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2012

I interviewed Arvind Swamy who discussed Strategic Sourcing versus Traditional Procurement.

 

 

How did strategic sourcing come about?

 

15 to 20 years ago when companies only had purchasing departments. The procurement function was treated as a need or necessary evil. When companies would procure their goods or services they would cut a PO. Not much was talked about leveraging suppliers and putting contracts in place to protect companies and suppliers. About 10-12 years ago companies started getting smarter and decided that for any good they have:

 

  1. They should have a limited number of suppliers

  2. They should be able to manage it. They should understand what they buy and how changes in marketplace effect what they buy and pay.

  3. They should know how their suppliers are doing. Are they best in class and delivering good quality?

 

Currently, a lot of companies are going down the path of strategic sourcing. I estimate that 20% of companies do strategic sourcing and do it well. Another 20% of companies have a strategic sourcing group but they have a lot of room to improve. 60% of companies are still making do with the traditional sourcing model.

 

What is strategic sourcing?

 

Strategic sourcing comprises spend analysis, category management and more. A good robust definition of the sourcing needs within a company would include:

 

  1. The need to define what you buy and what you need. A good presentation of this includes your current state and your future state where you want to be in 5 years etc.

  2. You also need a good understanding of total costs, which includes shipping, costs due to poor quality etc.

  3. There are suppliers who also go above and beyond. When you compute the total cost for them you are getting “freebies” from the suppliers which also need to be 'costed out' so that you understand what you are getting from a supplier.

  4. We do a market scan

  5. Following this you devise a market strategy based on suppliers and where they are located.

  6. You then decide if you need an RFI/RFP,

  7. Followed by negotiations.

  8. Finally, you do supplier performance management.

 

How is strategic sourcing different from purchasing and procurement?

 

Traditionally, purchasing had been more operations oriented in that it was more needs based. Whatever a company needed the representative would find it. In some cases they put in long term contracts. But they didn't combined the vendors and categories and have as few suppliers as possible, with good management. Managing suppliers and spend is what is different.

 

Can you talk about the technology aspects of strategic sourcing?

 

With the Internet we have RFI and RFP tools. In the past you had to do it by snail mail or email. The Internet tools give you the power to set up an RFI/RFP where the supplier puts the information in and the system checks for formatting and complete information. Finally, the tools can place all supplier bids side by side to provide an easy way to analyze and see what the suppliers are bidding.

 

We also have reverse auction tools where the suppliers can see the lowest bid. Therefore, some suppliers may be motivated if they want to play in the space, while others will drop out. It creates some amount of transparency and reduces the RFQ process to a day.

 

You also have tools to send reminders when contracts will expire etc. Contact management tools connect directly with ERP systems so that pricing and terms and automatically picked up in the system.

 

We also have tools for reporting and classifying spend. This is also a big task. With data intelligence reporting capabilities your spend information is parced into categories and aggregated to provide a corporate view of capabilities.

 

We have supplier relationship management portals. Most of the time suppliers fail because of payment issues and not knowing when they will be paid. Suppliers can now log in and check the status of how they are doing in terms of quality, delivery, payment status etc. This goes a long way in helping to manage suppliers with technology.

 

What is the first step in strategic sourcing?

 

The first step would be to understand your spend. Creating the spend database. Companies need to compile all forms of expenditures, with the exceptions of salaries etc. They need to adopt a common spend categorization method. The third step is the cleanse the data based on intelligence you have and industrial classifications. You then verify with what is in the business. You further classify the spend management database.

 

How do you manage strategic sourcing?

 

The way you manage it is to first get the business and cross functional leadership behind you. You need to make sure the goals in strategic sourcing are shared with the leaders of the companies. You strategize on spend categories and make sure you get concurrence from all cross functional leadership.

 

You set savings objectives against each category and make sure they are aligned with the enterprise.

Lastly, you assign roles and responsibilities I terms of who will do what in terms of managing the spend and driving cost reduction.

 

Procurement only has a responsibility of supplier facing issues. Once the new supplier comes on board or the new pricing comes on board, the rest of the company has to follow. Finance has to honor the new price and pay accordingly etc. All of these people have to be on board.

 

Can you talk about category management and some of the methods to measure organizational performance?

 

Once you pull the data and classify it into category, each has its own nuances for the way it should be managed. The way you manage electricity will be different from professional services. You hire subject matter experts to manage these categories. Some of the steps involved are:

 

  1. To analyze current supplier relationships

  2. Define the business needs and objectives for that category and your business

  3. Look at market and understand where the action is in terms of supply base and what you need to do strategically. (ie., nearshoring in Mexico or elsewhere).

 

Once you do this new opportunities will appear in terms of saving or better performance, quality delivery etc. Once you have defined the opportunities you establish goals and go after them.

 

Some of the metrics that are involved in strategic sourcing would be:

 

  1. Spend Vendor Management – Contracted spend you are actively managing versus total spend

  2. Spend With Preferred Suppliers – Suppliers you have negotiated good deals with and are meeting your needs versus total spend.

  3. Active Suppliers Per Employees – The supplier count is a key measure in strategic sourcing.

  4. Spend To Savings Ratio, Savings Per Procurement Employee Ratio and Budget to Savings Ratio are some of the key ratios for measuring strategic sourcing performance since the key role will be to drive savings.

 

About Arvind Swamy

 

Arvind_Swamy.jpg

 

VP | Procurement | Strategic Sourcing | CPO |

Consultant | Adviser | CEO | CFO |

Board Level at Various Clients

LinkedIn Profile


I interviewed Imre Szenttornyay who discussed nearshoring in Mexico and the opportunities in the IT talent market. Imre invested in a company in Mexico to open up their US operations. The company is called ScreenIT, which is a recruiting company that does recruitment and staffing with 20-25 recruiters on the payroll in Mexico. They recruit into local markets and help US clients expanding in the local markets in Latin America. They also help staff projects to leverage economies of scale with lower cost resources.

