Global Sourcing

An Anchor Format for Successful

Globalization Strategies

Sandra Reese, Managing Director

©2005 Reese Partners 303 West Erie Street Suite 310 Chicago IL 60610 312.397.3100
Chicago • Shanghai • Mumbai
 Global Sourcing – An Anchor Format for Successful Globalization Strategies

G lobal sourcing is a natural outcome of globalization and its sub-trends, such as

international trade deregulation, technological and communication advances, and
intensified global competition. Many companies are making it a priority to develop global
sourcing strategies with the goal of cutting production costs, but many do not know
where to begin. “Is my company too small to take advantage of opportunities
overseas?” “How do I develop relationships with vendors and suppliers?” “Where do I
begin?” Throughout this paper we discuss an outline of the necessary steps and critical
items needed to help companies of any size, in any industry, move forward with a global
strategy. Successfully implementing and managing this strategy can significantly
decrease costs and increase competitive advantage while leveraging the global
marketplace to more efficiently run a company.

There is no doubt that the outsourcing market will grow in 2004 and continue to do so
well into the future. Many multi-national companies such as General Electric, Wal-
Mart, Procter & Gamble, Siemens, and Nokia have moved part of their operations to
low-cost countries such as China and India. How have these companies successfully
adopted this new movement? While the process is complex, there are steps and
resources available to make it run smoothly and quickly, resulting in the identification of
immediate cost savings.

While there is no ‘master’ approach, the bottom line is that businesses across the globe
are becoming increasingly interconnected, and are experiencing excellent results with
global sourcing. Most companies that have been successful utilize outside resources
that have the experience and knowledge base to guide them through potential issues
and deliver immediate results.

The Right Way to Source Globally?

The Quest for Sustainable Business Benefit

Today, cost reduction is one of the leading factors in driving firms to turn toward global
sourcing. Additional goals include quality improvements, time-to-market reductions,
availability improvements, and synergy creation of company resources and the global
partner. But essentially, the goal of global sourcing is to meet or exceed product
expectations while driving down production costs and streamlining the supply chain.

Pick the Sourcing Approach that Fits Your Business

Sourcing for cost reduction approaches:

• Leverage Products - Companies may wish to improve the sourcing of “leverage”

products, i.e. low-to-medium-value products, where the firm is in a good position to
consolidate supply requirements and reduce the number of suppliers. The focus here
is on leveraging purchasing power. Since the products involved are of low-to-medium
value and risk, they are ideally suited to low-cost country sourcing.

• Bottleneck Supplies - Companies may seek to improve the sourcing of “bottleneck”

supplies which risk being periodically unavailable. These mission-critical supplies
may only be sourced in countries with developed infrastructures, reliable business
cultures, and stable economies. Only the most advanced low-cost sourcing countries
fulfill these requirements. Even then, risks need to be carefully managed.

©2005 Reese Partners 303 West Erie Street Suite 310 Chicago IL 60610 312.397.3100 2
Chicago • Shanghai • Mumbai
 Global Sourcing – An Anchor Format for Successful Globalization Strategies

• Strategic Sourcing - Companies may seek “strategic sourcing,” which in its purest
form, involves optimizing supplies that are the basis of the business success. Such
supplies are prized by the buyer because they improve performance and provide
value. Low-cost sourcing is attractive when these supplies are labor-intensive and
multiple suppliers exist.

In effect, global sourcing allows a company to capitalize on low production costs without
having to actually own the supply network in such countries. In this way, companies can
avoid the investment risks in such countries, but at the same time, enjoy the production
benefits.

Six Step Process

The concept of sourcing does not matter unless you execute. Focusing on simply
finding the lowest-cost supplier for a particular product is dangerous, as there are
multiple factors involved solely in the discovery process, and each factor needs to be
investigated carefully.

The point is to consider the total cost of ownership, not just the purchased cost. In terms
of global sourcing, price reductions are only the tip of the iceberg. Underneath the
surface are a myriad of factors that need balancing, such as taxes, shipping, compliance
requirements, and inventory. Avoid letting the desire to find the lowest-cost sources drive
the search. The key is to target products that provide high benefit and low risk.

Based on 50 years of collective projects helping companies achieve the best returns and
satisfaction from their global sourcing efforts; following are six steps to a successful
implementation:

1. Balance Hidden “Cost” factors

Supply managers must keep up-to-date on international tariffs, trade
regulations, and geopolitical landscapes that are constantly in flux. With
that said, here are six hidden “cost” factors to consider for your global
sourcing checklist. These will help you balance cost, performance, and
risk:
1. First cost: setup, price, tooling, transaction, and other costs
related to the product or service delivered
2. Transportation expense: transportation, drayage, fuel
surcharges, and other fees included in a freight rate
3. Supply Chain expense: warehousing, handling, taxes, insurance,
depreciation, shrinkage, obsolescence, and other costs
associated with maintaining inventories
4. Tariffs, duties, taxes, Visas: landed costs (the sum of duties,
shipping, insurance, and other fees and taxes for door-to-door
delivery)
5. Vendor compliance charges: the cost of noncompliance or
underperformance that can offset any price variance gains
6. Geopolitical and country issues: such as changed country
leadership; tariff and policy changes; instability due to war and/or
terrorism; supplier financial risk and supply base disruption;
natural disasters (e.g., typhoons, earthquakes); and disease

