroon. Sept. 2-5. Douala Trade Fair Grounds, Douala, Cameroon; 971-4-2828664

Fiaflora (gardening/landscaping). Oct. 4-8. Centro de Exposicoes Imigrantes, Sao paulo, Brazil. www.fiaflora.com/br

Malaysia International Jewelex. Oct. 6-9. Kuala Lumpur Convention Centre, Kuala Lumpur, Malaysia; www.kha.com.hk