 

 

Advantages and disadvantages of accessing talent in Mexico

 

The advantages are pretty clear. There are tax advantages. Doing business with Mexico provides a US company the business benefits that come with cultural affinity and geographic proximity. US clients are seeking bilingual talent. In Mexico you have political stability and a legal framework under NAFTA which allows you to bring resources to the US.

 

10 years ago the IT industry was growing at a negative 1%. Today the IT economy in Mexico is growing 4 times the GDP. They are graduating about 65,000 IT professionals per year. The Mexican government has a strong commitment to grow the IT industry. The government has established cash grants that IT firms in Mexico can receive which is up to 50% of Capex. It includes the total cost of their projects and tax credits up to 30% of R&D. 25% of that 50% comes from the Federal government and 25% comes from the state government where the business is located.

 

The government also puts a big emphasis on the education sector in Mexico. A lot of the large universities in Mexico focus on graduating software engineers and engineers in general. There is a lot of incentive for students to go into those fields and they are pretty much guaranteed a job when they get out. The students get 'real world' internship experiences which make it beneficial. They are exposed to real world projects working hand in hand with IT systems integrators and services companies in Mexic, under the direction of senior engineers.

 

When you think about what it means to do business in Mexico and you have the legal framework and IP protection because of NAFTA it is easy to see why the sector is growing. Today there are about half a million IT professionals in Mexico. The attrition rate is about 7-8%, largely due to some specific technologies there are not enough consultants, such as SAP or Oracle.

 

The downside of doing business nearshore in Mexico is that the market is only about 10 years old. The ability to scale on large projects is still not there. In some commodity technologies like .net or JAVA, you can scale the team. However, if you try to roll out projects with 200-300 developers, the scale is simply not there because the market is not mature enough yet. It will take 10 more years.

 

Outside of Brazil, Mexico is the largest market for IT professionals in Latin America. Countries like Costa Rica focus on the BPO sector where you can get low skilled labor such as call centers. Other markets that are emerging in Latin America include Brazil. The local economy in Brazil is growing with many businesses supporting it. In Chile there is the mining business which is promoting capacity of IT professionals. In Argentina they are growing rapidly in open source technologies such as PHP, Pearl, etc.

 

What are some of the important considerations when identifying and selecting talent in Mexico?

 

The key considerations are obviously the technical aptitude of candidates. Being bilingual and the English speaking ability is something which is often scrutinized. Mexico is very decentralized in terms of their job boards. To attract talent in Mexico you still have to get out there and network with different user groups and firms. There are a lot of boutique firms of 10-20 software developers focusing on a niche market such as Sharepoint or .NET. Trying to quality them and help them do business with American clients is where Imre and his company come to play. They understand US requirements and business culture.

 

Recommendations

 

Imre thinks that there is a lot of optimism in Mexico in terms of IT. The challenges have to do with the conservative business culture. Some US multinational companies have to expand with a start up culture. Telecommunications in Mexico are still quite expensive. This limits a lot of players from being able to get engaged. There are barriers to entry for a lot of the start up firms. However, there is a lot of cooperation between the private sector, universities and the government. They all want to see the industry grow more competitively. 10 years from now Imre thinks the market will be very mature.

 

Even to this day Imre has spoken with US clients who have not even heard of the term near-shoring and the concept of setting up their IT operations near-shore. There is lack of awareness. This is not the case with the large enterprises. However, mid-enterprise clients see this as a new concept. As the long as the economy in Mexico continues to be sustained he thinks there will be a lot of synergies between the US and Mexico.

 

About Imre Szenttornyay

 

Imre_Szenttornyay.jpg
Sales, Partner Development, Global Talent Attraction, LATAM Outsourcing, Nearshore Staffing, Recruiting & HR Executive

Executive Vice President

ScreenIT - Talent Attraction Services

LinkedIn Profile

I interviewed Lorcan Sheehan, Senior Vice President Marketing at ModusLink. He discussed the push for near-shoring and re-shoring final assembly in places like Mexico and the US.

 

The push for near-shoring

 

As labor rates change, fuel prices change, people's attitudes towards risk change and things will evolve. In the late 1990s and early 2000s there was a push for China manufacturing and there is still a role for China. However, there is a shift towards final assembly closer to region such as Mexico or Eastern Europe. Oil prices are one driving factor. The US is still a huge consumption market for products and the trend over the recent past exhibit higher double digit growth in labor costs in China. Fuel and logistics costs are increasing in China. The economics of manufacturing closer to the market are shifting and will continue to shift over time.

 

There is a huge push to get final products assembled closer to market in Mexico or domestically in the US. Companies want to take advantage of low cost geographies for manufacturing of 80% of product cost, but they want to finish their products closer to the market.

 

ModusLink has seen some shift in manufacturing from China to Mexico, in particular final assembly of the products themselves and relying on imported components. In time if the manufacturing continues to move forward to Mexico some of those components may move as well. Cost is one dynamic. Another is to be able to respond faster due to quicker transit times from Mexico to the US. Many EMS providers have shifted a portion of their volume to Mexico which provides competitive costs as well as faster access to markets.

 

The trade agreements between the US and Mexico helped in terms of getting easy access to product. A disadvantage to Mexico are the border regions and the security issues. By and large people are working around those concerns and Mexico offers and attractive close to market solution. There are also people looking to do more of those final activities such as configurations and assembly in the US.

