Global Sourcing Best Practices
Tucker Rocky Distributing and Berlin Packaging say to keep the following in mind when sourcing overseas:
- Some products lend themselves to buying directly from manufacturers overseas, while others require you to do everything to build the product line except manufacture.
- Understand currency issues. For example, the euro has strengthened against the dollar, and China's RMB now floats against a basket of currencies, so costs are no longer constant.
- You may need to set up an office in the sourcing country, but it's not necessary right away. The key is finding good local people who can work for you in the local language and who have a good understanding of the local culture. Berlin has an office in China but does not have one in other countries.
- It is important to meet face-to-face with potential suppliers, trading and facilitating companies. "Spend a lot of time with manufacturers over there. Relationships are very important," says the Tucker Rocky CEO.
- It is easy to be misled due to cultural differences, Berlin says. For example, the word "no" was never in the vocabulary of potential new sources when Berlin started in China. Sources always said "yes" even if they didn't mean it.
- Understand your customers' needs upfront. Manage expectations in terms of project turnaround, fulfillment and quality. Customers who can not forecast well, Berlin says, are poor candidates for global sourcing.
- Qualify suppliers using on-site factory evaluations with a review of quality systems in place and quality of products produced.
- Berlin requires suppliers to pass a Social Accountability audit to ensure no child or forced labor is used, and that there are no issues with working conditions, compensation and disciplinary practices in the factory.
for example, "China presents a great example of what to do commercially," Berlin says. "But politically and socially, it's a powder keg. No one knows what's going to happen.
… History teaches us that with any kind of industrial revolution comes a social revolution. And they haven't had their social revolution after their industrial revolution. Something's going to happen, and we believe it will set them back."
Other countries stand to gain from this, including Mexico and India. ‘There's a fantastic opportunity in China," Berlin says. "And anybody who is interested in lowering their costs should absolutely go to China. But nothing stays the same. The only thing we can count on is change. Create relationships in other places as well."
A $400-million distributor of motorcycle parts and accessories, Tucker Rocky Distributing, Fort Worth, TX, used global sourcing to create its own private-label brands. The company has 750 vendors overall with a line of about 86,000 SKUs. Its designing, sourcing and marketing of its own brand of product has been a "key strategy to success over the past six years."
As a result, the distributor has increased margins from 30-35 percent to more than 60 percent. "We have never lost a brand we own and never will," President and CEO Steve Johnson says of why private label was an attractive option.
Tucker Rocky sourced leather jackets from Pakistan and tools from China, and also looked to other low-cost countries. It sourced T-shirts and clothing from Thailand, Vietnam and the Philippines, and plastic molded parts from Taiwan.
"Don't look just to China," Johnson says. "There are other places." In China, you may have to pay for workers' room and board, for example, while in Pakistan that is not part of the equation. Most private-label product is sourced overseas, but Tucker Rocky also uses a California company.
The company began by using intermediaries – trading companies that would find the product for it. But while trading companies can add value, they also cut into your margins.
"Facilitating companies," Johnson says, are different from trading companies. Facilitating companies work for the distributor by consolidating suppliers and sourcing complex assemblies. Tucker Rocky still works with a facilitating company in Taiwan for some of its product.
Johnson outlined what to consider before going overseas:
- Effect on your current suppliers. "If you've got a good supplier in the U.S., work with them," Johnson says. "To be honest, we've made some missteps."
- Product liability insurance. Use a U.S.-based carrier. Also try to get your manufacturer to cover you.
- Whether you want to find a new supplier for a product you already have, or manufacture from scratch, letting you get the full margin benefit.
- Which products you can re-source. Consider commodity status, market pressures, volume, simplicity and quality requirements. If you choose to manufacture products, consider the total cost, including design, artwork for branding, testing and government regulations, cash use, shipping, duties and documents, supplier selection, and lead times.
- Attend trade shows in countries you are interested in sourcing from, and prioritize your efforts, Johnson says. Consider simpler, less quality-intensive products that are higher volume, lower margin and labor intensive with known off-shore sources. Use the Internet to get a feel for your supplier options. Also contact trade missions or business development departments at embassies.
This article details two mid-sized distributors' experiences with global sourcing and is adapted from presentations at the National Association of Wholesaler-Distributors' annual meeting, with additional information provided through follow-up interviews with MDM.
To use a cliché, the devil is in the details. Andrew Berlin, president of Berlin Packaging, says this has never been truer than when sourcing from China.
And one more cliché," he says. "You get out of it what you put into it."
Berlin should know. He's been sourcing from China for his customers and suppliers for almost 20 years, and understands the value of taking the time required to set up a profitable transaction rather than "shooting from the hip."
Berlin Packaging, Chicago, IL, with about $300 million in annual sales, distributes glass, plastic and metal containers and closures through 23 sales and distribution centers in the U.S.
Berlin's venture abroad started in the late 1980s when customers requested Berlin globally source jelly jars, popular in the gourmet food industry. Because of the changing glass manufacturing market in the U.S., Berlin found it was easier and cheaper to source from England.
With that success, and as the cost of sourcing from Mexico rose and customers warmed up to foreign-sourced product, many of Berlin's suppliers started seeking the distributor's help, particularly in China.
The manufacturers were being pinched by the costs of producing closures domestically – especially dispensers, which required assembly. These included sprayers, pumps, and closures for food products, such as mustard. "Anytime there is assembly required, we're talking about labor. And that's where China excels beyond the U.S.," Berlin says.
Labor costs are lower in China, making the total cost of producing the closures lower. Shipping is also minimal because of the number of closures that can fit in one container.
Sometimes Berlin's domestic suppliers would find a factory overseas and ask Berlin to manage the relationship. Other times they would ask Berlin to find the factory as well.
Berlin now makes all arrangements with global suppliers, carries receivables, offers in-house design services, stateside inventory management, handles quality claims and uses resources on the ground in Asia to handle project management and on-site product inspection.
The distributor receives a service fee and then it buys the product and sells it as a distributor in the U.S., improving margins.
Berlin Packaging has since branded this service as Berlin Global Packaging Group. Global sourcing comprises 20-25 percent of business. That percentage is growing, Berlin says, and that part of the business has become profitable.
Berlin Packaging sources from nine countries, including Venezuela, the Philippines, England, Germany and Indonesia. "We do still source from Europe," Berlin says. "Though the labor costs are higher there, there are some technologies and product that are only available there. The quality is also very high."
It takes work to choose countries – but less so than it did back when Berlin started this service. In the "early days," Berlin says he could not do preliminary research online.
He had to find manufacturers through embassies, and then go to the countries to see for himself. "A lot of trips were a waste of time," he says. Still, even with the advent of Internet, "nothing beats walking the factory floors and doing the audits and meeting the principals of these organizations. There's no shortcut for the hard work that goes into finding these factories."
Taking the extra time to find reliable factories will mitigate some of your risks. And as with any investment, sourcing from overseas requires the hedging of bets. Taking China