As you’d probably expect of any discussion of Low-Cost Country Sourcing (LCCS), Tuesday’s breakout session on LCCS 2.0 revolved largely around China. Everyone always wants to know where China is headed? And what’s the next China? I wouldn’t say there were definitive answers to either of those questions from the panel, which included V.N. Bedekar, former GM of Tata Motors, Linda Parcher, CPO at Diebold, and Dan Douglas, Emerson’s Global Sourcing Manager. But there were definitely some interesting points I should share:

• Chinese suppliers are very concerned about the devaluation of the US$, as Linda Parcher pointed out. After a couple of years of eating the rising costs brought on by the dollars’ demise, Chinese firms have begun requesting price increases.
• According to Dan Douglas, coastal China is literally “no longer a low-cost country, we’ve moved west.” But when it comes to predicting the next China, Vietnam, Mexico, Poland and Turkey were the countries named by the panel.
• Indian consumers, like those in the US, are skeptical of the quality of goods coming from China and they resent the perceived loss of jobs. As a result of the Indian government’s protectionist policies and consumers’ demand for Indian made products, Tata Motors has only utilized China for about 10% of their supply chain. Surely the fact that India is also a fairly low-cost country weighs into the financials behind this decision. But if the relative cost of doing business in the US continues to drop and protectionist politics take hold, could the US also begin to pull away from China?

Justin Fogarty is Managing Editor of Supply Excellence and will be covering Ariba LIVE 2008 from Las Vegas this week. Any questions or feedback about the event or this blog can be sent to Justin at jfogarty[at]ariba[dot]com.

One theme that I’ve seen several presenters stress is the importance of building and maintaining good relationships with suppliers. In the words of IACCM President Tim Cummins, you “must be [your suppliers’] trading partner of choice.”

MetLife’s VP of Global Procurement, Roy Anderson, said having that type of cooperation with their supply base is key to his team innovating in their procurement and sourcing projects. Working with suppliers, they are able to overdeliver to his internal stakeholders, often times anticipating their needs BEFORE they even realized that need exists. (With that kind of performance, it’s no wonder Roy received a Spend Management Excellence Award earlier today).

Chevron’s approach to the issue relies on easy access for their 8,000 suppliers, who like their employees, have a single sign on to their system from anywhere in the world. Oftentimes it’s those little things - like 24/7 access from anywhere on earth - that make or break adoption…and therefore savings associated with a process.

Justin Fogarty is Managing Editor of Supply Excellence and will be covering Ariba LIVE 2008 from Las Vegas this week. You can reach Justin at jfogarty[at]ariba[dot]com if you have any questions or feedback about the event or blog.

First, I gave you the Good News about the Global Economy from Professor Charlie Wheelan’s mainstage presentation this morning. Probably left you feeling pretty darn good about the state of the world. One big happy place full of potential for 6 billion enterprising souls.

Well, I hate to rain on the parade, but the Professor also warned of three very ominous looking clouds on the economic forecast…

1. Wage & Education Stagnation - The fact that median wages for high school dropouts in the US have dropped a staggering 27% is troubling news. But rather than site the usual suspect - outsourcing - Wheelan stated that it’s more due to the inability of the undereducated to add economic value in their jobs. Those people are then in danger of being replaced…by technology. Add in the education stagnation the Professor displayed (flat high school graduation rates and only small increases in college grads) and you can see two dangers on the horizon: further disparity of wealth in the US and more Americans losing their jobs to technology and outsourcing. There was a silver lining to this topic (unless you’re a supermarket checkout clerk or an airline that refuses to think about their passengers’ needs). Businesses that add value for their customers by thinking more holistically about how their product or services fits into their customers’ day are still poised to succeed.
2. Gas Tax “Holiday” (and other silly pandering policies) - I have yet to hear an economist who thinks the McCain/Clinton Gas Tax Holiday is a smart move. Professor Wheelan likened it to a family sitting around the kitchen table saying, “the family budget isn’t working, so let’s spend the college savings fund.” Ditching a tax that pays for infrastructure, deters consumption and provides needed revenue to deal with an economic problem - like oil/energy - that isn’t going away just does not compute to a quantitative, pragmatic, academic mind.
3. Entitlements - Like the Gas Tax Holiday, Professor Wheelan (and just about everyone else who’s looked at the projection that has entitlements eating up ALL of the Federal budget by 2040) says the math on entitlements does not add up. Professor Wheelan says that failure to address the financials, while still ensuring basic services to citizens and staying out the way of the private sector in the progress is both challenging and essential.

