Finance Partnering: Staying Put, Not Chasing the Next China, Is Way to Go

Much of the world’s footwear, apparel and fashion accessories are sourced from Asia, with production hugely dependent on relatively low cost labor. But few industries have remained so untouched by advances in process technology. Consequently, much of what we wear remains effectively hand-made.

And as production costs rise, companies continue to chase the next cheapest location. Yet the sheer volume of output has maxed out the available choices. Few new places exist with the scale to enable a real volume shift from China, Vietnam and Indonesia – except perhaps India.

While India looks full of promise, however, companies are still watching from the sidelines. Reform has stalled before.

Ironically, few have looked where the greatest gains can be won: in staying put, gaining a better understanding of what they actually buy, and through that defining the way to handle suppliers.

Fact-based procurement

Call it fact-based procurement, the practice of gaining a clear, comprehensive view of your position in relation to suppliers and using this understanding to your advantage. The Sourcing organization is the key player here, but finance and the CFO can be a driver and enabler, as well.

A more disciplined approach to managing the company-supplier interface, fact-based procurement requires more commitment in time and frontline negotiation than the Sourcing department and Finance are usually accustomed to, but the extra effort pays dividends.

Companies that adopt the approach face two challenges. They must equip their Sourcing organizations with the mindset of Finance and Procurement, ensuring that the boundary is clear between the company and supplier, and that employees know the role they are expected to play.

Secondly, companies must grasp the potential of targeted analytics. Product and stock keeping unit (SKU) complexity should be tackled and fact-based backup provided to ensure the company’s buying power is fully exploited.

Chasing capacity is over

Why change at all? Because times have changed.

For many years sourcing organizations were simply chasing capacity as their businesses grew. This coincided with the 25 years of high growth in China that has recently begun to slow significantly.

Multinationals during this now-gone era sourced their goods in an astonishingly simple fashion. Companies aimed to secure capacity, looking to build relationships with suppliers that had sufficient technical capability and quality to get products on the shelf.

Companies and suppliers grew together during this time. But suppliers increasingly gained a stronger hand, gaining leverage to decide which customer to choose, and to dictate conditions. Gradually, it became impossible to simply beat suppliers down on cost.

Dependency grew in another way. By seeking a lower cost base via outsourcing, companies necessarily parted with manufacturing capability within their own house. With it went knowledge that had value.

Over time, the crucial supplier interface was relegated to frontline employees with traditional sourcing skills. Negotiations on cost were on a straightforward, product-by-product basis. The positions became junior. 

Eventually, their job almost required them to be seen as part of the supplier organization, making it very difficult to engage in difficult negotiations.

Furthermore, as companies grew it became more and more difficult to recognize this as a problem. Growing fast, in fast-growth markets, organizations become more fragmented, and prey to organizational myopia.

Their annual buy grew complex, making it difficult for any individual in the chain to know the dynamics within multiple order profiles. 

Weapons of choice

What’s required now at the frontline is a different mentality. Procurement departments and their finance business partners in global companies by necessity must look at the entire cost structure within individual suppliers and across the supply chain.

This is less common than you would think. Many companies will focus cost-cutting efforts on one specific area, typically on the biggest volume product – or the top ten ranked by volume – despite dealing with this same supplier across a much wider range of products.

Many times in frontline scenarios, we’re told that that the data simply doesn’t exist. However, what we find is information tucked away in silos, or in the minds of people

Happy to have attained savings on the high-volume items, they may be unaware that the supplier has raised costs in lower-volume goods that receive less attention.

Another instance: suppliers may complain that the assembly of complex products requires compensation for that category. Negotiations focus on pricing issues in that single category alone, but the company may be working with the same supplier to produce other products of much lower complexity.

The exact same logic that the supplier is using to jack up costs for the complex products could be used by the company to argue for reductions on the simpler items.

Commercial functions generally want ultimate flexibility and pressure Sourcing to provide the means. This pressure often drives companies to pay up-front to suppliers for flexibility, but is this necessary?

In the case of negotiating minimum order quantities – the lowest quantity of a product that a supplier is willing to sell – the answer is: not always. With the correct analytics, it’s possible to decide if in reality that flexibility is even remotely needed.

More useful is to establish the cost of flexibility in negotiations, and bolt that cost on later, only if needed.

Many times in frontline scenarios, we’re told that that the data simply doesn’t exist. However, what we find is information tucked away in silos, or in the minds of people.

Time and again, we find useful data hidden in plain sight that has never been consolidated or its value harnessed.

Retake the data

Companies must retake control of their data and harness it to provide insight and gain leverage. Product complexity and explosions of SKU’s have outpaced most organizations’ ability to analyze them.

Handling large data-sets with a critical decision focus is specialist task, but one that can unearth significant leverage. The FP&A team can be harnessed here, as well as the finance business partner in the Sourcing organization.

Without the broader view of the relationship and the analytics to back it up, it’s hard to tell whether gains are optimal. A supplier may be delivering productivity gains in a single production line or platform, but unwilling to deliver gains that could be achieved if the full production spectrum is considered. 

Understanding and leveraging the “Quality of Business” the company is providing to the supplier is critical. A holistic, yet granular analysis of the business over a number of years provides insight and “laser sharp” targets for cost savings.

It is often the case that suppliers are not sophisticated in identifying cost drivers in their own operations. Analytics can contribute here too, by modelling supplier manufacturing environments and simulating how many changeovers are currently employed.

From that, it’s possible to estimate the productivity losses being created by supplier. This provides the basis to weigh the benefits of consolidations of products and designs so that manufacturing runs can be more efficient. Savings potential delivered to the supplier can be passed back to the brand.

An opening window

Without information, there can be no leverage. Fact-based procurement demands commitment of time and resource, but the results deliver the capability to make an informed decision, often discovering savings where none had been perceived.

Because of rising costs, companies now have the will to embrace this new mentality. An April survey by the Economist Intelligence Unit and Bank of America of 639 financial officers from companies around Asia found that 76% of respondents said margin pressures from higher costs were building in their operations.

The pressures are driving an emphasis on core disciplines, such as better use of technology, including better management of supply chain data. 51% of all respondents said they planned to invest in technology, including analytics. The results from China-based respondents were highest (67%). 

Awareness of the benefits of fact-based decisions is beginning to emerge on the ground in Asia, and an embrace of fact-based procurement can’t be far behind. It is now time to take this awareness to headquarters and seize back control of our relationship with suppliers.

About the Author

Peter Hopper is Partner and Head of the Manufacturing and Technology Practice at Strategic Decisions Group International, where he also heads the Hong Kong office.

Photo credit: Shutterstock

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