Friday, May 5, 2017

Is Your Sourcing Working For You or Against You? Sourcing Strategy Optimization
To some, sourcing seems so simple. Just choose a factory that makes your product and meets your price. It seems simple to such a degree that many companies choose and even give money to factories without proper due diligence or thinking the process through. Why? In many cases, companies have no real understanding of sourcing strategy or one that is wrongfooted.

What I have learned and put into practice is that, to be successful, it is necessary to not only have a strategy, but an optimized strategy for your particular product and requirements for you and your customers. While each situation is different, there are some general principles to follow that will lead to successful development and execution of your product.

Here are a few key principles:
1.     Choose the right partner for you. In China or any overseas country, there are many levels of factories, each built to serve a different type of customer. If your business is mid-level and you choose a low-level factory because they can meet your target price from the getgo, you will probably regret that decision in terms of quality, delivery, communication, etc.
2.     Product first, price second. A bit of a restatement, but many people cannot avoid being seduced. Every factory that wants an order will promise they can do your work perfectly. But you need to see more for yourself. With what product and for which customers have they been successful? Walking through the production line is not always the most effective, because factories make most products to their customers’ requirements. So see some finished, packaged product samples.
3.     The first price you pay to a factory should be the highest you ever pay. When you are a new customer or placing a test order, you cannot expect the factory to shave its profit to the bone-they don’t know your requirements and cannot be sure the order will go smoothly. This is not to say you should not negotiate-you should- but recognize where to set the bar for the initial order. As your volume and relationship grows, you can work with the factory and streamline cost. Over time, it will come down. In my experience, the reduction can be significant.
4.     Factory is your partner, not your servant. Without a factory that really cares about not only your business but your relationship, you cannot be successful.  There is no place for ethnocentrism in this relationship. Everyone is trying to make a buck, no matter who or where they are. Only with this genuine relationship can you develop a sustainable sourcing base.
5.     Communication and attention to detail is as important as product or price. If a factory can make a good product but they cannot communicate effectively or pay attention to details (such as developing product quickly and efficiently ordering accessories from quality suppliers in a timely manner), they are worthless to you. Your efforts and relationship will not end well. So meet and interview the person who will be in charge of your account, not just the boss.
6.     Your process must facilitate cost reduction or you should recognize that a more complex process requires more cost. If your process creates extra work or labor on the factory’s part, you cannot expect your costs to go down. Or, if your home office lack of efficiency, timely development/approval creates delays or stop/start on the factories part, you can expect not only delays but possibly quality issues or price increases.
7.     Keep it simple, do what is necessary and adds value. Forcing your factory to spend a lot of time on reports or activities that don’t add value is wasting both your home office and the factory’s time and money. My favorite example here is the PSR (Production Status Report). If you have 100 styles in the factory, do you seriously want someone to input when each style fabric is received, is cut, into sewing, etc. or do you want to know if your order will be shipped on time and what if any problems have arisen that will delay it? Micromanaging a factory will inevitably make them feel that the burden of following production has shifted to you-on the other hand, if they are fully responsible for managing these details, all problems are squarely on their shoulders.
8.     Use a calendar for a guide. This is especially relevant for product development. You cannot expect to start late and end on time.
9.     Know where the factory’s red line is-your targets should be based on the realities of your product, not magical thinking or your customer’s pressure. Sometimes a factory will accept a price lower than their minimum profit or even at a loss because they need or want an order at that time. If they do, it is not a victory for you but a smoking gun. No factory can stand to lose money, and the more they make at a loss, the more they lose (so standing on the idea that, because your order size is large, the factory has to lower its price to meet your price idea is fallacious and dangerous thinking-volume can produce cost reduction, but not always as low as what is in your mind-know the realities). If you don’t pay heed to this way of thinking and insist on and get your price below the factory’s red line, something may come out of your product.
10. If there are multiple factories, each factory should be positioned for their strengths. Even within a single product area, each factory will have strengths and weaknesses depending on their experience and supplier relationships. Your strategy should account for this and your sourcing puzzle should be a smooth fit between the pieces.
11. That being said, have a backup plan. Stuff happens. Each factory should be primary for its strongest category, and secondary for another.
12. Don’t stuff your factory too full. You don’t want to push a factory to capacity. Imagine this: You have filled the factory with your orders. One significant fabric is rejected as the mill made a mistake and will take 2-4 weeks to redo. Even if the factory agrees to pay air freight for the missing part, not only will the absence of that fabric will leave a giant hole in their production, but when the replacement fabric comes in and all lines are full, you will have to make some bad choices.

The dirty dozen pointers above are only part of the picture. Each product and product category has its own issues and needs to be looked at specifically and constantly. But if your company’s mindset, starting with top management, is committed to a responsible and diligent sourcing process, you will have a much better chance of sustainable success and many fewer headaches.

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