That Good and Bad news is the context that should shape the rest of the sessions here in Las Vegas. So, is the global economic glass half empty or half full? Give us your opinion in the Comments.
Justin Fogarty is the Managing Editor of Supply Excellence and will be covering Ariba LIVE 2008 from Las Vegas this week. If you have any questions or feedback about the site or event, you can contact Justin at jfogarty[at]ariba[dot]com.

As I mentioned yesterday, I was really looking forward to Professor Charlie Wheelan’s talk on the Global Economy and he lived up to my expectations. Given that his work deals with the intersection of economics and public policy, it’s no surprise that the context of his talk was around the choices we face as a nation and on the global scale. As with any major decision, our results will depend on how we interpret and react to the facts on the ground, or as he framed them, the Good News and Bad News.

So what Good News on the global economy did the Professor have…

1. Globalization - I know it’s been a while since you saw that publicly placed in the “Good” column since this is an election year. But the Professor’s point on why globalization is a very positive thing was twofold. First, bringing 1,000,000,000 people, who were living subsistence agricultural existences, into the global economy unlocks a tremendous amount of human potential. To put a Vegas spin on that point, the odds that a “special individual” who goes on to cure cancer or otherwise positively impact the world is greatly increased when you add that number of people to the intellectual capital pool. Second, was the upside of high population density, which the Professor believes will lead to further specialization. The theory is that greater density leads to greater competition. With that greater competition, people will continue to adapt professionally into more specialized roles and thus add greater value to society.
2. The death of the Unisaurus - I think most of the audience must have missed it when DaimlerChrysler quietly pulled the plug on the UniMog, which was some kind of massive SUV weighing as much as two Chevy Tahoes or…one Tyrannosaurus Rex. The Professor interprets low demand for such a vehicle for purpose of transporting kids and groceries as proof that indeed “green pressures are here to stay.” He made a strong Economics 101 case for continued high fuel prices (high demand and a limited supply). Although I’d say it’s debatable whether or not his belief that we’re seeing increased interest by consumers in sustainability, which economists consider a “luxury good”, due to our relative wealth…rather than the pain we’re feeling at the pump.
3. The 2nd Industrial Revolution - Professor Wheelan believes we’re at the cusp of a massive boom in productivity for two reasons. First, the efforts by Google, university libraries and publishers to digitize literally every book on their shelves will make “all of human knowledge accessible to you in your livingroom with a PC.” And second, the tremendous potential to improve human lives that was created in recent years with the sequencing of the human genome.

Some great signs if you look at the world as a glass half full. I’ll be back later today with the other side of the coin…the Bad News.

Justin Fogarty is the Managing Editor for Supply Excellence and will be reporting all week from Ariba LIVE 2008 in Las Vegas. If you have any questions or feedback about the site or event, you can email Justin at jfogarty[at]ariba[dot]com.

We’ve come a long way since San Francisco’s City Council banned plastic bags 13 months ago. At the time, the move seen as more of a late night TV punch line than a serious attempt to promote environmental sustainability. But in the wake of more legislated bans (as China, Ireland, Uganda and a host of cities across the globe have done) and demands by consumers that the brands they buy move to green their products, you can see why companies are exploring their packaging to see where improvements can be made.

Just to get our head around the scale of the numbers involved here, let’s take China’s recent ban on plastic bags. Whether you think it’s a case of pre-Olympic greenwashing or not, it’s hard to deny that a move which saves an estimated 37 million barrels of crude oil per year is a step in the right direction. To put that in perspective, the US imports about that much crude from OPEC nations every week. So when we extrapolate the numbers in anticipation of more cities and countries following China’s lead, you can see we’re not talking about an insignificant drop in the consumption barrel.

So should your company consider shifting to more sustainable bags and packaging? Here are a few benefits to consider:

• It’s an “easy win” - Many companies are interested in making sustainability a long term goal, but struggle to identify where to start. Unlike your product line, which involves a host of suppliers and manufacturers that are heavily integrated in the daily operations of your organization, your packaging supplies are pretty straight forward. In most cases, spend is attractive enough to entice new suppliers’ interest in gaining your business. So pulling the trigger on new packaging is a very attainable, short term opportunity.
• Suppliers want to collaborate with you - Many packaging manufacturers are being pressed to identify innovative solutions for their customers. Take advantage of their knowledge and creativity, and allow them to share best practices in “green” with you. You can benefit from their experience!
• Bags = Moving Billboards - We’ve known for a long time that branded bags a great way to market a company. Therefore, it’s a no brainer that easily identifiable “green” bags can help promote your brand AND your commitment to green efforts.
• Customer demands - Judging by the sheer volume of “green” product ads on TV these days, customers are either demanding more environmental awareness from companies OR Madison Avenue is very out of touch. Consumers appear to be rewarding companies that adopt sustainability and punishing those that don’t. Dragging your feet can damage the brand loyalty your company has worked hard to create and maintain.
• Legislation - If consumer demand doesn’t sway you, will a global patchwork of bag bans? If not, how will your various locations cope with the local mandates? It’s better to be seen as a leader, out in front of this issue, rather than playing catch up later.
• You’ve got options - There are a host of vendors offering a very wide range of packaging choices - from 100% post consumer recycled bags to plastic bags made of recycled materials. And if you’re flexible on things like color, the cost for making the switch can be reduced significantly.