 

People are also looking to address the triage associated with returns, closer to the key markets. Particularly with consumer electronics you have 9% to 12% return rate. However, among those returns 60% to 70% of the returns have no fault found. You don't want to have those returns sent all the way to China if you found there was nothing wrong with the majority of the products.

 

Emerging markets

 

There is a big focus now on the BRICS economies. A lot of people are looking at how to reduce taxes and duties in Brazil. To do this it tends to focus on locating manufacturing in Brazil itself. With Russia, India and China there is an interest in addressing the logistics challenges and evaluating working with local partners or establishing your own operations. Modus Link has 7 operations in China, 1 operation in India and they support Brazil out of Miami and a distribution location in to the US. They support Russia through Europe.

 

Mexico has some advantages for being a launchpad into South American markets. However, in terms of Brazil, Lorcan says Modus Link clients are looking at Brazil is the opportunity to reduce import taxes. Also, to really make a difference in Brazil it requires a significant investment in Brazil itself. Companies then use Brazil as a launchpad into South America.

 

About Lorcan Sheehan

 

Lorcan.jpg

 

Senior Vice President of Marketing

ModusLink

LinkedIn Profile

 

Modus  Link is a supply chain outsourcing services company with a yearly  revenue of $900 million. They are headquartered in Boston, MA and the  company has 30 operations around the world in 15 different countries, with 7 of the 30 operations being located in China. Their 3 key service  areas include:

 

  1. Supply  chain. Moduslink provides inbound supplies of materials of prints,  packaging, media, car supplies, cable, etc where the company acts as an  inbound supply hub which feeds back on a Just-In-Time basis with those materials, mostly within the high tech and consumer electronics  industries. 20% of their revenue comes from their supply chain factory supply services.

  2. Postponed configuration and distribution solution. The company offers a distribution center operation which includes a large amount of value  added services around kitting, assembly, software content final packaging, etc. Behind all of this they help with the sourcing of materials,     packaging, redesign and execution and distribution to retailers, distributors etc. around the world. 60% of their revenue comes from the postponed configuration services.

  3. Aftermarket services. Manage returns, repair and recovery, which makes up 10% of their revenue.

  4. E-commerce operations including building webstores, physical fulfillment etc.

Jill Ayuso has more than 20 years experience in human resources. She specializes in benefits comp and HR systems but she also does generalist work. She also has international experience where South America and Mexico offices reported directly to her at two companies she worked at, specifically Herbal Life and St. John Knits.

 

 

At Herbal Life they located most of the distribution centers internationally and they didn't do their own manufacturing. Since there was not an HR presence for South America or Mexico Jill became the HR corporate generalist. At St. John Knits she had the HR manager and his team in their Tijuana factory reported up to Jill.

 

Herbal Life had a large distribution center in Guadalajara. St. John Knits had their distribution center in Tijuana, which was more close to nearshoring than at Herbal Life. However, Herbal Life didn't have many issues with sourcing employees there because it is easy to find people they could train. Jill put in a compensation plan and reviewed their benefits. For the most part benefits in Mexico are socialized medicine, governmental programs. For managers and above for US based companies the US company will purchase a plan for managers and above and their family members.

 

This was done both at Herbal Life and St. John Knits. It was done as a paid benefit. They didn't have to contribute to the benefit plan. They also received life insurance plans.

 

The turnover was low at Herbal Life in Mexico. The employees were loyal. At St. John Knits while the employees were loyal, when the company decided to expand their group from the US to Mexico it was difficult to find the people needed because it was a very specialized manufacturing process. They needed to find people who could sew specialized knits. The quality of the product was very high and there were specific manufacturing processes and quality assessment procedures. They would hire and start training someone and it could take 6 months. The HR manager was challenged. They spent money  on billboard campaigns and the team would hand out recruitment fliers. They also had specialized benefits including a cafeteria on site with supplemented meals. The company had a part time doctor on staff to supplement the normal socialized medicine for the rank and file workers.

 

Jill challenged the HR manager to learn what they did in the US regarding reward and recognition and wellness programs. The aim was to come up with programs that matched the culture in Mexico. They didn't have budgets to do the things so they had to find ways to pay for it. The manager moved the budget around to make it happen and it was a win/win situation. It made the employees feel they were part of the US company. There were weight loss contests and other grass roots programs which worked well. The on-site doctor was also a great benefit.

 

The manager learned compensation planning with the help of Jill which helped them move the bar in terms of pay. US companies face the challenge of different laws in Mexico. Mexico has a legal process which protects employees. If an employee is faced with the prospect of losing their jobs they may bring up litigation. To handle it the company may need to pay more money. When setting up wellness benefits or compensation rewards, the laws in Mexico require that once you start giving you must continue to give them. In the US reward programs are not prolonged, which can be a challenge from the US perspective because once you start a reward program or benefit it becomes a guarantee for life.

 

The company had an attorney in Mexico that helped to draft special agreements for special bonuses. The employees knew it was a one time deal.

 

Cross functional teams and team building in Mexico

 

At St. John Knits they had a good management team in the US. They hired a new distribution center director in Mexico who was a US citizen. He was a great guy and was in Irvine for weekly management meetings. His management team came up and there was cross functional training. When Jill was given Mexico as the corporate HR person she became more involved. When they started something new in the US she made sure she communicated with the Mexico team.

 

At Herbal Life Jill had to get more involved with cross functional activities. There was a 'dictator' manager in Mexico. Jill had to build a relationship with him in order to build trust and help him understand what they were doing in the US and globally. Once he saw the benefit for his people and his operation he was more open minded about cross functional programs. His top people who were supervisors and above from the distribution center would take turns being sent up to the US operations where they would do cross training. They then did 'train the trainer' programs. It became a great program for the team in Mexico and this expanded to the South American operations as well.

