Is Global Sourcing Still Worth It?

Think about the baseline requirements.

  • Supplier Selection
    • potential supplier identification
    • verification and risk analysis
    • onboarding
  • Purchase Order Generation
    • order creation
    • transmission
    • acknowledgement
  • Route and Carrier Selection
    • potential route identification
    • potential carrier identification for remote trucking, ocean/air freight, local trucking
    • final carrier selection
    • cross-dock identification
    • FTZ identification
    • route selection based on cost and network balance
    • carrier selection
  • Transport Insurance
    • multi-quote obtainment and analysis
    • insurance provider selection
  • (Inventory) Financing
  • Trade Document Creation
    • export document creation
    • (automated) cargo manifests
    • import document creation, inc. security filings
  • Transport & Shipment Tracking
    • loading
    • transit
    • cross-docking
  • Importation
    • holds
    • inspection
    • tariffs
  • Documentation
    • goods receipt
    • invoice acknowledgement
  • Payment, Taxation & Reconciliation
    • payment authorization
    • pre-clearance
    • tax payment
    • supplier payment
    • refund tracking
    • refund collection
    • reconciliation

These are just baseline. Even the most simple global sourcing situation is insanely complicated. On top of this:

  • supplier risk analysis is insanely complicated as you have to consider all the supplier risks and supplier location risks
  • … as well as the raw material risks that affect their ability to acquire the materials and components they need to produce their product
  • carrier risk is also complicated as rapid fuel increases or primary lane closures that cuts off a significant portion of their revenue can take a financially healthy carrier to an almost bankrupt one
  • tariff risk is now a thing as one major country in particular changes tariffs on the whims of its leader; outdoing the chaos Brazil charged when it was changing tariffs weekly
  • insurance risk is real as the increasing risk of natural and man made disasters has resulted in insurance rates going up
  • every year, even though you’re paying more for insurance, more and more exclusions are being added with conflict, war, and piracy on the rise (again)
  • export, manifest, and import documentation, as well as tariff filings, are becoming insanely more complicated by the year … with every country and carrier having different requirements
  • the countries with e-invoice requirements (clearance and post-audit) tend to invent their own, slightly different, requirements and dealing with global invoices from 100 countries requires 100 different rule sets — that’s why there are vendors that just do global e-invoice compliance
  • global e-payments can be complicated as well … not all countries support your favourite e-transfer platform, accept your primary bank’s payment network, or deal with your preferred currency
  • VAT/Taxes can be just as difficult to pay, and ten times more difficult to reclaim

So, if you can get the stuff locally, or next door (i.e. one country over), why should you go global?

Especially when the cost argument doesn’t cut it anymore. Even if the model still comes out making the global source cheaper, the cost of risk, which needs to be taken into account as the potential of any multinational experiencing at least one major disruption a year is approaching 100%, means that the losses in any category will eventually exceed the savings (because the chances of a disruption for any major lane or supplier increase over time — you can’t treat it as an independent event because even coin flips aren’t independent — one is 50/50; but if 9 in a row have been heads, the chance of tails is almost 98%).

In other words, if it’s not necessary, does it still make sense?

Managing Your Relationship Off of a Scorecard? I give you an F!

Unless it’s a two-way scorecard, then I give you a C- for effort.

Don’t get it wrong, SI likes two-way scorecards. It’s the only scorecard ever developed for Procurement that’s any good. There’s no other way to properly capture subjective opinions which can be just as important as objective relationship measurements. If there are misunderstandings or personnel issues, a focus on improving processes or efficiency based on objective measurements will be all for nought since whichever side believes the problem lies with the other will be adverse to making any effort (and if you’re only capturing one side, who knows if you’re capturing the right side).

But many SPM platforms define the (two-way) scorecard as their entire foundation of relationship management when it’s just a minor tool. A very important tool in the toolkit … like the measuring tape that a carpenter shouldn’t do anything without — as no relationship manager should be without a two-way scorecard, but still a tool.