Ellen Terchila is a Senior Consultant on Ariba’s Spend Management Services team. Ellen specializes in strategic sourcing in the retail sector.

As Supply Excellence’s Managing Editor (which is a euphemism for “Principal Cat Herder”), I would be a remiss if I didn’t point out that the blogging efforts by many of our contributors are a byproduct of their ‘day jobs.’ These folks spend their days digging deep into their respective categories to uncover the opportunities and risks that impact buying decisions, global markets and supply chains. Their findings are published quarterly in SupplyWatch, a collection of category/commodity analyses, LCCS country spotlights and supplier profiles.

If you’ve found the posts from our contributors insightful, I invite you to take a look at some of their latest SupplyWatch articles:

• Rachel Rutkoski - Transportation & Logistics: Hot on the heels of her Truckload and Less-Than-Truckload posts (which pointed out opportunities for savings and improved contract terms for shippers), Rachel’s Transportation & Logistics Core Category Detail dives further into the excess capacity brought on by the soft economy. The most important point, which she touched on briefly in the blog, is that it’s wise to look at freight contracts more holistically, rather than simply trying to cut short terms rates. If you can lock in better terms for accessorial charges (which have risen a staggering 900% in the last 10 years!), the savings over the life of the contract could be substantial.
• Mike Petro - Metals: In a 2 part post, Mike broke down the real root causes of the steel price surge (Part 1 & Part 2). Taking that analysis quite a bit further, he and the rest of the metals team discuss strategies for dealing with the challenging market. The case study of a medical instruments manufacturer saving 33% on syringe manufacturing by outsourcing it to a specialized partnership of suppliers is a great example of spend management savings in spite of rising raw material costs.
• Bob Zieger - Plastics, Rubber & Raw Materials: Recently Bob explained the diminishing dollar’s impact on oil prices…and why that means high prices for some time to come. Now he and the Plastics, Rubber & Raw Materials team dig further into how decreasing demand in some categories and the credit crunch further complicate the pricing equation.

Let’s also do a quick community poll: Which article in this quarter’s SupplyWatch best helps you address a current challenge in your supply chain? Leave your answers, questions or observations in the Comment section of this post and I’ll make sure they find their way to the right Category Manager’s desk.

Justin Fogarty is Managing Editor of Ariba’s Supply Excellence blog. He can be reached for story ideas, feedback or questions at jfogarty[at]ariba[dot]com.

When we last left our daring trio of Spend Management Town Hall panelists, they were debating the best ways to get a handle on services spend in the ever tightening global economy. The esteemed panel, which included the CPOs from both Kellogg’s and Whirlpool, had turned their sites on services spending to counter the double-digit inflation striking the core commodities their teams buy.

Another key strategy on the panelists minds: global trade. As is often the case these days when discussing low-cost country sourcing (LCCS) or global trade, the panelists spent most of the time discussing their China strategy. While the debate ranged all over the map — from rising labor prices to the emerging consumer class — three core themes emerged for Supply Excellence readers to consider when crafting a global sourcing plan.

Buy where you make - With the dollar’s demise and oil and transportation costs skyrocketing, Kellogg’s and Whirlpool are both re-evaluating their global sourcing strategies. And nearshoring is once-again becoming more prevalent. Factor in an increasingly skilled workforce in our neighbors to the South and Whirlpool SVP of Global Strategic Sourcing, Mark Brown said, “it’s kind of a jump ball between Mexico [and China] to service the US market.”

Alistair Hirst, Kellogg’s VP of Global Procurement, stressed the importance of sourcing “as locally as we can,” albeit for different reasons: to hold down transportation and tariff costs, satisfy local content needs, and get products to market faster. After all, consumers like their Corn Flakes as fresh as possible.

Michigan State University Professor Joe Sandor noted that the cereal king was following up the ”buy where you make” philosophy that has been so successful for leading Japanese automotive manufacturers, such as Honda or Toyota.