©2005 Reese Partners 303 West Erie Street Suite 310 Chicago IL 60610 312.397.3100 3
Chicago • Shanghai • Mumbai
 Global Sourcing – An Anchor Format for Successful Globalization Strategies

2. Three Initial Analyses—Right Product, Right Country, Right Company

Partner
The first step in an international sourcing strategy is to target the products
that fit well with overall company initiatives. Such products generally have
high labor content and low shipping costs.
The second step is to choose the right countries from which to select your
supplier. A desirable low-cost supplier has skilled workers, affordable
labor, and choice of component sourcing either in the same country or
within a local free trade zone.
The third step is to choose the right supplier. It is important to monitor a
supplier’s viability and reliability closely, as closely as if you owned it.
Reese Partners partners with companies that specialize in helping select,
qualify, and develop/monitor relationships with overseas suppliers. It is
important to find a supplier that is open and transparent. Ensuring
adequate information transparency by the supplier is essential to allow
you to conduct total-cost analysis and effective supplier evaluations.

3. Automate the Process

The level of automation applied to the process is another key to success.
Companies using online sourcing (e-sourcing) tools report fewer
challenges and greater satisfaction with their sourcing initiatives than
companies with manual or marginally automated procedures.
Advantages of e-sourcing include the ability to foster collaboration and
standardization of global sourcing procedures throughout the enterprise.
Automation also allows companies to better identify suppliers and more
frequently communicate and negotiate with them.

4. Monitoring the sourcing chain - No Surprises

Executing a global strategy requires close monitoring. It is important to
balance involvement: Disengagement leads to disappointing quality and
supplier reliability, while over-involvement leads to the same risks as
direct investment.

Quality control is extremely important during the global sourcing process.

An initial evaluation as part of a qualification process, follow-up reviews
and product inspections, will greatly improve the chances of building
successful long-term relationships.

5. Coordination – Seamless Supply Chain

Companies must coordinate sourcing requirements, activities, and
decisions across functions, divisions, and geographies. Be sure to
synchronize information and material flows by communicating the
company’s outsourcing strategy across the enterprise.

6. Calculation
A company cannot maximize the value of its global sourcing initiatives
without reliable procedures for calculating and managing landed costs.

©2005 Reese Partners 303 West Erie Street Suite 310 Chicago IL 60610 312.397.3100 4
Chicago • Shanghai • Mumbai
 Global Sourcing – An Anchor Format for Successful Globalization Strategies

7. Generating value in the sourcing process

Every sourcing project must have an anticipated and realistic Return on
Investment. By optimizing the following key levels of business activity,
Reese Partners’ clients help ensure business value:

1) Physical - Movements and flows within and between firms: transportation,

storage and inventories, delivery, services
What we do: streamline transport costs, reduce inventories, ensure supply

2) Financial – Cash flows, transfer pricing, expenses, investments

What we do: Improve accounting and billing procedures, leverage financing

3) Informational - Processes, access to key information, benchmarking, market

intelligence
What we do: Develop performance metrics based on the company’s own
strategic goals, know the supplier and product markets, demand total cost-
transparency from the supplier

4) Relational - Appropriate linkage between a supplier, the company and his

customers for maximum benefit and service
What we do: Align company and supplier incentives, spell out company needs
and requirements, provide suppliers with accurate forecasts of demand, ensure
early supplier involvement, address effective language and cultural differences to
ensure effective communication, invest in periodic in-person meetings

5) Product - Design, production cycle, quality

What we do: Reduce design-to-production cycle length, optimize operations and
costs, develop methods for monitoring quality and performance

“Hot spot” focus: China

Why China?
Over the past few years, China has firmly established itself as the spot for global
sourcing. During 2003 alone, Ford announced plans to buy $1 billion in auto
components from suppliers in China; Wal-Mart established a sourcing division in
Shenzhen to buy direct from Chinese factories; and Philips Electronics’ 23 factories in
China surpassed $5 billion in goods produced.

For the last two decades, China has been steadily transitioning from its former centrally
planned model to a market-oriented economy. This increasing openness, especially to
foreign direct investment, has contributed to its exceptional growth. China’s success in
attracting foreign businesses can be tracked to its market size, labor costs, quality of
infrastructure, and government policies. Any comparison of figures for labor costs—and
there are many—reveals that China’s labor costs are extremely low compared to other
countries.

Competitive advantages and drawbacks

China’s competitive advantages involve low labor costs, good engineering and R&D,
proximity to clients (especially electronics), and critical mass of clients and suppliers.
Obstacles include poor logistics and the potential for copyright and patent infringement.