But that’s just a tool to measure alignment. You need to focus more on ensuring there’s alignment to start with. This means you primarily need to:

  • ensure you select the right supplier in the selection process
  • clearly define what you expect from the engagement
  • define milestones and key metrics you will be monitoring and agree on the definitions
  • regularly meet to discuss improvement, stagnation, decline

ensure you select the right supplier in the selection process

Your selection process must ensure:

  • you vet them for any risks or red flags that go against your policies
  • you clearly define the product / service requirements
  • you analyze their offering against those requirements
  • you analyze their culture

Frankly, you’ll never have good performance if

  • the relationship ends up being short term because you missed a red flag that legal or risk management won’t put up with
  • you don’t define precisely what you need in functionality and service level requirements
  • you don’t ensure the supplier’s product or service isn’t a great fit for you
  • their culture doesn’t mesh with yours

clearly define what you expect from the engagement

It’s not just saying you want a product that does A through ZZZ or a(n outsourced) service that provides you a detailed transformation plan, takes over your procurement function for tail spend, or helps you onboard your suppliers. It’s a

  • detailed description of what functions you are looking to transform, whether you are just looking for process redefinition support or the selection and implementation of new technologies and automation platforms, and how much project management and assurance you need
  • detailed definition of what tail spend is in terms of categories, amount, frequencies; what type of tail spend can be catalog/punch out, which should be quoted, and when it should be passed back and included in a (modified) category or treated as strategic spend; along with detailed platform requirements, the data collection and model requirements (for integration with your master data and analytics systems), and whether or not it’s okay to use a GPO
  • what processes you use now, the data required for every supplier as well as specific data requirements by category or region or spend, who is responsible for support during on-boarding and post-on-boarding and for what, what systems should be integrated with, and so on.

Just like there’s no success without clear requirements, there’s no foundation for a good relationship without clear requirements of expectations.

co-define milestones and key metrics you will be monitoring and agree on the definitions

In order for a party to perform well, they need to know precisely

  • what they are being judged on
  • how the metrics are defined
  • what the ultimate goals are

The reality is that what get’s measured gets managed, and the management that happens is that which aligns the performance to what improves, or at least maintains, the metrics — whether it is the right thing to do, or not. For instance, if your supplier is hooked on your early payment discount offering as a form of financing (it’s not, by the way, but that doesn’t stop most organizations from treating it like it is), and you make that availability contingent on a 95%+OTD metric, and every shipment that arrives the next calendar day, even if the difference is 4:00 pm for end-of-day unload vs 8:00 am for start of day unload, is counted as late, your supplier is going to do everything it can to not only be on time, but attempt to get all deliveries out early to make sure construction, weather, or unexpected delays don’t stop the shipment, even if that means paying a trucker to sit in a parking lot with unloaded inventory for 2 days! And if getting it out that early requires factory workers to go from 10 hour shifts to 12 hour OT shifts, which makes them tired and increases error rates after hour 9, so be it! End of the day, you’ll get your OTD and pay more for delivery and have to deal with higher defects and waste and all of the tracking and return costs incurred. If the goal in introducing OTD was just to minimize customer stock-outs, you didn’t exactly achieve it because if you end up having to reject a (considerable portion of a) shipment due to poor quality, you’re stocked out (and the OTD metric gives them a pat on the back).

This is why we said “co-definition” — both parties should work together to define (blended) metrics (and scorecards) that will not only achieve the goal, but allow each party to be measured fairly.

regularly meet to discuss improvement, stagnation, decline

Emailing your counterpart a scorecard and saying “You did great here, acceptable here, but sucked in these parts — Do Better” is not relationship management because it doesn’t even imply any sort of relationship. Relationship management is developing the collaboration and desire for both parties to work together, not just pointing out deficiencies in a scorecard and saying “do better”.

All of this means that if you want to do true relationship management, you need to build in relationship management into everything you do because just defining a scorecard-driven program after the fact when the supplier performance isn’t too your liking isn’t relationship management.