The panelists noted a number of new dynamics when sourcing South of the Border, including banditos and local government corruption. But, when weighted against the rising costs of doing business in China, the lower transport and border crossing cost, Mexican truckers newfound ability to transport deep in the US, and a host of other factors are making nearshoring a more attractive proposition for many companies.

You can’t turn back the clock - No great shock that our panel weighed in on the side of free trade. In the words of Alistair Hirst, “we certainly encourage free trade” and “think [renegotiating NAFTA] would be a huge mistake.” Professor Sandor seemed to agree, yet took a more human angle in admitting “clearly global trade hurts some people, but the fact is it helps more than it hurts.”

In an election year at a time of economic uncertainty and populist (sometimes borderline jingoistic) rhetoric coming from both sides of the aisle, how the US deals with labor and trade issues is somewhat up in the air. So, Mark Brown’s advice that “maybe the strategy is, you better be flexible and you better be able to react quickly because our ability to predict is somewhat limited” was the smartest tip the audience heard that night.

Predicting the future - And speaking of looking ahead, all three panelists were eager to point out that anticipating what’s next is the multi-million dollar question for supply chain professionals.

So, where is the next China? For Whirlpool, the answer is currently Vietnam, where a lot of their supply chain has moved. But Mark Brown wasn’t quite willing to say where their supply chain may shift after that.

On the other side of the coin is emerging markets. Again, China is strong possibility, which as Professor Sandor said is “not just a place for cheap labor, it’s the fastest growing market for end products.” No real shock there. But luckily, Kellogg’s Alistair projected that “Russia’s going to be a huge developing market for the future.” (Although Mr. Hirst may want to check his long-term demographic trends. Russia’s population continues to decline. So the consumer boom there may be short live. Literally.)

Still more Town Hall recaps to come as we look at the panel’s discussions of Environmental & Social Responsibility and Risk Management next week. In the mean time, listen to the full podcast of the Global Trade discussion. And download 10 Tips for dealing with these trends in Global Trade so you can start taking action today.

The American Chamber of Commerce in China released it’s annual white paper on the state of American business in China and it seems to back up a lot of what we’ve all been hearing lately; the cost of doing business in China is increasing. With 2/3 of US businesses claiming rising labor costs and other inputs are chipping away at China’s competitiveness, it’s no wonder so many companies are reevaluating their low cost country sourcing (LCCS) strategies. For example at the recent Spend Management Town Hall, Whirlpool’s SVP of Global Strategic Sourcing, Mark Brown, said “it’s a jump ball between Mexico [and China] to service the US market” (mp3 available here).

Lower labor costs, followed by access to alternative suppliers and localization strategies for local overseas manufacturing, are the main sources of motivation behind LCCS strategies. However currency fluctuations, extended supply chains, supplier capacity and product quality concerns are critical risk factors that must be managed in any LCCS strategy.

Best in class companies are approaching up to 40% of their direct material spend being sourced in LCCs with an average cost savings near 20%. So there’s certainly still savings to be had, but not without clearly defined goals and strategies. In my experience, these 10 components are critical to ensure your LCCS strategy keeps both your costs and risk low:

• Have a LCCS strategy - Seems obvious…but you’d be surprised. Invest in an analysis of your spend to determine the best country fit by category, realistic cost savings targets and organization requirements to manage your program.
• Total Cost of Ownership - Thoroughly test your savings assumptions based on a TCO framework that includes currency changes, all logistics costs including emergency freight requirements, extended working capital requirements, etc.
• Supplier qualification - Thoroughly prequalify new LCC suppliers, including site visits, and ask yourself what type of supplier you are willing to work with.
• Invest in supplier implementation resources - On the ground, technical sourcing teams will work with suppliers to make sure your identified sourcing savings really stick to your bottom line.
• Low cost may be close to home - Not all categories should be sourced overseas - think near shore (Mexico, CEE)
• Supplier development programs - Work with your suppliers overseas to explore mutually beneficial ways tot take waste out of their production process. These suppliers are typically very receptive to your expertise.
• In country audit and testing - Don’t discover quality surprises at your loading dock. Test your shipments in the LCC country of origin.
• Leverage 3rd parties overseas - Don’t try this all yourself. 3rd party specialists exist to assist you with LCC strategies as well as supplier research, qualification, implementation and development.
• IP - Protect your intellectual property by sourcing sensitive components and assemblies from different suppliers. Don’t rely on the rule of law to protect against potential IP theft.
• Be realistic - LCCS is a journey and it takes time to do it right. There are few quick wins that truly stick to the bottom line, however a diligent approach will permanently restructure your cost base.

