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Executive debate

How do you execute global sourcing quickly and effectively?

With interest in low-cost country sourcing growing, CPO Agenda invited a group of Scandanavian procurement leaders to Stockholm to share their experiences

 

Summer 2007

 

PARTICIPANTS

Edvin Bekkhus is purchasing director, direct materials, at Nycomed, a privately owned pharmaceutical company based in Denmark

 

Ola Billing is vice-president, purchasing, at Skanska, one of the world’s biggest construction firms

 

Pernille Boisen is vice-president, corporate sourcing, at Novo Nordisk, a world leader in
diabetes care

 

Andrew Clough is director, financial operations, and heads up global procurement at Fast Search & Transfer, an IT company based in Oslo

 

Philippe Courregelongue is director of consulting services EMEA at Emptoris, co-sponsor of this series of debates

 

Johan Dingertz is senior vice-president, purchasing, at Stora Enso, one of the world’s biggest paper manufacturers

 

Johan Eriksson is group purchasing controller at Autoliv, a developer and manufacturer of automotive safety equipment

 

Per Hill is head of purchasing in Sweden for the pharmaceutical company AstraZeneca

 

Geraint John is editor-in-chief of CPO Agenda and chaired the debate

 

Tommy Karlsson is vice-president, operations purchasing, at Alfa Laval, a manufacturer of heat transfer, separation and fluid handling equipment

 

Laurence King is purchasing director of Elekta, a Swedish maker of high-tech medical equipment

 

Henrik Larsen is senior director of procurement at AP Møller-Mærsk, the Danish shipping giant

 

Christina Lundman-Lagerstedt is division director, business development and supply chain management, corporate sourcing, at TeliaSonera, a leading Nordic telecoms firm

 

Marc Magistrali is global sourcing senior vice-president at Kone Corporation, a world leader in the elevator, escalator and services business

 

Claes-Erik Norén is vice-president, supply management, at Assa Abloy, the world’s leading maker of door locks

 

Per Segerberg is a partner at Accenture, co-sponsor of this series of debates

 

 

Geraint John (GJ): What does global sourcing mean for your company and what has been your main focus to date?

 

Tommy Karlsson (TK): Alfa Laval operates globally and the output of our factories is 70-75 per cent purchased materials. The company is very cost driven and we always have to prove cost savings a certain percentage below inflation, so to be able to maintain our competitiveness we are forced to move at least a part of sourcing to low-cost countries. To support this we have set up small purchasing offices in China, India, Eastern Europe and Mexico. We are not going to move 100 per cent of our spend there, but we need to move as much as we can.

 

Andrew Clough (AC): In IT software the cost base is predominantly in human capital. We’ve kept R&D centrally for the past 10 years in Norway, because we tap into the higher education system, but what we’re noticing now is that as the world flattens and we become global, we see that there is a lot of brainpower in lower-cost countries and there is an opportunity to get in there. We can keep our top-end engineers doing research and outsource a lot of the D in R&D.

 

Marc Magistrali (MM): Having gone through a significant internal restructuring at Kone, global sourcing has replaced purchasing and procurement terminology as it more accurately reflects the strategies and goals of forward-thinking businesses to succeed in a global landscape; it implies a horizontal (cross-functional) rather than vertical (functional) approach. Where we were decentralised in the past, we are now structured as a centre-led sourcing organisation that has significantly optimised support to our global operations across Asia, including manufacturing facilities in China and India, North and Latin America, as well as Western and Eastern Europe. A significant portion of our direct materials spend is coming from emerging markets, and this trend continues to grow as our experience and supplier market knowledge expands. The key is to ensure quality and cost-competitive supply globally.

 

Per Hill (PH): I work in the pharmaceutical business and we have come into this from quite a different perspective. AstraZeneca is a global company and we have manufacturing in many countries, so we have been sourcing globally of course, but it’s tended to be around where we have our operations, and that’s traditionally not been in low-cost countries. We have focused a lot on establishing a presence, especially in China and India, but also in other emerging economies such as Mexico – potential markets with large populations. We started by establishing sales and marketing, expanded into research and manufacturing to make sure we are seen as a local player. Direct material cost as a proportion of our sales cost is fairly low, so sourcing opportunities are something we have started focusing on only in the last couple of years. We have established procurement offices in China and India with a handful of people in each country. There are good business reasons why we are looking at more low-cost country sourcing now.

 

Pernille Boisen (PB): It’s very similar for us at Novo Nordisk. Our expansion into China and India was very top-line driven. What we’ve sourced from there today is less than 10 per cent and all in indirect materials. Shipping things around the world and leveraging the synergies has not been our focus. But pressure on the pharmaceutical industry to reduce costs is there, so of course we will be looking at that.

 

Edvin Bekkhus (EB): We are also a pharmaceutical company, but not in the same business as Novo Nordisk or AstraZeneca. Nycomed is a generics company, manufacturing products, so we have a high level of competition. For us, five years ago it was not a question of going to low-cost countries or not, the question was how to do it. The main reason was to reduce costs and get the right pricing. Today we source most of our active substances from India or China. To my mind that has paid off very well.