How Do You Execute Effective Supplier Performance Management in Today’s World?

This is an interesting topic. Many books have been written about this; dozens of specialized software vendors and consultancies have cropped up over the past two and half decades to address this; many top tier analyst firms have been putting out frameworks for almost three decades; and every Big X consultancy has their detailed methodology, 200 page strategy and implementation deck, and a dozen or so publications on their website documenting numerous benefits and case studies.

In fact, there’s so much material out there that if you asked your favourite clod or chat, j’ai pété instance to write you a book, put together an implementation plan, prepare an executive presentation, prepare an implementation plan for your team, and prepare a training plan for your supply base, chances are, believe it or not (and the author rarely does) any particular Gen-AI instance is likely to do a decent job of it because there is so much nearly identical material on the subject that the models are likely to be decently weighted to generate a decent facsimile of the material.

But here’s the question — is everything that has been defined, prescribed, optimized, and re-prescribed over the last two and a half decades the right approach? This might appear dumb on first read and sound dumber on first vocalization, but it’s actually pretty poignant. Just because whatever has been prescribed for the past two decades has worked just fine, that doesn’t mean it’s optimal. And just like modern drugs can deal with most symptoms of any ailment you might get, at least at first, that doesn’t mean they address the root cause. And if they don’t address the root cause, you can still get really sick, and even die if the symptoms the drugs are addressing are covering up a long term, slowly progressing, [incurable] cancer or autoimmune disease.

Plus, certain practices are designed to achieve end-states with certain assumptions in mind that are based on expected market conditions and activities that are expected to optimize to those conditions. In other words, its assumptions across the board (on what to do) based on assumptions across the board (on what is success) based on expectation across the board where the assumptions on what to do assumes that what got a result before will again (without any proper definition of the scenario in which it worked or proof that its effective) and the assumptions on what is success is only based on what has achieved the best results (and not the best results that could be obtained) and the expectations are simply hopes that what came before will come again.

Of course, given the reliability of some of the methodologies out there, the consistent results obtained by the best-in-class providers, and the wide-spread adoption of certain methodologies, it’s hard to argue with the assumption, the underlying assumptions, and the expectations because, for most organizations that adopt the methodologies, and stick to them, they get great results!

But what happens when the results flatline?

I’m asking because I expect there’s a chance it will happen, and possibly sooner than I expect, for companies who are already practicing good supplier performance management. There are a number of reasons for this. As per above:

  • effective is not necessarily optimal
  • you can get short-term results treating the symptoms, but you can’t get long term results unless you address the route cause
  • everything is based on assumptions, on assumptions, against expectations

and

  • market conditions are (drastically) changing
  • all good things must come to an end
  • managing after the fact is not the same as laying the groundwork for success

These are the reasons in particular I suspect there is a chance that current SPM frameworks and efforts might crash.

All Good Things Must Come To An End

This universal truth holds true for anything with a limit. Since every action has a limit when it comes to the minimum time required for completion, the maximum number of uses or lifespan of a product, the value that can be delivered against a metric, and so on.

Combine this with the definition of supplier performance management which focusses on measuring, analyzing, and managing vendor performance to cut costs, minimize risks, and drive continuous improvement, this means that SPM has a limit. This, of course, is nothing new — we’ve known this for decades. But, applied properly, SPM has worked spectacularly for decades because:

  • only so many suppliers can be measured, managed, and developed at a time … so there’s an endless supply of projects
  • suppliers constantly change … increasing the endless supply of projects
  • technology in our space has kept improving, allowing for slow, continual, improvement
  • the global trade situation was relatively static for two decades
  • most companies haven’t, and still aren’t, doing SPM in earnest
  • SPM is done by humans, who aren’t perfect and continuously make mistakes

It will continue to work spectacularly for the majority of organizations the majority of the time as a result of all of these reasons. But it may soon start sputtering for some organizations. The reasons being:

  • the suppliers not measured, managed, and developed are the ones that will need it the most and cause you the most problems
  • suppliers will suddenly become (effectively) unavailable unexpectedly — often before the contract expires
  • technology has stalled in SPM
  • the global trade dynamic has drastically shifted and has entered a new age of continual instability
  • those doing SPM are running on outdated assumptions
  • Agentic AI is being injected everywhere, and decreasing the reliability and effectivness

This means that the days might be numbered for SPM-in-a-box, which is pretty much what you get because most vendors / consultancies who do SPM just do SPM.

