Doing business with suppliers located overseas or in another country can be an overwhelming and daunting task even for expert Sourcing professionals.
Recently a friend of mine asked me to have lunch with him and one of his associates. The other gentleman had invented a new product. He had a marketing plan. He knew what his cost point had to be on the product which meant that he had to have the product manufactured overseas.
But beyond that he had no idea on where to start to source his product.
Large companies can afford to have Strategic Sourcing Procurement staff around the world. Even if it is not their core competency they can justify creating an internal organization and infrastructure, along with the relationships, processes, systems and resources needed to run this kind of sourcing operation.
However small companies, and many mid-size companies, can not afford to make this kind of investment in resource and structure.
Dealing with overseas suppliers directly can be highly problematic. This is not as simple as just finding a supplier on Google and asking them to start making your products. There are a myriad of processes, controls, conditions and situations that need to be managed to ensure that your products are sourced consistent with your expectations. And nothing will ever go smoothly.
They are better off considering dealing with partners and outsourcing agencies to provide the on-the-ground sourcing support necessary to have their products manufactured, distributed and shipped. In fact many large companies must rely on Sourcing partners to support this aspect of their business.
But even dealing with agencies who provide an outsourced Sourcing service requires a level of experience and management expertise on your end to ensure that you are going to get the product you want the way that you want it. While the agency is supposed to be expert in this field they have other customers, allegiance with suppliers, and potentially conflicting interests which requires due diligence on your part.
Whether your company is large or small there are a number of elements that you want to ensure are in place in managing your Outsourced Sourcing partner.
You can’t just start and manage these relationships over the phone or on Skype. You need to see your Outsourcing partner face to face on some periodic basis. If you are out of sight you should expect that your partner is distracted by other customers who are demanding their attention.
Your Sourcing agent and your suppliers are also likely to come from different cultural backgrounds and norms. Understanding these different cultural nuances will help you work through issues and manage the relationship moving forward.
There should be a key owner of the relationship at your end and at your Agent. If there are issues to be addressed you don’t want to be navigating your way through an organization on the other side of the world. You want one person to go through.
Code of Conduct
Because you are relying on your Sourcing supplier to select and qualify suppliers you must ensure that there is a Code of Conduct in place. The Code of Conduct should include elements requiring compliance with all laws and regulations, ensuring there is no underage labour, provision of proper working conditions, appropriate wages and benefits, etc.
Even though you are relying on someone else to provide the Sourcing service you are still responsible for the conditions under which your product is manufactured.
Aside from the situations which arise and need to be dealt with on a daily basis you require a structured process of governance and communication.
This should involve the review of metric performance against targets, schedules, resources, audit results and action plans, and control posture. Target setting is critical to ensure that there is alignment on expectations from all parties.
A formal contract is essential for any relationship. This contract needs to be between you and your Sourcing agent and with your suppliers. The contract must provide absolute clarity on the ownership of tools, machines, processes, materials and intellectual property for instance.
If at some point you, or your Sourcing agent, want to move your business to a new supplier it can be disheartening, to say the very least, to find that your current supplier won’t release tools because they claim ownership. Even worse you don’t want to find that your supplier steals your intellectual property and starts making products competing with yours.
You also want full disclosure and transparency of the relationship between your Sourcing agent and the suppliers they are recommending. You don’t want to find out later that the agent is getting kickbacks for bringing the supplier business.
A contract is critical!
Supplier Selection and Qualification
Wherever possible you should try to visit potential suppliers, with your agent, before they are selected. When visiting a supplier do not do the “Tourist” tour. If your tour is cursory you should know that the supplier has prepared to show you only what they want you to see and made things look good for the hour or two that you are there. It can be wise to drop in on a supplier unexpectedly to see how things really work.
You need to know that your supplier has the flexibility to respond to your needs whether they are higher or lower than your forecasts. Clarity as to what happens to cost, delivery and quality under these circumstances should be discussed and documented up front.
Always qualify your suppliers thoroughly! This should include having Golden samples of all of your products. If there are disputes as to quality or adherence to specifications later on you need your Golden sample to settle the case.
Additionally you should ideally always be looking for new suppliers to support future needs, to augment or supplant existing suppliers, and to ensure you will always have continuity of supply.
Most small and mid-sized companies, and even some large companies, will need to do business with suppliers from other countries and continents. Yet the lack the Strategic Sourcing expertise to manage these supplier relationships directly. As such they will need to engage with Sourcing agents to help them manage these critical relationships.
Don’t however relinquish total control of your overseas suppliers to your Sourcing agent. Problems will occur quickly and frequently which can jeopardize your business. Instead ensure that you have the basic elements in place that we have discussed here, and more.
Your in-house Procurement team must proactively manage your Outsourced Sourcing partner!
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