Challenges in Supply Chain Management

This is part of Sourcing Innovation's cross-blog series.

As a good friend once said, “that ship has already left the harbor”.

It’s the perfect metaphor for the globalization of a peak functioning supply chain. You need look no further than the Wal-Mart model to see a corporation capturing the benefits of internationally integrated supply. International supplier integration has gone from innovation to competitive necessity in what seems like the blink of an eye. With the benefits of rapidly advancing technology and the virtual marketplace a global supply chain that once existed for only the “500lb. gorilla” is extended for all companies to access. The benefits can yield eye-opening cost savings, expand access to supply and thus improve a firm’s ability to stay competitive.

Although few said it sounded too good to be true, at least a few of us thought that way or maybe knocked on wood when pocketing cost savings ranging from 20-60%. Sadly, those savings are shrinking or even disappearing in light of the most recent oil shock and the resultant adjustment in world petroleum pricing. With overseas shipment costs rising by as much as 170%, and some carriers slowing speed by 20% to conserve fuel, unit prices have escalated and delivery cycles have stretched.

Yet the effect of petro-economics is only one component of the international sourcing equation. Other challenges have presented themselves and will continue to be factors in the decision to integrate international versus domestic suppliers. These challenges, along with others that arise, make international sourcing one of the most complex choices procurement will be managing for the foreseeable future.

Consider the following:

Currency-Currency values must be included in evaluations, especially where long delivery cycles are involved. Procurement Managers may not make anyone forget George Soros, but they must be savvy to the impact that currency values play in international purchases. The relative strength of the dollar versus foreign currencies, excluding the euro and pound, has made currency moves an economic subtlety up to now. As the dollar gains strength against the Euro, however, is it possible that doing business with American buyers becomes less attractive to Euro zone sellers?

Quality-Without question, a supplier audit in Minnesota is a good deal faster, less expensive, and easier to arrange and execute than a supplier audit in Malaysia. Equally important, a firm’s ability to return unsatisfactory product and time to receive replacements goods is significantly enhanced through purchases from domestic supply.

Redress-Unlike the distributor 30 miles away, suppliers in the virtual marketplace are not governed by the same laws as we are. Getting redress for unsatisfactory products and services can be dicey. Granted it’s always in the best interest of supplier to satisfy the customer. But when one considers the costs, the time investment and the potential for success, the leverage of legal action for supplier non-performance is hardly the hammer we’re used to here at home.

Trade Barriers-Delays in customs are still common, with shipments often sitting for days or even weeks. New rules and practices are constantly evolving. Foreign governments are weighing the costs and benefits of barriers to trade just as we do. Some, such as China, have already taken action.

Political (In)Stability-It’s typical to consider the Middle East, or Venezuela as areas whose political instability threatens to interrupt supply at any moment. Yet political instability exists in numerous Asian countries and Euro-zone (and nearby) suppliers as well. It only takes one coup to shut the door on international commerce for a country.

Natural Disasters-Earthquakes in Indonesia, Sumatra and Japan, tsunami’s in Thailand and Peru, a Cyclone in Myanmar, and those are just in the last five years. Granted, North America is not isolated from disasters either. But domestic disasters have taught us that the supply chain is easily interrupted. Procurement must become savvy not only to trends, but the tactics necessary to manage the effects of disasters on our international suppliers.

Ultimately, these drivers and others (e.g. corruption) make international sourcing a complex and evolving supply strategy. It’s incumbent upon procurement to evaluate every supplier choice not only on the supplier’s merits, but also the factors mentioned above and any other exogenous variables. The explosion of virtual commerce and an ever expanding supply base have demonstrated tremendous benefits to firms struggling to remain competitive. At the same time, supplier choice and integration are a more challenging and potentially risky proposition than ever before.