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.

Oh what a year it’s been for supply managers. Oil prices are up 79%. The value of the US dollar has dropped 8% against the Euro. And the price of milk (and other key food stocks) frothed up 20-60%.

It’s enough to make a guy want to swap from cream to soymilk in his morning coffee. (That is, if soy prices weren’t off the charts themselves.) It’s also enough to make the global economic situation issue #1 at the inaugural Spend Management Town Hall Forum earlier this month.

The panel of experts assembled for the Michigan State University hosted forum could not have been more representative of the global economic engine. MSU Professor Joe Sandor was joined by CPOs from Kellogg’s and Whirlpool, both of whom are consumer price index (CPI) bellwethers.

Unfortunately, the weather they were reporting was dismal. The panelists freely used the ‘R-word’ when describing the current market dynamics and suggested that the downturn started earlier and may last longer than what is being reported in the ISM index.

“This is a unique recession,” said Professor Sandor. “We feel the downturn, but simultaneously, we see rapidly rising commodity prices.”

Audience members looking for evidence of this conundrum did not have to look much further than Whirlpool. With appliance purchases closely linked to the ailing housing and credit markets, Whirlpool is feeling the pinch of waning consumer demand in the US and rising costs, particularly for commodities like steel and plastic.

“I wouldn’t call it stagflation yet, but we have two big pressures going on in our business,” said Mark Brown, Senior Vice President of Global Strategic Sourcing at Whirlpool. “We’ve seen kind of a perfect storm with the credit markets, tax calls, gas and raw material prices. The cost structure of our machines has radically been impacted by it.”

Alistair Hirst, Vice President of Global Procurement at the Kellogg Company, agreed, noting that inflationary pressures have caused the cereal giant to rethink both its supply chain and business strategies. “[The current economy] puts a lot of pressure on the inputs side, but it has also impacted the pricing side of our business model. Consumers have less disposable income” and that is changing their buying choices.

This lack of pricing power is particularly concerning because, historically, food companies have had more flexibility to pass along price increases to consumers. If consumers won’t swallow food price increases, they won’t accept price increases from other industry segments. That will put added pressure on business to further reduce costs. Yet, the panelists argued that rising fuel and commodity prices leave little room to negotiate savings.

“Nothing beats the market regularly.” said Professor Sandor. “So, the management of costs and the degree of sophistication with which you attack it is ever more important.”

One strategy Kellogg’s is using is hedging on the grain markets. “We’ll hedge out various risks of time depending upon the risk profile.” (This echoes comments from the head of supply chain at a major food service company I met with last month who said they locked into the price of wheat for a full year: “It’s the first time we ever locked into such a long-term contract.”)

Whirlpool is also taking this approach, but in a more limited fashion. “There are no missing links in the supply chain that can’t have predictability driven into it,” said Brown. Although he quickly followed up with a joke, asking if there were anyone in the crowd with any great ideas on hedging steel.

Hedging is just one of the strategies the panel recommended as an antidote to the down economy. Professor Sandor suggested that companies begin to attack new spend on categories that are not directly linked to commodities like oil, gas, metals, or plastic. “Spend management in the indirect space is becoming more critical and a differentiator.”

Later this week, we’ll examine how Kellogg’s and Whirlpool are controlling indirect spending, including business services purchases. In the meantime, listen to the podcast of the Spend Management Town Hall here. Or download the Spend Management for the Economy platform for additional best practices you can use today.

About a month ago I had dinner with the head of supply chain for one of the world’s most recognized food service brands. We weren’t even through the salad course when he lit into me about previous Supply Excellence posts encouraging buyers to consider alternative fuels, materials, and lighting methods.

“Next time you’re at one of those fancy cocktail parties and folks go on about the benefits of alternative fuels, tell them they’ll pay for it at the dinner table.” He went on to tell the story of how one of his tomato suppliers threatened to plow over its fields and plant corn for ethanol unless he conceded to price increases.

He was right to be angry. But his anger was somewhat misplaced. Ethanol is only one (and, considering limited production and distribution infrastructure, the smallest) of culprits for rising food prices. Rising global food demand, quality scares, and crop hoarding have been at the root of sprouting food prices.