Which is concern #1.

More importantly, SPM is pointless if the supplier is going to suddenly become unavailable or unable to produce the products that you need.

A sanction, border closing (due to conflict or epidemic with pandemic potential), seaway closing, economic collapse, etc. can all take a supplier out of the picture overnight. Chances are you’re monitoring for this for your (most) strategic suppliers, can usually see it coming with enough warning to at least take some emergency measures.

However, chances are that this sub-tier supplier, or it’s sub-tier supplier, aren’t monitoring for potential disruptions like you are. What happens when those suppliers suddenly shut down or become unavailable. Then your supplier is unable to produce the products you depend on, and it’s essentially the same as that supplier suddenly becoming unavailable.

Which means you need Supply Chain Visibility in order to not only select appropriate suppliers, but ensure your suppliers are selecting appropriate sub-tier suppliers and, if not, help them to do so. However, not only are most companies still not adopting SCV solutions, but they aren’t part of standard SPM.

In addition, it’s not just availability, it’s supply line, and dependency. Rare earths are becoming more rare, oil keeps going up, and many renewable commodities in the food stuff categories are in relatively short supply due to population increase, droughts, and wildfires. Sufficient supply demands that dependency on any one raw material be minimized to the extent possible. This means that PLM, and especially design, alternate designs, and substitution capability is becoming more and more critical. But this is completely ignored by today’s SPM that just focusses on making the production process more efficient, not the product.

In other words, while the classic SPM theory is fine, and the implementation close to flawless in a handful of suppliers, the impact will soon be minimal to non-existent if they continue to address the wrong problem or try to address the right problem in a vacuum.

Now that process performance is often not the critical problem, the effectiveness of traditional SPM may begin to wane — fast.

Which brings us back to the starting question:

How Do You Execute Effective Supplier Performance Management in Today’s World?

I don’t have a good answer yet, but I believe you need to find one before the question becomes relevant.

Modern Strategies for Supply Chain Finance

The strategies for success haven’t changed much in the past few decades, but for some reason still aren’t in widespread practice. So we’re going to review the best practices from two decades ago and then indicate what else you should be doing.

1. Open Account and Letter of Credit Balancing

It’s critically important to understand your organization’s cost of capital versus your supplier’s cost of capital. Open account terms, for example, may bear lower fees than a letter-of-credit based transaction, but they can also restrict a seller’s access to working capital financing and increase its costs of working capital. The additional cost borne by the supplier for accepting extended payment terms, for example, could be finding their way back into your cost of goods sold.

2. Better Forecast Accuracy

One of the best ways to take cost out of the supply chain is to take unnecessary inventory out of the chain, as this just leads to additional storage, overhead, and financing costs and losses when it has to be cleared at considerable markdowns.

3. Supplier Cost Reduction

Depending on where your primary supply base is located, (up to) half of your suppliers might be struggling to access financing at acceptable terms. It might be their top issue, even above reliability of component and raw material supply! Their cost reduction is your cost reduction and your best chance at good supply chain finance strategies!

Building on these foundations, today you need to be considering:

4. Deep Tier Financing

Making sure your suppliers’ critical suppliers have access to fair and affordable financing so they can manufacture and sell their products affordably to your suppliers’ and not inflate your supplier’s cost which would inflate your cost.

5. Sub-Tier GPO

If you are relying extensively on a few key raw materials or components across your product lines, and if those are in short supply, costly, or volatile, buy the raw materials on behalf of your sub-tier supply base and sell it back at cost.