 

About Jill Ayuso

 

Jill_Ayuso.jpg

 

Global Human Resource Director

Connects People to Strategies

Engage Multi-Generational Workforce

LinkedIn Profile

I interviewed John Leishman who is the Director at Teleworking Expats For Hire.com, pioneers in Expat-shoring. John believes we are reaching a point in time where geography becomes less of an issue in accessing global talent.

 

 

John started nearshoring IT staff in Mexico by hiring a bilingual staff who were native Mexicans but who also spoke English. This didn't work out very well because there was a big back-lash in Canada, the US, UK and Australia towards big banks and phone companies outsourcing their call centers to the Philippines etc. People make judgment calls based on their accents.

 

He then hired nationals from the countries where people were calling in from. Now all of John's staff are expats consisting of Canadians and Americans living in Mexico. Expats like the opportunity because they are discriminated against in Mexico because they are “gringos” without fluent Mexican accents. They also like working for a Canadian company because in many cases it provides the benefit of staying in touch with expats and their home culture.

 

John says his business model is unique in that most companies which promote the service of offering teleworkers want staff located in their own city. There are very jobs that allow you to live and work wherever you want. John's company Teleworking Expats For Hire.com is not limited to locating staff in a local city.

 

With VOIP technology it is getting to be very cheap to deploy for any company. John can deploy a VOIP server at a cost to his company of $10/month. This allows for the communications piece enabling the hiring of staff anywhere in the world. You can now take advantage of labor wherever it tends to be located.

 

Business Process Outsourcing (BPO)

 

After doing some research recently John learned about Business Process Outsourcing (BPO). John is taking BPO to the next level. For example, John's book keeper is a C.P.A.. He is over qualified but partially retired. There is a whole range of talent pools you can take advantage of. Over a period of time there will be a shift in the BPO. John read an article in the Economist which said that BPO is shifting to higher level activities. Instead of someone in the Philippines doing book keeping etc, they will start doing higher level activities such as analysis and recommendations.

 

John is adding the communications piece to BPO. One of the disadvantages to telecommuting is that if the company culture doesn't support it, the workers feel alienated. By integrating the communications system into the operations you help the distributed workforce feel they are a part of a team. Another thing which may be considered to be a disadvantage to teleworking is lack of face to face interactions with customers. However, John runs his whole staff virtually. He brings up the example of a hotel who wants to hire someone to handle evening requests by customers. You could set up a webcam with staff in Canada and Australia who take care of your customers requests 24/7 through a webcam. A lot also depends on the age of the customers. If the customers are in their 20s they are more open to receiving help via a webcam.

 

Benefits of hiring virtual expats in Mexico versus local

 

If you are a manufacturing operation, there isn't a lot of benefit in hiring expat virtual workers. However, if you have a customer service center in Mexico you could take advantage of the lower costs while also having the Canadian or American culture and personnel to deal with your customers.

 

Why not employ people in low cost geographies who have high level customer service skills? You get a cost savings and you can get a lot of experienced people working for you. For example, there are many experienced individuals who are not ready to retire, but want to work 4 hours per day.

 

Conclusion

 

There is a prevailing mentality that people need to see their workers in order for them to be productive. However, John has had an open air office with 15 staff. While John could see them, they were still doing things they shouldn't have been doing. What is important is hiring the right person. There is also 3rd party software which can monitor key strokes and webcams. John doesn't use these technologies since he believes in trusting people. In 60-90 days it becomes apparent whether the person is a right fit for the organization.

 

There is also an opportunity for blended models for non-customer facing work. For example, John placed some Mexican programmers with a company in Calgary that does project work. They had a combination of native Mexican staff and Canadian staff.

 

About John Leishman

 

john_leishman.jpg
        Director at Teleworking Expats For Hire.com
        CEO at ReservEase
        President at Geeks On The Way

        LinkedIn Profile

I interviewed Judy Foley, a Global Strategic Sourcing Executive, who shared her views on nearshoring.

 

1.       Please provide a brief background of yourself


I am an innovative strategic sourcing/supply chain and operations executive that has driven bottom line impact of over $150M in cost savings over the past ten years. I have worked for multiple firms in various industries including Motorola, Allstate, CNA Insurance and consulted at Kraft Foods. The hallmark of her professional career has been her ability to drive strategic direction, develop and lead key initiatives that drive business value, and achieve bottom line impact. My educational background encompasses an MBA from DePaul University with concentrations in Operations and Marketing and a Bachelor of Science Degree in Business from the University of Wisconsin-Stout.

 

 

I am also an active member in my local community,  and serve on the Board of Directors for the YWCA, Partner and am Chairman of the Women’s Economic Advancement Advisory Committee. I am also Co-Chairman for the Entrepreneurial Opportunities Program for the Women of the YWCA, and Co–Chair for the YWCA 90th Anniversary Leadership Speaker Series. I also am a member of the Nominating Committee for YWCA Board Members.  I am also an active partner and  leader in a Non-Profit Organization called  "The Bridge"  with 10 other executives from major corporations with expertise in different industries . The goal of this group is to work with entrepreneurs to help achieve business success. We accomplish this  by providing on-going mentorship, introductions to key business contacts, and financial investment or referral to financial organizations that can be of assistance to them. I am also a member of the Alumni Sharing Knowledge (ASK) mentor program at DePaul University, and has provided mentoring assistance at the IL Small Business Development Center.


2. Do you believe nearshoring in Mexico will increase?


Garter stated in 2011,” Mexico continues to offer the advantages of proximity, cultural affinity, time zone alignment, lower costs, and ease of software and hardware procurement.” I believe there are opportunities to expand nearshoring in Mexico . The areas that will need to be concentrated on will be reducing the violence in recent years as safety is a concern and reducing employee turnover. Also looking at other countries and the advantages of outsourcing to them over Mexico. If Mexico can achieve additional competitive advantages this will expand. Based on Sourcing Line Mexico is ranked number 22 in outsourcing.

