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Avoiding Common Outsourcing Pitfalls

Renault is marketing a car called the Logan -- a starter vehicle that retails for about US$6,300. A safety conscious consumer may pause before getting in -- but he shouldn't, or at least not more so than he would with any other car. Renault is not cutting corners in its manufacturing process. Instead, Renault is reverse engineering its landed costs to make sure its manufacturing and sources processes are done at the lowest cost possible.

Landed costs is a term that refers to the total cost of a sourced product -- a cost that includes such items as duties, trade tariffs, transportation costs and documentation generation. Landed costs are the internal costs to an organization to bring that container load of products to the manufacturing or assembly site, John Vincze, senior vice president of TradeBeam, a global trade management software and services company, told CRM Buyer.

Calculating Costs

By reverse engineering the costs of the car using the TradeBeam application -- a process that would allow it to determine, for instance, whether it would be cheaper to source a product in Malaysia or India -- Renault is avoiding one of the most common pitfalls in global sourcing, explained Vincze.

"It is always a challenge for companies to have a comprehensive view of the world when it comes to landed costs -- especially when you consider that there are 200 countries from which you can source in the world," David Gustin, managing director and head of International Trade Programs at Global Business Intelligence, told CRM Buyer.

A global sourcing operation can be a highly complex, detail oriented process. For many firms, a profitable global sourcing operation can mean the difference between long term success or mediocre performance. Companies have invested millions in procurement software, in human resources and training to make sure they get it right. Too often, though, they still get it wrong. Landed costs are just one example.

Recognizing Problems

It is probably, though, the most frustrating of all sourcing pitfalls, especially as it is a cost of which most companies are cognizant. The trouble is that these costs are easy to under or overestimate, according to Gustin, especially when factoring in inventory buffers that many firms must maintain, and the ever-increasing competitive inventory cycle times in many industries. A miscalculation could have severe impact on a firm.

"Sure, it might seem at first glance that you can manufacture a gadget in China for 20 cents while it would cost you $1 in North America," said Kurt Cavano, CEO of TradeCard, provider of on-demand supply chain management solutions. "But once you build in the additional costs, you now find it really will take 50 cents to manufacture that item once it is all said and done," he told CRM Buyer. "Meanwhile you have already promised to sell it at 25 cents."

There are other pitfalls as well. Export licensing can be fraught with the possibility for error, especially as some regions shift to new regimes.

Enforcement has stepped up in many countries as a result not only of 9-11, but of new laws implemented in local jurisdictions, claimed John Brockwell, practice lead, Global Supply Chain Management with JPMorgan Chase Vastera, a trade management application and consulting service.

For instance, in 2007 there will be a momentum change in the European harmonization tariff schedule, with deadlines staggered according to country. "Companies will have to manage multiple classifications potentially," he noted.

Mistakes made at the very beginning of the sourcing process can also haunt a company later, Cavano said. "Will you do it with a partner, through an agent, by opening an office or from your headquarters?" The latter, he warns, is likely to mean a lot of overseas trips.

Fledgling Software Category

Many of these potential pitfalls can be navigated by the right software, typically called a global trade management or compliance application. Indeed this category has become so populated by vendors that several consulting firms have decreed it a legitimate software category, including Gartner (NYSE: IT), AMR Research and Frost & Sullivan.

These firms are using a number of different strategies to attack the problem: most, though, tend to offer value-added services in partnership with trade content or knowledge providers as well as application platforms, Frost & Sullivan contended.

In spite of this, or perhaps because of it, choosing one application over another is still more art than science -- and yet another potential pitfall for a global sourcing operation. There is a lot of activity in this space, said Gustin, who tracks this software category, but the category is still a nascent one.

"Consulting firms are varying in their estimate of the category's size, as just one example. Even the definition of what GTM is varies from consulting firm to consulting firm," he concluded.