In fact, economist Elizabeth Baatz (editor of the closely watched ICE-Alert) warns that input costs for grains and margin pressures for food processors could send food staples — from rice to tortillas — up more than 20%. In fact, rising rice, corn, soybean, and other crop costs prompted Baatz and her Thinking Cap Solutions team to rank nine food manufacturing sectors on the Top 20 inflation watch list out of the more than 371 U.S. manufacturing industries they track.

According to Thinking Cap’s analysis, food buyers can expect the biggest price boosts in dog and cat food, flour-based mixes and doughs, and rice milling. (Recent reports from The Wall Street Journal last week suggest that the rice crisis may be even worse. Prices for the grain have more than doubled since the beginning of the year, climbing to a record $760 per metric ton. The boost is pegged to increased demand from Africa, crop hoarding in Asia, and a pest outbreak in Vietnam.)

(Click to table to enlarge.)

Ironically, my dinner companion is offsetting some of these increases through sophisticated contract hedging. Yet, other businesses (and consumers) that lack the volume or frequency for food buys will certainly pay more at the checkout. “Consumer staples companies generally do well in an economic downturn and in periods of increased inflation, since they often can pass higher costs on to consumers,” said fund manager Steve Neimeth of AIG SunAmerica Asset Management in a recent BusinessWeek article.

News of the credit crunch has been unavoidable in recent months. Hopefully your business (and home mortgage) have been spared and you’re in a position to weather the storm. But what about your suppliers? If they’re having any credit/cash flow problems, that’s a huge risk to your supply chain. And buyers’ companies may be unwittingly contributing to the problem and injecting unnecessary risk into their own supply chain.

You see, suppliers - especially relatively small ones - are being hit hard by the credit crunch. In fact over half of small businesses in a recent online poll claimed the credit crunch had already impacted their business. Sure some of them simply had poor business plans, products or rainy day funds. But others are struggling with liquidity problems caused by late payments from their buyers, some of which are deliberate (and sometimes savvy) attempts to gain extra cash by floating the payment for an extra week or two.

But are the small gains you get by floating your cash (~2.25% in the current short term rate environment) worth adding risk to your core business and potentially interrupting you supply chain? Obviously not, as any supply chain interruptions could cost you far more in production delays, lost sales and a potential open door to your competition. But that doesn’t mean you have to concede all the hard earned gains your business has been adding to the bottom line through smart money management.

There are options available to fund early payment to your supply base, either in exchange for significant discounts (Dynamic Discounting) or to enable you to hold onto your cash while still removing risk from your supply chain (3rd party financing). Given that such early payment to suppliers is not debt, and can come a a lower cost than a supplier’s alternative cost of financing, it can truly be a win-win situation that reduces risks, saves money and acts as a stabilizing influence on the supply chain in otherwise turbulent times.

Drew Hofler is the Senior Manager responsible for Ariba’s Financial Solutions suite of products. In addition to extensive experience in banking and financial services, Drew is ACH Accredited and held Series 7 & 63 NASD certifications.

In the analyst industry, we used have a saying that “when the mainstream press catches on to a trend, it is certainly almost over.” I’d like to think that is the case with the automotive supply chain dilemma, but I’m afraid I would be wrong.

While Supply Excellence has been tracking the ongoing instability and decline of the U.S. automotive supply chain for some time, an article in yesterday’s USA Today predicts that the worst is yet to come. In the piece, my own colleague, Pat Furey, head of Ariba’s automotive sector business, calls the recent rise in bankruptcy filings among automotive suppliers “just the tip of the iceberg. Unfortunately, more will come.”

All the other pundits quoted in the article agreed. In fact, one analyst went so far as to predict that more than half of small- to mid-size automotive suppliers will go out of business within the next five years, either closing their doors or selling to a larger conglomerate.
What’s the problem? Well, the article points to the following pressures as the main culprits for the auto supply chain’s decline:

• Declining vehicle sales. Automakers trying to curtail production, as evidenced by recent production cutbacks at Ford and Chrysler. However, labor contracts have kept automakers from cutting production to required levels. Union agreements also assure workers wages, which keeps automakers from realizing the full potential savings of such cutbacks.
• Price pressure. To make up the difference, automakers continue to demand price concessions from suppliers, many of which are already in financial dire straits.
• Global competition. North American auto suppliers must compete not only with each other but with suppliers in China and India, where labor costs are much lower. And, thanks to recent concessions from the United Autoworkers union (UAW) allowing automakers to bring some parts and assembly manufacturing back in house, auto suppliers must also compete with their customers.
• Commodities inflation. Raw material prices, from oil to metals to plastics, continue to skyrocket. Suppliers must hold down these costs while delivering lower prices to customers.
• Cash flow. As noted here in an earlier post, automotive suppliers are strapped for cash. And credit lines are drying up fast. Auto suppliers are literally dying of thirst for cash.

