In this sixth edition of Gunpowder, our European correspondent Stuart
Burns reminds us that China will not solve every company’s
cost reduction initiatives. Having globally sourced metals and other
direct materials for over twenty years, Stuart has seen China
sourcing work (and fail). Back on this side of the Atlantic,
Lisa Reisman has had all she can take on this (mis)perception that
reverse auctions serve
only as a means to ‘hammer down the incumbent supplier.’
Last, we have adopted one of Jason Busch’s entries from Spend
Matters, a blog dedicated to Spend Management. In this edition,
Jason examines a newer phenomenon of buying organizations charging
supplier fees for winning business
with the Big Boys.
Disagree with us or got an idea for an article?
Let us know: firstname.lastname@example.org.
From China–It’s Not a Panacea
Recently, a colleague emailed me an intriguing
article from the Detroit News entitled, “China losing cheap
labor allure…More U.S. companies find savings are drained
by errors, shipping costs and engineering changes.” The
article goes on to describe a US based wire harness manufacturer
that moved some operations to Mexico in 2000—in search of
lower labor costs. They then closed more US based operations to
move them to Honduras in January 2004. And finally, last summer
they signed a JV with a wire harness manufacturer in China.
Does this sound like a reasonable progression for
a company seeking lower and lower cost sources of labor? Perhaps.
But today, despite large investments, the company has yet to produce
a single part out of its JV in China.
It is one thing to set up an entire operation in
Mexico where language barriers are typically easier to overcome
and where the supporting logistics infrastructure, geographic
proximity to the US and similar business hours make for easier
sourcing/operations decisions. It is quite another thing to outsource
even a single component to China. In short, the “control
factor” has an economic advantage that tends not to get
calculated into the savings equation.
Many manufacturers are making the move to China
not just to source parts and ship them back to the States (though
many do so). Rather they are making the move to establish a market
presence and build their brand within China. In the automotive
industry, for example, they have come to China to support JIT
and sequencing activities for their major OEM customers.
Don’t Discount the Benefits
We have long argued that there are both benefits and risks
to sourcing from China. The benefits can be numerous:
- Substantial cost savings (our rule of thumb
is 25–40% piece part savings is required once you add
in all of the new costs from sourcing from China)
- Increased market knowledge and new sales channels—sourcing
from China is a logical first step to determine how to sell
- Latest engineering and manufacturing processes—this
isn’t always true but can be for certain parts and components.
There are other benefits in sourcing from China.
These include: hedging supply risk, currency hedging and developing
an opportunistic sourcing scenario when the price of a commodity
or product is in a state of flux.
Weighing the Risks
But the benefits can only be realized if firms understand
all of the potential risks associated with sourcing from China.
Our experience indicates that many companies, particularly small
and mid-sized companies make big mistakes the first time out.
The main challenges are as follows:
- Selecting the right products to move offshore and selecting
the right products to keep with current suppliers (and by the
way, big companies make this mistake too!)
- Qualifying overseas suppliers
- Maintaining supply chain flexibility
- Keeping inventory carrying costs down and managing stock
levels throughout an extended supply chain
- Ensuring that suppliers produce and ship products that meet
quality standards and developing a process to handle defective
- Ensuring the products selected have a long enough product
lifecycle to prevent product obsolescence in the middle of the
There are many additional risks that companies must consider
when sourcing from China, so whilst China sourcing has its place
to play in making US manufacturing companies more competitive
it is clearly not a panacea for all companies or all products.
Download our whitepaper
to learn more about what your company ought to be considering
when sourcing from China.
Stuart Burns is
Managing Director of Aptium
Global where he leads the firm’s
practice in Europe and Asia.
of the Incumbent Supplier
In the purchasing and supplier world, no words conjure up as
much passion and resentment as the words reverse auctions. Reverse
auctions are electronic tools that allow a buyer to post an RFQ
and then invite qualified bidders to ‘bid down’ the
price of goods. Reverse auctions have become standard operating
procedure for larger companies.
What’s most interesting to me is that small and mid-sized
companies are just now beginning to reap cost savings like their
larger brethren by deploying these dynamic pricing approaches.
But not all companies like reverse auctions. In fact, many of
our small and medium-sized ‘buyer’ clients state that
they do not like reverse auctions because they only “hammer
down the incumbent supplier.”
Now, if I had a dollar for every time I have heard that statement,
well, I wouldn’t be writing this article. But the time has
come to set the record straight on this “hammering down
of the incumbent supplier.” Somehow, the incumbent supplier
has become a victim in the sourcing process thanks to reverse
auctions. But I strongly disagree with this victimization. It’s
a bit like feeling sorry for the Yankees because they “earned”
what should have been a victory over the Boston Red Sox.
But enough of the baseball analogies—before you incumbents
start throwing rotten tomatoes at your screen, let us examine
some of these popular stereotypes and offer an alternative point
Many buyers state their incumbents have “been with us for
a long time…they helped us develop a particular product,
capability etc.” Some claim that their incumbents have made
significant technical or financial investments to work with a
particular client or a particular program. This is the supplier
“hook,” or guilt trip that many will use when they
play the incumbent card to emotionally defeat the reverse auction
process before it begins.
Second, many buyers from small and mid-sized companies say, “we
are getting the best pricing from our incumbents because they
have told us so…in fact, we haven’t had a price increase
in five years.” Often this line will be followed by “we
believe that we already buy world class.” This argument
is the supplier “line”.