©2005 Reese Partners 303 West Erie Street Suite 310 Chicago IL 60610 312.397.3100 5
Chicago • Shanghai • Mumbai
 Global Sourcing – An Anchor Format for Successful Globalization Strategies

Sourcing versus joint ventures

Many companies view sourcing as one of their best options for dealings with China. For
example, an electronics industry survey by the China Trading Fair asked manufacturers
doing business with China how they had structured their business arrangement. Some
46 percent of respondents said they were operating wholly owned enterprises, while 34
percent said they were meeting their needs with outsourcing. Only 10 percent had joint
ventures.

This indicates wariness towards investing capital in China without adequate control over
fund use, and wariness toward ventures with state-owned enterprises. In this context,
sourcing offers the best opportunity to ensure reliable supply without investing capital.

China – Know where you are headed

Traveling
Flying your own quality and engineering personnel to China can be
difficult, and can easily eliminate some of the savings associated with the
new effort.
Private or public company?
When sourcing in China, companies must be cognizant of the type of
company they are dealing with. Public companies can present several
problems. The government owns these companies, and therefore, they
may prioritize political ends rather than business ones. Public companies
may not have reformed, nor adopted private business practices.
Communication
Communication in China can be difficult. Although supplier
representatives can often converse in English, critical communication with
supplier management and factory workers often requires the ability to
speak the native language. In addition to the language issue, time zones,
ethnicity, business practices, and culture all vary greatly by region.

Sourcing is Here to Stay

Whether the future of sourcing for your company lies in China, India, or any foreign
location, the changes to your bottom line can be significant. Leading U.S. companies
have made big strides overseas, and foreign investors are investing consistently on an
annual basis. Though sourcing from a foreign entity may not appear to be as easy as
sourcing from around the corner, a global sourcing strategy--managed properly--can be
vital to your company’s future success.

©2005 Reese Partners 303 West Erie Street Suite 310 Chicago IL 60610 312.397.3100 6
Chicago • Shanghai • Mumbai
 Global Sourcing – An Anchor Format for Successful Globalization Strategies

About Reese Partners

Reese Partners builds world-class global operations and generates rapid and
sustainable savings through tailored consulting services focused on sourcing and supply
chain, process improvement, and business process outsourcing.

Founded: 1995

Industry Expertise: Manufacturing, Retail, Consumer Products, Higher Education,

Financial Services, Business Services

Client Profile: Mid-market companies and divisions of the Global 2000

Services:
Global Sourcing Strategy and Execution
Indirect Procurement Strategy
Global Supply Chain Restructuring
Business Process Outsourcing Strategy and Execution
Inventory Planning & Control
Operations Integration & Reorganization
Systems Evaluation and Selection
Process Improvement
Finance & Internal Controls, including Sarbanes-Oxley

Expertise/People:
Reese Partners’ consultants blend extensive, hands-on experience with high-level
strategic thinking. Our professionals average more than 20 years of industry
experience, and have worked and lived in over 60 countries around the globe.

Globalization Success Stories

Cutting Costs
Reese Partners helps companies reduce costs and increase revenue through practical
global sourcing strategies. Successes include:

• $60 million in estimated cost savings over three years after implementing a
strategic sourcing initiative for a $1 billion consumer products company.

• 32% reduction in inventory with no negative impact to customer on-time

performance for a $7 billion industrial manufacturer.

• Increase sourcing volume from less than $100 million to $450 million at first cost
for a multi-billion dollar full-line department store.

• Reduction in annual direct costs of 400 inventory items by an average of 5%, an

aggregate savings of $2 million for a multi-billion dollar international
manufacturing company.

©2005 Reese Partners 303 West Erie Street Suite 310 Chicago IL 60610 312.397.3100 7
Chicago • Shanghai • Mumbai
 Global Sourcing – An Anchor Format for Successful Globalization Strategies

Case Study
Reese Partners was retained by a $200 million consumer products company to
review their global operations and customer interface. We evaluated existing processes
in the US, Hong Kong, Europe, and Canada across Sales Productivity, Product
Management and Development, Global Logistics, Inventory Management, and other
G&A. Within 8 weeks, we identified opportunities to save more than $5 million per
year. The initial objective outlined by the investors was to realize more than $2 million in
sustainable performance improvement opportunities. After Phase I, EBITDA improved
in excess of $7 million, and cash flows improved by $14 million.

What our clients say

“Reese Partners helped open our eyes to new opportunities in which to improve our
current purchasing practices that could save us significant amounts of money. Reese
Partners got the ball rolling and helped us realize that domestic sourcing, while
comfortable, is not the most desirable sourcing solution for us. Now, rather than just
talking about it, we are doing something about it. We are making a huge transformation
within our company - a transformation expected to result in savings on some
components of as much as 30-40 percent.”

Neil Gambow
President, Midland Manufacturing

“Reese Partners helped Huhtamaki realize significant cost savings of over $2 million a
year. The expertise provided by Reese Partners was superior to what we could have
done internally, with respect to both quality and time. They brought an objective view
that couldn’t be replicated internally, worked within a tight timeline and presented what
made the most sense given both current and future business trends.”

Thomas P. Wilkas
Former Executive Vice President and Chief Financial Officer, Huhtamaki Americas, Inc.

©2005 Reese Partners 303 West Erie Street Suite 310 Chicago IL 60610 312.397.3100 8
Chicago • Shanghai • Mumbai