Buying from low cost countries has supply chain risks

Roger OakdenProcurement

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Another case of problems with international suppliers.

Companies that buy items internationally, which become products sold through retail stores have many risks. A big risk is that the media, including social media, will uncover any misdeeds and ‘cutting corners’ by your business and your international suppliers. And you will get all the publicity you do not need!

Examples of problems with suppliers occur on a regular basis. While purchase price is always an important element, the critical factor underlying negotiations with suppliers should be the total landed cost to your facilities. And this must include ‘uplift factors’ of doing business with particular countries and suppliers, identified from the risk analysis.

An example of a company’s reputation being affected is a recently aired BBC TV program. It highlighted Apple’s international procurement actions compared to their published Statement of Responsibility. Hidden cameras filmed working conditions at a factory in China producing the iPhone. Also filmed, were poor families in Indonesia illegally mining tin. They sell the ore to middlemen, which on-sell to smelters, who sell the refined tin to Apple.

The filmed sequences showed that even a company of Apple’s size cannot ensure that its Tier 1 suppliers are abiding by the agreed Statement of Responsibility. The company has even less chance of compliance by its suppliers at lower Tiers in the supply chain.

But this blog is not about Apple, it is about your business and its procurement policies. Once again, the Apple disclosure shows that buying from Low Cost Countries (LCC) does carry additional costs above the purchase price. It includes your business reputation and brand image, which could far exceed savings from buying in LCC.

At each link along LCC supply chains for consumer goods there is pressure on price; this is ultimately generated by large importers and retailers. The outcome is that suppliers up the chain may ‘cut corners’ to gain fractions of a cent off each item made and sub-contract work to even cheaper and often unregulated businesses.

If buyers do not manage the contract relationships in LCC, the risks will increase – in most countries mobile phones (with cameras) are widely available and social media is ready to publish.

What your business should do to reduce international procurement risks

There are three rules for buying from LCC, which provide the basis for reducing your Procurement risk profile. These rules must also be understood by senior management, who are often the most enthusiastic about obtaining low purchase prices, without considering the risks.

1. The majority of risks occur outside your business. Some of the highest risks will be caused by your suppliers (or supplier’s suppliers), which include sub-contractors, service providers, contract employment agencies, agents and consultants.
a. Suppliers are not ‘partners’; they are in business for their reasons, not yours. Their primary reason for having the business relationship is to sell you something and make a profit that allows them to stay in business and prosper – and there is nothing wrong with that! But, certainly work towards a business alliance where your business culture and their technology or ‘know how’ can add value to your business

2. At the commencement of negotiations, your procurement people must set their expectations with LCC suppliers:
a. Provide a written document, preferably on one page. This is the Statement of Responsibility, which identifies your expectations of the supplier. It must be written in a simple to understand but direct style. It must emphasise the supplier’s adherence to ethical practices
b. Your business will be punctual and ethical with audit reviews of the supplier, as defined in the contract. This applies whether the audit is undertaken by your business or a contracted auditor
c. Your organisation will comply in full with the commitments it makes to suppliers. In LCC this especially applies to commitments concerning the provision of education and medical care for employees’ families

3. As the latest example has shown, without your own audit staff permanently located at each LCC facility, supplier risks will increase, no matter how large your business
a. Suppliers in LCC should carry your highest risk ranking (and therefore plans for high likelihood of events occurring) until they can prove adherence to your Statement of Responsibility
b. Understanding and co-ordinating supply chains over large distances has more complexity, uncertainty and variability than working with supply chains in your home country. Make the necessary investment in qualified and experienced procurement and logistics people

It is self-interest that your businesses implement these ‘rules’; it is the initial step in reducing risks of unexpected events. If not done thoroughly, your business needs to be ready for the consequences. For investigations into work practices and damaging publicity by the media, non-government organisations (NGOs) and internet-savvy consumers.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...