Finally our buyer clients tell us that “there is nobody
else that can supply this type of product, with this quality that
can meet our delivery requirements (e.g., JIT).” This argument
is the supplier ‘sinker’.
Let’s take a look at each of these arguments one by one
and dispel some common misperceptions.
- The supplier has been with us for a long time and has helped
us to develop a particular product or capability. The truth
is any of us would be willing to pay a slight premium for an
on-going relationship with someone that we can trust but how
much is too much? Would you pay 20–25% above market value
for a hair cut? Perhaps but what about for groceries? What about
prescription drugs? Don’t feel sorry for the incumbent
when they make this argument. The fact of the matter is that
the buying company has likely been handsomely paying the incumbent
for these product development costs.
- The alarm bells should go off if your organization has not
extracted price concessions from your incumbent suppliers in
the last few years! And in markets with large raw material inputs,
have you been able to hold your prices with your customers with
no erosion during the past few years? Even in markets which
face rising commodity prices, companies can still gain price
concessions by conducting reverse auctions. Steel stampings
and plastic injected molded parts, if competitively bid can
yield double digit savings.
- Monopoly supply markets do exist but they are indeed rare.
A friend who sources rail cars has told me that there is only
one supplier in the world for certain types of cars (okay, we
might buy that one). Activated carbon for the automotive industry
appears to be another but metal stampings (whether they are
made on a 200 ton press or a 1000 ton press) can be supplied
by multiple companies. Even items with tight technical specifications,
tolerances etc can usually be supplied by a range of suppliers.
The fact is, for most industrial parts and materials, multiple
supply options exist and many of those suppliers can produce
high quality parts that meet tough JIT requirements.
So by conducting a reverse auction, are you really “hammering
the incumbent?” On the contrary: our experience is that
it is usually the buying organization that has been “hammered.”
This is because buyers almost always give the benefit of doubt
to their incumbents. But better incumbents will actually share
some cost-savings with their clients and often avoid a reverse
auction in the first place. There are also benefits to incumbent
and challenger suppliers for participating in a reverse auction,
see our previous
issue of Gunpowder.
But for those suppliers who won’t play ball at first and
complain about being singled out, it’s almost always easy
to dispel their protests with even limited analysis. And it is
our experience, in fact, that strong incumbents will perform well
in reverse auctions once they realize that this is how a sourcing
decision will be made.
Given this, small to mid-sized buying organizations should relish
the reverse auction. These tools create level playing fields and
a transparency to market pricing that simply can not be accomplished
any other way. And never be fooled by incumbent squawking. Get
them on the field and let them play by your rules. And put their
hammer away once and for all.
Tune in next issue for our case study on the supplier “Hook,
Line and Sinker” and how we debunked these myths for one
of our clients.
Lisa Reisman is
Managing Director of Aptium
Global where he leads the firm’s
practice in North America.
Bring Your Checkbook
Over the years, there's been many an effort to make suppliers
pay for access to buyers. But historically, many of these "supplier
pays" models have been by intermediaries, such as FreeMarkets
(in its early days) and other online channels for suppliers, such
as marketplaces and indirect procurement portals. Even Ariba recently
announced that it would be adding fees to suppliers that make
frequent use of the Ariba Supplier Network (ASN).
But recently, I've spoken with a number of large buying organizations
who are beginning to make suppliers bring their checkbooks to
meetings (well, almost). In virtually all cases, there's a twist
that goes along with these new supplier fees. For example, take
the case of a large global technology-related company (I've blinded
the exact industry to protect my source) that charges winning
suppliers in reverse auctions to pay a fee to get the business.
Obviously, this is fancy budgeting to get suppliers to offset
the sourcing software and other costs associated with negotiations,
but suppliers do indeed cut checks to the buying organization
when they receive business.
Other companies charge suppliers when they register and maintain
information on a supplier portal. One large global diversified
conglomerate charges over $3000 a year to its suppliers to gain
access to their supply portal to list their goods and services
in their online catalog system. By my calculations, knowing the
number of suppliers in question, this more than covers the cost
of software, staffing, and other expenses associated with maintaining
an online eProcurement and catalog requisitioning system. This
gives "profit from procurement" an entirely new meaning!
I know of other large buying organizations considering a similar
move as well. Many reason that suppliers happily spend thousands
of dollars flying to sales meetings, and some of that cost could
be re-allocated to off-set the technology investments that the
buying organization makes to make it easier for suppliers to transact
But charging suppliers is not just limited to offsetting software
(and associated) costs. In the travel and hospitality industry,
I've heard of one company that lets suppliers sponsor their bi-annual
supplier conference. While the buyer bills this as “advertising”
for attending suppliers, it certainly raises an ethical eyebrow
about whether “sponsors” would be favored over non-sponsors
in the sourcing process when it comes to new contracts. In this
case, the buying organization has put a stake in the ground and
has said that sponsorship will have no impact on contract award
decisions, but regardless, visibility at events like this can
help reinforce brand and other subjective criteria that buyers—who
are in attendance—rely on during award decisions. Talk about
a captive audience!
Is there a slippery slope by making suppliers pay—either
at the point of sale, for access, or from an advertising perspective?
At this point, I'm not sure. But to be careful, buying organizations
should ground supplier-pays business models in tight, well-thought
out businesses cases, lest they start down a path from which they
What do you think? What is your experience? Are you considering
such a model yourself? Post a comment or drop me a line: email@example.com.