Fixing the automotive supply chain will take more than just government bankruptcy protection. It will require a complete overhaul of the industry, including ensuring that the entire supply chain — not just the OEMs and Tier One suppliers — engage in more effective strategic sourcing and supplier management strategies, including more effective commodities hedging and a better balance between in-sourcing and outsourcing and on- and offshoring. And, while the Big Three have their own problems to grapple with (the most prominent being non-competitive labor costs), they would be wise to rev up their efforts in supplier development, joint ventures, and co-sourcing or contract sharing arrangements, that allow lower-tier suppliers to purchase materials at the automakers’ preferred contract rates.

But, just in case, let’s hope the pundits are wrong.

With the outcome of what some are calling “the most important U.S. Presidential race ever” still uncertain, many business executives are fretting over the economic, tax, and trade policies of the eventual President No. 44.

Yet, savvy procurement and supply management professionals aren’t waiting for the election outcome. They know that, regardless of who wins the White House, they must devise strategies and tactics to overcome the prevailing issues of the day: global economic malaise, new pressures (and opportunities) of globalization, risk management, and sustainability.

This is the premise behind the upcoming Spend Management Town Hall at Michigan State University (MSU) next Monday night. The first in a series of debates among industry thought leaders and top procurement, supply chain, and finance executives, the MSU Town Hall will showcase how leading companies are applying spend management techniques and approaches to address the leading business and socio-economic issues of the day. Featured panelists at this inaugural debate include:

• Mark Brown, Senior Vice President of Global Strategic Sourcing at Whirlpool
• Alistair Hirst, Vice President of Global Procurement at The Kellogg Company
• Professor Joe Sandor, Hoagland-Metzler Endowed Professor of Supply Management and Supply Chain Management at Michigan State University

I have the enviable honor of moderating this illustrious panel. And, unlike Tim Russert, I plan on pulling no punches. I will get right to the most pressing supply management questions:

• How has the declining U.S. dollar impacted your sourcing and supplier strategies?
• How have rising labor, commodities, and shipping costs caused you to rethink your China sourcing strategy?
• How are you assessing quality, performance, and supply risk in your global supply chain?
• Is the push for environmentally responsible supply a long-term business strategy, or just a passing fad?
• What can procurement do to hold down healthcare and other complex services costs?
• …and more.

I am pleased to extend a special invitation for Supply Excellence readers to attend what I’m certain will shape up as a lively debate. You can register or get more information on the Spend Management Town Hall here.

Can’t attend? Use the comments section of this post to submit a question you’d like me to pose to the panel. I will be sure to report back on the answers and approaches these leading supply management organizations are taking to overcome the challenges of today’s global economy.

Just weeks after the Big Three shocked the industry by announcing plans to move some assembly back inhouse, a labor strike at a major auto supplier is making the automakers appear clairvoyant. Adding to pricing pressures, volume cuts, and rising material costs, the United Autoworkers (UAW) strike at American Axle is shuttering production across the industry.

American Axle is a supplier of parts to leading Tier One assemblers Lear and Delphi Corporation. According to a Purchasing Magazine article earlier this week, American Axle had stockpiled a week’s worth of inventory to maintain supplies to its key customers. As the strike stretched into its second week, depleted inventories have sent shock waves throughout the industry.

According to the Detroit Free Press, part shortages stemming from the strike have forced Lear and Delphi to layoff workers and curb production. The outages have also caused General Motors to shut down six pickup and SUV plants as well as its transmission plant in Toledo, Ohio. The paper reports that American Axle is also a sub-tier supplier to Chrysler and Toyota, although neither company has reported that the strike has caused them to curb production just yet.

However, industry watchers warn that, unless resolved quickly, the strike could have a far more negative impact on U.S. auto manufacturing. The issue? Cash flow. Already pinched by the sagging economy, many auto-suppliers have borrowed against future sales. Production halts could cause them to default on these loans, forcing more auto-suppliers to file for bankruptcy. And that’s not good for anyone.