 

 

It is a nearshore outsourcing hub in the United States with a large percentage of its clients coming from the United States. Mexico launched Prosoft in 2002, a program aimed to advocate the technological industry maximizing the IT industry value to USD estimated to be $15 billion by 2013. Mexico built three technology parks; Monterrey Technology Park Mexico for multinational companies, Apocado Technology Park and Guadalajara Park. Mexico has also added the NAFTA membership advantage allowing free flow of goods and services between the US, Canada,  and Mexico and offering protection of intellectual property rights within all three countries.


3. What factors are impacting  why people are outsourcing in China?


China’s outsourcing market is growing at an estimated 30% annually and many companies have established corporations in China. China has five major cities that capture most of the outsourcing which are Beijing. Chengdu, Shanghai, Shenzhen and Guangzhou with each city specializing in a specific outsourcing. China is known for manufacturing, finance, services , healthcare, government and education. China has offered policy changes to extend advantages  such as offering financial support, subsidies, tax breaks, and intellectual property protection rights. China is facing major challenges such as wage inflation, a growing unionization movement and labor unrest as workers push for wages and benefits on par with those earned in developed economies. Based on Sourcing Line China is number 5 in outsourcing.

 


4. What factors need to be considered when trying to decide whether to near shore in Mexico versus offshore in China?


Companies should adopt a planned approach towards outsourcing taking into account the interests of employees, their company needs and customers alike and come up with a balanced approach. Below are some standard questions I would suggest to consider for outsourcing.

 

1.Expertise – Do they have the required expertise?

2.Alignment – How aligned are they with our organizational goals and strategy?

3.Culture – Do we anticipate any culture clash?

4.Organizational Fit – How will the partnership work with our organization structure?

5.Collaboration – Will it improve overall collaboration?

6.Management - What do we know about their management?

7.Partners – Are they working with strong supply chain partners?

8.Visibility - Will it improve visibility in the supply chain?

9.Cost – Do we understand cost to serve and total cost?

10.Process impact – How aligned are our processes?

11.Technology – What software are they using and will we have any integration challenges?

12.Efficiency - Will it improve efficiency?

13.Closeness – Will we get closer to our customers or end consumer?

14.Flexibility – How flexible is their system?

15.Implementation risk – How long will it take and what guarantees do we have?

16.Barriers – What challenges will we encounter?

17.Regulations – Are there any regulatory issues we need to be aware of?

18.Safety - What is their safety record?

19.Financial – How financially stable are they?

20.Quality – Will we maintain or improve quality standards?

21.Trust – Do we trust them?

 

 

The cost advantage of offshore services comes from having more people working at a lower cost geography. A typical offshore project has an onsite component at the client’s facilities in the US/Canada and an offshore component at the vendor’s development centers in the offshore country.

 

·         Man/Hour rates in Mexico tend to be higher than other countries, like India or China, due to a higher cost-of-living.

·         Mexico’s advantage in terms of cost resides in the possibility to carry out an important amount of work at the vendor’s facility due to closeness.

 

 

When a high degree of interaction is needed, a typical offshore engagement with India or China requires measures to mitigate impacts of time-zone difference and distance. Such measures include allocating a significant number of people on-site (customer locations in the US) and having a redundant project leader role, one on-site and one off-shore, due to the fact that travel and voice communication are cumbersome and expensive. In this case Mexico is highly competitive, because distance and time zone have no negative influence in the engagements.

 

 

The Total Cost of Engagement (TCE) evaluates the total expenditures of outsourcing projects. In addition to the hourly rates of engineering talent you must consider the cost of additional management overhead, travel costs, the painful cost of staff turnover, and a certain amount of productivity loss due to the distance and degraded communications. Most of these costs are directly related to the separation in time between teams. The overall cost of nearshore engagements is equivalent or lower than offshore because of the efficiencies brought about by working in close proximity to the US and in the same time zone.

 

 

China's low product and labor costs are well known. Today, when a small or medium-sized importer needs labor-intensive, value-added services, Chinese suppliers and logistics service providers are capable of responding. Chinese labor costs is a fraction of US labor, it is worth examining whether a particular service can be performed in China.

 

 

5. How do you recommend companies approach the possibility of shifting more sourcing to Mexico versus China?


I personally would look at top outsourcing countries capabilities  and then determine the advantages verses disadvantages for the specific outsourcing I was pursuing. I do not believe I can reduce it to Mexico and China when there are so many countries that have become known for outsourcing. If I needed to review just Mexico and China, I would review the responses highlighted in questions 2, 3 and 4 to determine the appropriate location for outsourcing.

 

 

About Judy Foley

 

Judy_Foley.jpgGlobal Strategic Sourcing and Operations Executive,

Senior Consultant,

Member of YWCA Board of Directors

LinkedIn Profile

I interviewed Timothy Tsai who discussed the Hybrid Engineering Supply Chain. He suggests a new future for innovation in our current times where globalization has reached a turning point. We have been through outsourcing and offshoring. Now the human capital channel and manufacturing channel is broken. Timothy offers offers an alternative to the

SCOR®  model.The Supply Chain Operations Reference (SCOR®) model ignores the  fact that there is a lot of interaction between supply chains. The  Engineered Supply chain works in parallel with the traditional model.

 

Timothy is the Founder/Chief Researcher at Flow Fusion Research Laboratory and MEMS Supply Chain Network Manager at Texas Instruments.

 

 

Q1: How do you distinguish between traditional SCM and the engineering supply chain (ESC)?

