Global Sourcing Creates Supply-Chain Challenges - InformationWeek

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Global Sourcing Creates Supply-Chain Challenges

The drive to increase profit margins has retailers and consumer-goods companies sourcing more products from China, Eastern Europe, India, and other low-costs regions. Yet such savings can come with negative hits to supply chains, such as longer lead times, unreliable delivery, and slower turns on inventory, a new study says.

U.S. and European companies plan to increase the amount of goods and services they source from suppliers in lower-cost countries by 85% within the next two to three years, according to a study Accenture released last week based on interviews with 238 procurement executives representing a range of industries. An earlier study by the consulting firm found that between 2001 and 2003, annual inventory turns in the retail industry declined from 14 to 11 and in the consumer-goods industry from 17 to 13.

"One reason this happened is that sourcing overseas is increasing," says Gary Godfrey, associate partner of supply-chain management. "It's not a short boat ride from China to the U.S." What's more, companies often are compelled to carry high inventories to avoid low product availability, since the risks of delays or undeliverables increase when dealing with far-flung suppliers.

Global sourcing creates challenges for retailers, says Paul Gaffney, executive VP of supply-chain management for office-supplies retailer Staples Inc. "No one has figured out how to make the Pacific Ocean smaller," he says. The retailer sources many of its branded products overseas. Branded products accounted for 15% of its $14.4 billion in sales last year. Staples has worked closely with manufacturers and transportation providers to avoid supply-chain delays, and delivery times have dropped in the past year from 120 days to between 55 and 59 days, Gaffney says. The goal is 45 days. "Working to collaborate with suppliers helps," he says.

Despite the desire to increase inventory turns, retailers and others need to ensure that they're keeping well-stocked shelves, considering the improving economy, says Ken Goldstein, economist at the Conference Board, a nonprofit private research firm. When the economy was in the doldrums a few years back, many companies sharply decreased inventory levels to avoid getting saddled with unsold products. "That bare minimum wasn't increased much in 2002, 2003, or 2004 because retail businesses were worried about the economy stalling out. In the last six months, it's becoming clear the economy is holding its own or slightly improving," Goldstein says.

The leading economic index, a key gauge of future U.S. economic growth, released last week by the Conference Board, rose 0.1% in February, suggesting continued economic growth, Goldstein says. The index of leading indicators climbed last month to 115.6 after falling 0.3% in January.

For companies, the goal is to have high product availability without too much stock--and that's often only possible with close collaboration between companies and their suppliers. As the economy improves, the idea that companies and their suppliers can use technology to achieve a single, shared view of multiple warehouses and stores is on the rise, says Sam Starr, president and CEO of Sterling Commerce Inc., a provider of business-integration software and services and a wholly owned subsidiary of SBC Communications Inc. "Companies have learned that working together gives insight into where stock is located," he says. "This reduces inventory buildup but can keep stock on store shelves."

Staples underwent a cultural change in early 2003, starting a three-year supply-chain improvement strategy that includes technology investments that allow it to collaborate more closely with its suppliers. "We first shored up our processes to understand what products are actually on the shelf," Gaffney says. "We audited our stores to determine quantity in our IT systems versus what the customer actually saw on the shelf."

The plan has kept inventory low and store shelves stocked with the items customers want most, Gaffney says. When Staples closed its fiscal 2004 year on Jan. 29, it reported that inventory turns had improved to 5.6, up from 4.9 in 2002.

Meanwhile, consumer-goods companies are doing a better job of managing supply-chain costs, according to Pittiglio Rabin Todd & McGrath, a supply-chain consulting firm. A survey last year of 80 consumer-goods companies found that 1.6% of revenue was spent to manage inventory and orders and maintain materials costs, down from 2% spent in 2000, according to a comparable study of 20 companies.

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