6. 0 Days DPO

Pay cash-strapped suppliers who would have to borrow at loan shark rates of interest immediately. It’s that simple. You’re paying for their overhead, so if your cost of finance is 1/5 or 1/10 of their’s, then, even if you risk borrowing occasionally, it just makes good financial sense.

7. Inventory Financing

Either enable your supplier to get financing based on their inventory materials and components and the goods they are going to produce, or create your own inventory financing solution for them.

The reality is that the standard techniques of JIT (and forcing suppliers to sit on inventory), increasing DPOs to the maximum legally allowed, and pretending EPD is a substitute for financing is NOT financing, only hurst the supplier, and only hurts you.

There’s No Cost Savings If It Doesn’t Hit the P&L

Anytime costs go up — due to oil spikes, tariffs, raw material shortages, generic inflation, etc. — which is, sadly, the majority of the time — the first word out of every solution and software provider’s mouth is how their solution will generate savings … which, sadly, almost never materialize.

Yes, they show up on the sourcing award, on the new spot-buy Procurement, in the (temporary) workforce reduction from automation, etc. — but that’s not what hits the balance sheet, and definitely not what hits the profit & loss statement. What hits the balance sheet is how much actually gets paid out to obtain the products or services (not just the unit costs, but the delivery costs, including expediting when forecasts or planning is off), what gets paid for all spot-buys (including those that don’t go through RFQ but instead the first punch out with product the user wanted), and how much loss occurs when the automation doesn’t catch errors and when exceptions require hiring a FT resource at an outsourced Procurement operation to deal with them (at 3X the cost of the internal resource you let go).

The reality is that all of the “savings” the majority of software and solution providers deliver results in cost transfers to other line items in the organization, the totals on the balance sheet don’t change, and nothing hits the P&L.

Even worse, when the “savings” strategy is too aggressive, it usually results in the introduction of additional risk into the supply chain and, eventually, something breaks where the required mitigation ends up costing way more than the “savings” that was identified, which not only results in no savings hitting the balance sheet, but a significant additional expense which results in a loss on the P&L, resulting in the CFO correctly claiming that Procurement didn’t save a dime (and, in fact, somehow drove up costs), which results in the CEO claiming it’s time to bring in a new Gen-AI-based solution to cut costs and a useless Big X consulting firm to tell you how. (And we all know how that’s going to turn out!)

So if you want to ensure you stay in control of all relevant organizational spend, you need to produce results that hit the P&L. That means you need to reduce overall outlays on the balance sheet, which means you need to stop looking at short-term savings that cost more than they deliver and start looking at long-term expense reduction efforts.

The best way to do that is to prevent unnecessary expenses, not to try and shave additional margin off of categories that you have strategically sourced multiple times and are already below market and within 1% or 2% of optimal. Look for allocations that mitigate risk and the associated disruption costs. Find ways to improve forecast accuracy and balance stock to prevent stock-outs, minimize the need for expediting, and prevent overstock that will have to be liquidated later. Ignore the new hype experimental tech and instead focus on tried-and-true last generation tech that will be low cost, highly accurate, and capable of addressing the majority of your needs when you adequately define your process workflows, break them up into tasks, and identify appropriate automation tech for each task. (And if you do need AI, classic AI works best, especially when you pick classic AI designed for a specific task.)

Instead of trying to replace people with overpriced tech, focus on trying to find augmented intelligence solutions that will make your employees up to ten times as productive while allowing them to appropriately source and procure every single category. Instead of outsourcing critical or difficult categories to third parties, get your people training and, if necessary, work-along-side category experts to help them improve. Instead of using outdated methodologies to classify your categories and strategies, like the Kraljic Matrix, step up to something modern like the Busch-Lamoureux Exact Purchasing methodology which will help you understand what you truly need to be effective in each category.

In other words, don’t focus on the savings — focus on getting the spend right and overall spend will decrease, generating more savings than any single effort ever would.