Inspect process, not production, with overseas suppliers
Preparing for an international audience through an appreciation of their culture and methods of communication helps to set a foundation for building a relationship. While this is critical, you still have other opportunities to make colossal mistakes or achieve quantum leaps in productivity.
Of course, there is a lot of room for mediocrity as well in conducting international operations. In this column I will focus on three additional variables and how you can manage them for maximum protection and results. They are infrastructure, distance, and standards.
As you grow up in your home country you become acclimated to the quality and width of the roads; the consistency, voltage, and amperage of the electricity; the size and capacity of airports and seaports; the gauge and security of the rail lines; the cost, productivity, and flexibility of the labor force; the capabilities of suppliers; and accepted business practices. As you move to conduct business in new areas, you have the opportunity to design your approach based on the infrastructure in the host country. Ignoring this opportunity can lead to some painful lessons. For example:
- One company decided to build a new distribution center in the Southeast of the United States. It used optimization software to identify the perfect location based on the company’s plant, customer, and supplier locations. It then used a consulting firm (not mine!) to negotiate with the state and municipal governments for good tax breaks and other incentives. When it had finished the building, the management realized that the highway network would not support the type of trailers their private fleet used. This state-of-the-art distribution center was then abandoned!
- One client improved its total cost of ownership by incorporating airlift capacity into its supplier evaluation process. In prior cases it had selected suppliers who had to hold shipments for days or weeks until a cargo plane or container ship had open capacity.
Here are ways to maximize the benefits of your international supply and distribution base:
- Shishir Babu, a Tokyo-based executive logistician and independent consultant in the healthcare and manufacturing industries, explains the importance of infrastructure related to supplier development. In the early 1990s the majority of German medical instrument suppliers outsourced their manufacturing to Pakistan. Some failed, some succeeded. The successful ones were those that spent their time and resources teaching and training the workers in Pakistan. By establishing good manufacturing practices with a local and established supplier, they developed a dependable partner.
- An expensive option in working with remote suppliers is inspecting production. Although this is a common practice even with local suppliers, you can do better. Replace this reactionary inspection with a proactive one; inspect the process, not the production. For example, one seafood buyer implemented a supplier certification and metrics system that provided the process controls and checks and balances to eliminate the inspection process. Step one was teaching the supplier how to ensure a high-quality product that met all specifications. Step two was installing some measurements to identify any exceptions. Step three was negotiating consequences for any failures.
Remember that infrastructure represents the substance of the supplier. If you identify the best methods to manipulate that infrastructure, the supplier will truly become an extension of your company!
It is common for managers to visit their service providers to develop relationships, evaluate capabilities, and monitor performance. When you expand your supplier and carrier base to international locations, you dramatically increase the cost of performing this important step. In a perfect world you would be able to secure the budgets to make these site visits, especially given the infrastructure variables in international business. In the real world, however, you must be more innovative.
The risks of ignoring site visits are legion. If you do not gain a solid understanding about how a supplier provides his service, you are poised for surprises. These surprises grow exponentially as your dependence on the supplier grows.
To mitigate this risk you can prioritize, leverage available resources, and use the Internet. When prioritizing, be sure to consider those suppliers that will provide critical path products and those that will act as the sole source of supply. However, when site visits are not always feasible, what other options do you have?
One option is to consider alternative resources to act as your eyes and ears in remote areas. Floyd Stone, director of global supply chain for Griffith Laboratories in Alsip, IL, explained this in an interview: “I find my relationships with freight forwarder alliance partners very helpful in this regard. I used my budget to carefully select and build relationships with freight forwarders in each key market for Griffith. Since forwarders have a tremendous presence throughout the world and build their own relationships with many companies, they are a powerful resource in gathering information on potential and active service providers.”
Other options to site visits include:
- Set up an international procurement office staffed primarily with local personnel. If you have people near the suppliers, the travel costs will be more manageable.
- Use integrated suppliers or third-party providers. By tapping their scale and experience, you can gain access to their international markets without having to develop in-house expertise and resources.
- Use the Internet to research potential service providers. The resources listed below link you to the investigations already done by others and allow you to gain intelligence on specific suppliers or regions.
Site visits or not, be sure to have eyes and ears at your suppliers’ locations. The blindness that you suffer otherwise can be quite painful — try walking through an unfamiliar room with your eyes closed. A few bruises and stubbed toes will illustrate the point.
After nearly five centuries as a Portuguese colony, Mozambique obtained its independence and switched to communist rule in 1975. When the government abandoned communism in 1989 and stability crept back in, business began to return. In the final decade of the millennium, a cola bottler decided to build a plant in Mozambique. The building went according to plan until the bottler prepared to turn on the lights. The plant and its machinery had been wired for a traditional European power supply, but Mozambique’s hydroelectric supply turned out to be the real thing. Since the wiring was incompatible, the losses in time and expense were considerable.
While examples of such avoidable disasters abound, you can prepare to avoid becoming their victim. Whenever you enter a new location, ensure that you are using the correct:
- units of measure
- power supply
- rail gauges
- measurement system (ask NASA about the metric system on Mars!)
- legal system
- bridge heights
- weight thresholds
Over time you will learn how to work with the standards embraced by a particular supplier. Unfortunately, the lessons you learn will be expensive along the way. Pad your team with allies who have the experience to prevent your having to learn the lessons in the first place. The next section will provide some resources to assist you.
While a well-prepared site visit is a necessary tool in evaluating the supplier’s infrastructure, compensating for the distance between you and your supplier, and incorporating the accepted standards, here are some additional tools to consider:
- Freight forwarders. Build a true partnership based on trust and commitment with your forwarder, then you can use the in-country personnel he employs.
- www.internationaltrade.org. This official Web site for the Federation of International Trade Associations (FITA) contains dozens of audio interviews covering different aspects of global trade. Be sure to follow the link to “Web resources” to find various tools and information sources.
- www.unido.org. Unido’s mission is “To improve the living conditions of people and promote global prosperity through offering tailor-made solutions for the sustainable industrial development of developing countries with economies in transition.” Unido offers help in developing subcontracting and partnering relationships with suppliers in developing countries.
- www.opic.gov. The Overseas Private Investment Corporation helps companies capitalize export efforts. Here you will find links to libraries of information on the country in which you wish to do business and to people who can help you do it effectively.
- The National Foreign Trade Council. NFTA is a coalition of over 670 companies and 40 associations that promotes U.S. businesses throughout the world. You can review their charter and member resources at www.usaengage.org.
- Integrated suppliers. In some cases you may decide to outsource your international purchasing and distribution to companies or consulting firms that perform the task for multiple companies. You will pay a higher variable cost in many cases, but you will be able to limit your fixed costs.
In this and previous columns I have mentioned repeatedly that site visits play a powerful part in mitigating the risks of operating a global supply chain. With this in mind, I will focus in the next column specifically on effective site visits to international suppliers.
Timothy Van Mieghem is a founding partner of The ProAction Group, a consulting firm that helps companies leverage their supply chain to serve shareholders’ and customers’ interests. He is author of Implementing Supplier Partnerships. Van Mieghem can be reached by e-mail at email@example.com and by phone at (312) 726-6111 .