The events reaffirm the importance of assessing and balancing supply risks and understanding cost structures for both primary and sub-tier suppliers. (A point validated by the priority top supply execs put on supplier performance and risk management in Aberdeen Group’s latest CPO Agenda study.) It also signals a fundamental restructuring of the auto industry; one which will see automakers rethink their global sourcing strategies, bring more production back in house, and engage in more joint ventures and alliances to offset costs, balance risks, and penetrate new markets.

The love affair between LCCS (Low-Cost-Country-Sourcing) and China has taken a few hits in recent years: bad press on humanitarian issues, unfavorable VAT rebate reductions, a weakened US$, and increasing government interference. It’s made more than one company turn a speculative eye towards central and eastern Europe (CEE).

And why not? There are a number of factors that make the more stable countries (such as Poland, the Czech Republic, Slovenia and Hungary) in CEE attractive:

• Highly skilled workforce with multiple western language skills
• Good to strong infrastructure
• Access to raw materials at better prices
• Ease of business in terms of cultural differences
• Decreased lead times
• Government incentive programs
• EU membership
• Labor costs (which while still not as low as China or India, usually come in at less than half those of the US or most of Western Europe)

So should we expect to see a migration west (or east depending on your starting point)? Well… those labor costs in CEE are increasing at a concerning pace, causing doubts as to the long term total cost advantage. Additionally, a recent issue of the Economist highlighted (glowingly, really) the infrastructure improvements China has made: a highway system to rival the United States, a new airport in Beijing, new bridges, improved railways, port transit upgrades and deeper shipping lanes.

Needless to say, China has big plans. More importantly, they are executing on those plans at a staggering pace. Having been in the military, I can attest to the fact that an authoritarian environment does make for efficient completion of projects. Case in point: China is currently 13 years ahead of schedule on their highway system development plan. These infrastructure improvements make a convincing case for continued investment in China.

Given all of that, where in the world should you go? We haven’t even discussed India, Mexico or the early stage hopefuls such as Thailand and Vietnam (though truly it may be quite a few years before they are ready to compete with China on infrastructure, quality standards and skills). As always, the answer is… it depends.

It’s a frustrating, yet accurate answer. It depends. It depends on: what you’re looking for, where you’re shipping to, what your objectives are, whether you’re setting up an International Purchasing Office (IPO), looking for new products, building a plant, or just trying to get out of the office on an elaborate boondoggle… in which case I highly recommend Hong Kong - a beautiful city.

It also depends on whether or not you’ve done your homework. These markets are changing so quickly that you really can’t just assume that the best answer is to head to China, CEE, India… or wherever the hot spot of the moment is.

Carol Pilarski is a Consulting Manager in Ariba’s Spend Management Services group. Her current focus is on supporting customers’ LCCS (Low-Cost-Country-Sourcing) initiatives.

The House Energy and Commerce sub-committee on Oversight and Investigations had some of the nation’s top food company CEOs on the witness stand this week. Congress’ look at the record breaking recall of 143,000,000 lbs of beef, piled on top of the tainted vegetable stories of the last year, serves to highlight another example of supply chain risks gone bad.

The attention this issue got when it was microscopic bacteria on vegetables was nothing compared to the graphic footage of abuse at a California cattle ranch, which experts believe actually posed little threat to consumers (including school children), who ate the beef. The public and the Federal government are giving food safety their attention now…leaving the industry with two choices:

1. Leave no stone unturned and protect your brand - “trust but verify” the pieces of the supply chain with more stringent selection of suppliers, increased product testing, real supply scorecards for vendors and regular site visits.
2. Do nothing and let government regulators tighten safeguards while the press probes you with expose reports for a (literally) hungry, yet scared audience.

I don’t know what’s going through the minds of the CEOs on the witness list or at the hundreds of other companies in their supply chains. But, if it were me and I was paraded before Congress in an election year and scolded by Rep. DeGette that voluntary recalls by the food industry is like letting the “fox guard the hen house”, I’d be implementing some tighter controls quickly and publicly. Minimizing risks in your supply chain is critical. And it’s always better to do it yourself than leave it to regulators and politicians.

Kris Colby, a Director of Ariba’s Spend Management Services group, recently authored a white paper on the subject – An Ounce of Prevention: Steps Your Organization Can Take Now to Reduce the Risk of a Product Safety Incident.