 

We can use the Supply Chain Operations Reference (SCOR®) as a standard. The current supply chain basically focuses on finished goods. We buy things from suppliers and sell things to customers as finished goods. The quality of the finished goods is included and warrantied.

 

score.jpg

In the traditional supply chain you have a Demand-Supply process of managing:

 

–Plan levels of aggregation and information sources

–Source locations and products

–Make production sites and methods

–Deliver channels, inventory deployment and products

–Return locations and methods

 

Biz transaction (activities)

 

–Procurement, Logistics to response to Sale

 

 

 

Traditional SCM Considers Engineering as Corrective Action of Quality Return

 

  • Quality Return is only engineering level transaction in SCOR as reversed PO in Biz transaction
  • Product/process integration between buyers and suppliers are off-the-book operation until they surface up to return process in SCOR
  • Engineering is buried behind quality, delinquency, cost, capacity etc.

 

score_structure.png

 

 

Supply Chain Deep Behind SCOR

sc_behind_score.jpg

 

SCOR Over Simplified Complexity Involved Production Chain

 

A finished good (Product such as Mobile phone, PC, etc) to customer is root of the chain network covering multiple industries:

 

–Component and material industries

–Design, Assembly, Process industries

  • When the supply chain becomes more fragmented, process inter-dependence between the nodes is increasing

–Problem behind Quality, delinquency, cost, and capacity

–Out of Procurement, Supplier Relationship, IT capability to handle under SCOR assumption

  • Consequence

–Turns strategic outsourcing into a high risk activity due to over estimation of the under layer risk of distributed organization when crossing industries

–Low degree of freedom of strategic outsourcing. It has very few natural partition in supply chain. CEO either keep the entire biz, sell them all off, or move them out to somewhere can justify the cost

 

Products like PCs and mobile phones have very long supply chains which include a lot of industries such as components. You have product design, assembly etc. The SCOR® model ignores the fact that there is a lot of interaction between supply chains. The Engineered Supply chain works in parallel with the traditional model.

 

 

Q2: What are the two important cycles before a finished product appears to the customer?

 

 

Cycles Before a Product

 

life_cycle.jpg

 

2 cycles: with technology & product only

 

–Acquisition Lifecycle invokes full technology cycle from early research to sustainment

 

•Ref to Defense Acquisition System - DoD 5000 Process Life Cycle - DAP

•Best practice framework: DoD 4245.7-M

 

–Product life Cycle Management (PLM) over Matured Technology Platform

 

  • Wiki: entire lifecycle of a product from its conception, through design and manufacture, to service and disposal
  • Industrial Supply Chain is less complicated to DoD

 

–Acquisition lifecycle is rarely done over supply chain, mostly in-house activities

–Apple is 1st Enterprise executes Acquisition cycle over supply chain rewriting history

–All cases are different in activities level

 

 

 

Changing Paradigm to Supply Network

supply_network.jpg

 

 

Traditionally, Acquisition cycle are all in-house activities

 

 

Last decade, some companies successfully transformed into supply chain:

 

  • Boeing: 787
  • TI: CMOS
  • Ford: automotive platform
  • Apple: i-series

 

They all suffer a lot of pain but one of the pioneers in their industries can hold a position in next decade

 

 

 

 

 

Example: DoD 5000 Process Life Cycle Framework

 

 

image001.jpg

 

 

 

The 2 cycles: Core Competency of Innovation

 

  • Digitization is to transform the activities into a new more productive workflow but not drop it

–From fully in-house to be connection-oriented virtual enterprises

–Innovation is effective execution to idea. Without that execution, that is creativity makes no value to revenue in product company

  • Dilemma of being failed to transform: can’t response to change, finance instability due to asset-heavy

–TI vs. Motorola in semiconductor

–Apple vs. HP in connection platform

–Ford vs. GM in automotive

  • Suggested Engineering SC to keep the capability

–SCOR vs. ESC coverage

–Keep strategic core component, the technology enabler(s)

 

SCOR vs. ESC coverage

 

score_versus.jpg

 

 

Q3: Can you talk about the importance of the hybrid engineering supply chain?

 

 

IT Evolution Maturity & Globalization Turning Point

 

1.The world is confirmed to heading next level of outsourcing when Economic Policy Institute (EPI) said statistics confirmed 1.4M jobs were created overseas by U.S. companies, compared to 1M domestically in year Dec, 2010 (Scott, 2010). Majority of employees growing is overseas or virtual.

 

2.China became world’s top manufacturing nation, ending 110 year US leadership at May, 2011

 

3.U.S. reaches $14.3 trillion debt limit and his perfect credit rating was being downgraded from AAA to AA+ with a negative outlook by Standard & Poor at Aug 5th, 2011, the first time ever.

 

4.Apple has surpassed oil group Exxon to become the world's most valuable company by market capitalization at Aug, 2011;

 

5.e-commerce is confirmed a persistent activities conducting post-Internet economy where Amazon (20.4%) sites visited by 1 in 5 global internet users, about 282 millions in June, 2011 following with eBay (16.2%) and Alibaba(11.3%) in China (comScore, 2011).

 

6.Facebook value may soar over $100 Billion and Facebook set to reach 1 BILLION users by 2012

 

 

Challenges in New Game Plan

 

credit.jpg

 

 

Jobs Moving Back?

 

  • Government

Jobs & Innovation Accelerator Challenge

$26 Million Multi-Agency Advanced Manufacturing Jobs and Innovation Accelerator Challenge

The Obama Administration announces a $26 million Advanced Manufacturing Jobs and Innovation Accelerator Challenge, a partnership between the U.S. Department of Commerce’s Economic Development Administration and National Institute of Standards and Technology, the U.S. Department of Energy, the U.S. Department of Labor’s Employment and Training Administration, the Small Business Administration, and the National Science Foundation. This initiative will assist the development and implementation of regionally-driven economic development strategies that support advanced manufacturing and cluster development. In addition to the six partnering agencies, the initiative will leverage technical assistance from up to eight other Federal agencies…….