David Morgenstern is a Managing Director in Ariba’s Spend Management Services group with extensive experience in establishing strategic sourcing and low cost country sourcing programs. Since joining the company in 1999, David has developed Ariba’s global sourcing practices in Europe, Asia and Canada, and has served the private equity, manufacturing, automotive, consumer and public sectors. David has spent over 11 years working overseas, primarily in Asia, and holds a MBA from INSEAD. David currently leads Ariba’s global private equity and diversified manufacturing practices.

Another day, another story about soft retail numbers. When you subtract inflation and prices at the gas pump from the March data, you end up with flat or downward sloping lines for most categories. But for companies who can utilize Less Than Truckload (LTL) transport, there’s a potential upside to these dour retail numbers. Why?

In a recent post, we looked at the effect the housing decline has had on flatbed trucking. The drop has left a great deal of capacity and a buyers’ market for savvy procurement organizations. In an effort to utilize their fleets (and stay afloat), carriers have been far more willing to work with buyers on price and terms than we’ve seen in several years.

Think of the retail/LTL relationship the same way. Fewer flatscreens moving off store shelves means there’s more room on the trucks that typically carry those plasmas. Some analysts are hoping for a bump in consumer spending as tax refunds and stimulus checks make it into people’s mailboxes. But realistically, I doubt there are many economists who truly believe that a) consumers will spend all of their money on retail rather than rent, and b) that it will be the magic bullet that pulls us out of a recession. It seems more likely these anemic conditions will continue for quite some time, leaving a significant amount of empty space to fill on LTL trucks.

So if you’re an organization that can take advantage of this excess LTL capacity (retail, consumer goods, food services and industrial products for example), now is probably a good time to look at your contracts and consider your sourcing options. And I know it’s easy to focus on short term price. But the bigger opportunity is to look at your contracts more holistically, because there are savings opportunities in several areas, including:

• Rates - An obvious focus, but often limited to short term savings.
• Fuel surcharges - A necessary “evil” brought on by triple figure oil prices. But you might be surprised how many carriers are using surcharge tables that are well above true market rates. Standardizing tables across carriers can lead to major savings for years to come.
• Accessorial charges - The move towards a-la-carte fees for anything above and beyond simple dock pick-up and delivery has become a major driver in the true cost of LTL transport. Including these charges in your assessment of current costs and negotiations of future contracts is a financially prudent move.

Of course it’s important to recognize that LTL carriers are usually more regionally focused than other trucking companies. So potential savings vary by region. For example, the Northeastern corridor has more competitive rates than the Southwest.

FYI: I’ll be diving further into the LTL opportunity in the Transport Category Snapshot of the next issue of SupplyWatch.

Rachel Rutkoski is a Category Manager for Transportation and Logistics in Ariba’s Global Services Organization. Rachel is recognized by the Institute for Supply Management as a Certified Purchasing Manager (C.P.M.) and has several years experience as a supply chain and transportation analyst in Fortune 500 companies.

Last week, we looked at the driving forces behind rising steel prices in the US: surging raw materials, a weak dollar and global consolidation. Those are the Big 3, but there are other long term forces at work here, including greater vertical integration and steel executives with finance (rather than operations) backgrounds.

Global mills are doing a much better job at controlling the global steel price by becoming more vertically integrated. Large integrated mills (which make steel from coke, iron ore, etc in large blast furnaces) are extensively acquiring global mines to better sure up their supply chain of steel-making raw materials. And mini-mills (those smaller, more nimble mills predominantly making steel by melting down scrap steel in electric arc furnaces) are now acquiring scrap dealers in an attempt to better control their raw materials supply and pricing volatility.

This shift towards integration is no coincidence. It’s brought about largely by a new crop of executive leadership in the industry that came from finance/accounting backgrounds rather than operations (case in point - US Steel CEO John Suma). The number crunchers have worked hard to get a handle on steel’s historically rocky supply/demand. Their intentional limiting of supply has had a stabilizing effect, but it’s also contributed to relative scarcity and price hikes.

The reality is, steel suppliers are getting smarter. Market trends coupled with their consolidation, management of supply, and overall approach towards the bottom line have them in the driver’s seat right now on price. That’s not to say there aren’t opportunities to better manage your spend on steel. But, you’ll certainly have to do your homework.

Mike Petro is the Senior Category Manager for Metals in Ariba’s Global Sourcing Organization. Previously, Mike analyzed supply chain options and competitive pricing for US Steel.