  • Enterprises

–Apple wants to make products in U.S., but that's not so easy Critics want Apple to manufacture more products in the U.S. CEO Tim Cook does, too. But there's a lot in the way.

  • Reality

–Entire manufacturing ecosystem has been moved out and not easy to come back

–Global market also needs global manufacturing capability either next to customer or for taxation purpose

  • Conclusion

–Hybrid engineering supply chain to provide enough Degree of Freedom to connect the facilities where it is when it needed

 

Apple Re-engineering Acquisition Lifecycle to Turn Hardware a 58% PFO Biz, HP 2.5%

 

apple.jpg

Challenges, Apple as Example

 

 

Kill your patterns in long value chain

–Apple eliminates Microsoft’s value in Wintel value chain by creating Apps Store

 

Re-engineering value chain
–Simplify value chain: ask Foxcon does more
–Take technology enabler: A6 CPU,
–Reserve capacity: hold ~7B paid capital in SC

 

Right Human Capital
–Multiple disciplines expert on complicated engineering SC
–Cloud services also complicated engineering complex
–More challenge to SME when reaching oversea resource and hybrid ESC

 

Some players phasing out
–ODM industry diminishing. Taiwan ODM only 0.5% of Apple cost structure
–Product company can't have vertical integration capability both in the 2 cycles and services integration

 

Significant Impact Area

 

Rapid Changing Industries like Consumer Market

china_marketshare.jpg

 

  • OEM (129$B)
  • IC & EMS (395$B) going to merge due to TSV(Through-Silicon Via) technology
  • Terminal market ranking from Apple, HP, to RIM, Lennova, Acer etc
  • Rapid Changing Market in SC IT Market
  • Cloud computing in SaaS sector like saleforce.com in Biz Transaction level will continue to grow
  • Loser: SAP
  • New market in Hybrid Engineering SC shall grow
  • Social based collaboration tool such as PM, office in the cloud
  • 4PL players to support core Supply Chain Operation
  • 3-15% of revenue vs. 2-3% of revenue in P&L BPO

 

Supporting Infrastructure


Academics
Supply Chain System Engineering: Framework Transforming Value Chain in Business Domain into Manageable Virtual Enterprise and Participatory Production

–Not popular, still in single discipline mentality within SCOR scope

 

Enterprises

–Pioneers such as Foxconn, Apple, Ford, TI, Boeing,..
–One-of-a-kind, lagging indicator to Management Science

 

Government
–Lagging, should have training facility to rebuild broken chain of engineering development ladder due to moving out manufacturing ecosystem
–Suggests to create “Distributed Manufacturing Center” which is share facilities to industries to provide molding services, and bridge to oversea resources

I interviewed Frank Lange who is currently the Vice President of Global Development for Menlo Worldwide Logistics, a subsidiary of Conway Corporation. He has roughly 25 years of experience in international logistics, supply chain management design etc. He is currently responsible for Menlo's alliances, M&A etc. to expand its infrastructure around the world.

 

 

Current state of global economy and nearshoring in Mexico

 

Menlo Worldwide Logistics is starting to see the strength of emerging markets, particularly since the recession and the resulting recovery. In Asia and Latin America in particular you have a very fast recovery. Many companies in Asia have been nearly as impacted by the recession as others. We are starting to see not only those economies doing well with a 5% GDP growth range, but also seeing 3pl revenues increasing in these markets where 3pls are experiencing very slow growth in Europe and the US. We are starting to see growth rates on a container basis that are much higher in the emerging markets.

 

Private consumption as a percentage of GDP is also rising in emerging markets. This suggests that the domestic economies as demand markets are actually improving a great deal, which is also improving the 3pl and logistics industry in those markets. Export markets are really starting to turn into demand markets. The old export model is becoming much muddier. If you look at the growth rates today compared to 10 years ago you see a very different picture. A lot of manufacturers and retailers are starting to understand this and are looking at how to shift their manufacturing to adapt to it.

 

One thing Menlo Worldwide Logistics is really starting to see is Latin America is one of the areas that is really growing rapidly, both in terms of private consumption as a percentage of GDP growth, as well as overall GDP. It is not just Brazil, but also Argentina, Brazil, Columbia etc. Menlo is assessing whether it makes sense to position themselves in Mexico which is near a key demand market in the US as well as the demand markets in Latin America.

 

Mexico becomes attractive with the growth in Latin American and the corresponding slowing of growth in China to around 7.5% (which is still a nice area of growth). China's focus and priorities are to make sure they have the proper level of income distribution etc.

 

There are a lot of things pointing towards a 're-balancing' of supply chains and manufacturing bases.

 

Why consider nearshoring in Mexico?

 

In particular, when talking about China the first thing companies need to ask is themselves is whether it makes sense to nearshore. One of the first things they need to look at are cost factors. The cost factors that everyone is always focused on is that it is all about cheap labor. The fact remains that there are a number of other factors which combined are starting to edge companies towards a re-thinking of that traditional model.

 

There was a recent study by Boston Consulting Group and Alix Partners which really talked about those factors and the impact they are having. Not only is it just cheap labor but you also have to look at the increase of wages over the past few years.

 

Frank has worked in China for a long time but he hasn't seen the labor cost increases be as steep as over the last few years. When he ran his Menlo's unit in China it was common to see wage and market increases of 10-15%. Now you are starting to see it jumping to 20-30% in some industries, year after year. Overall, it is showing a strong inexorable rise.

 

In fact, when you look at freight increases, exchange rate increases, cost of energy, etc., Alix predicts that China's production costs will probably be close to the United States by the year 2015.

 

Just recently, when Frank was in Mexico and having lunch with some senior Mexican businessmen he learned that this was not news to them. Their issue was to stress that similar cost factors in Mexico have either been dropping or have stayed stable.

 

Cost is one factor and understanding your total landed cost is one side of it. The other side is really dependent on what industry the company is in. China favored certain industries over others when they started industrialization. Now that is not only continuing but is becoming more pointed. They are actually following a pattern of restricting industries, heavily manipulating others, and outright encouraging others. If you are in one of those bands of industries being manipulated, you might see the overall location advantage of China may not make sense.

 

Some industries that are beginning to see this are appliances, tires, chemicals, stamping, batteries and even automotive OEMs to some extent as China is beginning to favor local manufacturers over companies like GM, Ford, and VW etc.

 

If you are in one of those industries and your overall landed cost is starting to show less of an advantage, you may want to start thinking how you can at least balance out that manufacturing and hedge your bets

 

Driving factors to consider a shift from China to Mexico

 

One example is HP which has pushed a large amount of manufacturing into Mexico, while still entrenched in China. Most of the movement you see are from companies establishing new capacity and re-thinking the automatic choice of throwing it into China. They are looking into diversifying their base.

 

The automotive industry has invested more than 7 billion dollars into Mexico over the last 2 years and these are both OEMs as well as their accompanying parts suppliers. You are starting to see aerospace increasing its operation or manufacturing on the US/Mexico border. These companies are asking whether they want to be closer to demand markets in the US and potentially Latin America and whether they need their supply chain extended for 11 days between the US and China. Does it make sense to look at China less as a manufacturing base for the US and more for a manufacturing base for demand markets in Asia? It is less of a decision of getting out of China and more of an issue of how to expand and balance a strategy against growing demand markets.

 

 

Recommendations when considering expanding operations from China into Mexico

 

Landed Costs

 

The first thing Menlo focuses on is landed cost for their clients. Frank says it is surprising sometimes to look at world class manufacturers and see that the decisions they made to position their manufacturing is based on one or two cost factors, such as labor. The first thing they would look at is to look at landed costs and determine which landed costs are important. They ask how important flexibility is and whether they can quantify what flexibility means. Other issues to consider include currency exchange and how much of an impact it has on the client's business. Volatile escalating energy costs are also important. China is more stable today than they have been. However, there is a very large push by the government to move manufacturing westward where manufacturing costs are lower. Yet, the transportation infrastructure in the west is also weaker. Energy also begins to become less consistent and reliable in the western part of China. Companies need to quantify this and look how this affects their bottom line.

 

How important is IP protection to your business? China's track record with IP has been poor. Mexico is bound by certain tenants of NAFTA and most manufacturers say they withhold or exceed them.

 

Adapting Internally

 

The other side of it is to consider what it is going to take internally inside your business and with your network to make that move. It is not something that will happen overnight. Supply chains need to adapt to it. Customer networks need to adapt to it. How smoothly do you think you can make that transition? If enough is pointing in favor of making the transition then it is a good idea to sit down and have a serious conversation about it.

 

About Frank Lange

 

frank_lange.jpg

 

VP Global Development

Menlo Worldwide

LinkedIn Profile

Tom Allen is a senior technical recruiter/senior contract recruiter/consultant. He was worked both US corporate and international corporate. He has also worked on the agency side and individual consulting side. Tom has been in the staffing and recruiting field for 17 years.

 

 

 

Human capital issues faced when nearshoring

 

From the human capital side, when outsourcing using the nearshore model in places such as Mexico the benefits are the time zones. The ease of doing business during US business hours is an advantage.

 

There is a lot of super talent that is coming out of South America, including Mexico, which is readily available and super competitive. Tom set up a recruiting center in San Jose Costa Rica a few years ago. He found that it was very easy to do business there. There are a lot of English speaking individuals throughout South America and this makes it attractive.

 

One of the downsides to nearshoring is being able to provide US resources to nearshoring company's clients in the US. They try to support that from their nearshoring facilities in their local countries. Tom's involvement with a few of these companies led to discussions about how they compete in the contingent labor market.

 

Factors to consider when nearshoring talent

 

Each company is different in their decision making process regarding whether to nearshore or offshore. The primary driver is cost. However, it is also important to look at whether it can be accomplished by the same business hours run in the US. Currently, Tom is not seeing giant pieces of work being outsourced nearshore. The idea of nearshoring to Mexico things such as software QA seems to be an attractive item.

 

It is important to look at the client needs and demands. The infrastructure needed to meet demand needs to be put in place before servicing the client.

 

The key areas to consider include looking at what is the nearshore company's key service areas. What does their offering look like? Do they have the ability to staff that within country and keep up with the workload? Are they familiar with current recruitment methodology, tools and processes? Is that something they are willing to adapt to integrate and support the US client?

 

The area where nearshoring companies seem to lack is the service delivery of the actual human capital which involves recruiting, identifying, qualifying and submitting the candidates to the client. That is a huge learning curve for them in a lot of ways.

 

The overall size of the contingent labor market in the US is in the billions of dollars in annual revenue. Currently, the IT market in the US is hot. Tim thinks that areas where these companies may make some mistakes are in not hiring a US counterpart and subject matter expert who can help them define how to support their clients.

 

Nearshoring companies entering the US need to be careful not to mishandle the local contingent labor needs by not being able to fill them. This can create some serious business problems for the nearshoring company.

 

About Tom Allen

 

Professional Contract Recruiter

LinkedIn Profile