 

Johan Dingertz (JD): Global leveraging we have been doing for quite some time. Global sourcing is something different, where you are utilising all the new countries. Our direct materials are, to a large extent, not doable, because it’s the same vendors there as here – the Dows, BASFs and so on. Indirect is a possibility and we have started, a lot through agents. The most difficult is capital expenditures – new factories – and developing new suppliers in India, Latin America and China, which we are working hard on but it’s a big challenge. We have quite high standards when it comes to corporate social responsibility and sustainability. That puts some limitations on us.

 

Christina Lundman-Lagerstedt (CL): In our company, we did not have a corporate centre-led sourcing function until one year ago, and before that it was very hard to look into even focusing our purchasing volume and global leverage and find synergies. We are now looking at going into more low-cost countries; we’ve recently been to China and audited a couple of vendors there. I think the sourcing organisation in our company is very much the driving force in this process. The main obstacle is long-term relationships with suppliers in different countries and trying to look out of the box when we choose vendors.

 

Johan Eriksson (JE): Autoliv spends just over $3 billion on direct materials, and a quarter of that is in low-cost countries. We mainly buy components with a high labour content from those countries, such as diecasted components. In China we have seven manufacturing sites and 30 buyers in the Shanghai area. The challenge for us is not to find suppliers or to source for the local factories, it’s to get our factories in, for example, Western Europe to also buy from low-cost countries, to move their existing business from current suppliers to new, more competitive suppliers.

 

GJ: There’s a perception that there’s been more talk about LCCS than real execution to date. Is this a view you share?

 

Per Segerberg (PS): I work quite a lot in the automotive industry across Europe. For some reason many companies have set up the authority to source for $1 billion or €1 billion in China over the next couple of years, independent of their size. They have set up international purchasing offices (IPOs) in China, India and so forth, and have had 20-50 people there for some time. It’s interesting to note that the number of suppliers they have there are very few. I keep hearing stories such as “It took us three years to move eight parts”. So we see that the issues are on the execution side. The targets are there, people know how to drive the sourcing process, search for suppliers and audit them, but when it comes to moving volumes it’s a different story. Companies are not prepared to manage the switch process at the pace that would be necessary to meet the targets, and for the supply base there are a lot of promises that are not kept. Many suppliers in China are “RFQ’d out”; they refuse to participate because they don’t see the volumes come back in that industry. It’s a clear switchover process management issue.

 

Ola Billing (OB): We have some 13,000 projects ongoing on a worldwide basis, so if you talk about China and so on, our challenges are twofold: first, being able to commit to the longer term when the average length of a project is six months; and second, the logistics, because whatever we find is a good solution in China – and we’re not selling into China – we would have to bring that to Europe, for example, and then distribute it to thousands of projects.

 

Laurence King (LK): As someone who lives in Beijing for two weeks out of four, I think a lot of people coming over to China for the first time know nothing about the Chinese market, they’ve just been put on a plane and think they can look in a few directories and find the right companies. That’s why it takes them years to get the right supply base. They will go through a lot of pain before they get there.

 

Claes-Erik Norén (CN): I’ve seen people go to China to get offers, then take those home and bang their suppliers over the head and tell them they must beat them. I think that’s quite dangerous. Some Chinese suppliers have told me that they have a blacklist of companies that take offers, then go home. You need to show that you are serious about sourcing in China, there for the long term. What we did was build our experience on the suppliers who supplied our local factories, because the relationships were already there. Then, as a second step, we opened sourcing offices in Shanghai and Shenzhen to be closer to where our suppliers are, to show that we are serious, that we are here to stay and that we are investing for the future.

 

MM: This depends to a large extent on your industry, as high labour costs and materials required play a determining role in whether you pursue the LCCS route. Simply bashing one’s suppliers “back home” based on Chinese offers may be a short-term tactical approach, but it is not a sustainable solution. 

 

Philippe Courregelongue (PC): You can alleviate the issue of being blacklisted by suppliers by making sure you understand the total cost of ownership associated with low-cost countries, that you compare terms in a sophisticated fashion with low-cost suppliers on a regular basis, and by bringing transparency to the process through RFQs.

 

Henrik Larsen (HL): We talk about this as if we are the decision makers, but I think we have to be careful. Sometimes we are forced to look to China, because that’s where your suppliers happen to be. Another factor is that globalisation hasn’t created transparency, so you might end up with an untransparent market with the bulk of your suppliers being Chinese de facto and you don’t have a choice. We should not forget this.

 

GJ: How have you managed the switch of business away from “traditional”, local suppliers and towards those in emerging markets, and what issues has this raised?

 

PH: In the pharmaceutical business we have two additional challenges when it comes to switchover. One is that we have extremely long product cycles, 10-20 years. Based on my previous experience I believe the best time to change a supplier is when there is an introduction of a new product or product generation, and that doesn’t happen so often in our business. In addition, we are also dealing with a regulated environment, where even if we want to switch supplier we may not be able to do that. So there are some complexities. I don’t think that’s the only reason we haven’t been so quick to move to low-cost countries, but it adds to the challenge when you talk about switchover time.

 

TK: Our key struggle is to speed up the change process, and what we did was start with the existing purchasing office, which is staffed with only local people, and try to boost the effect of that by arranging purchasing fairs in India and in China, where we invite existing suppliers together with potential new local suppliers for a couple of days, exposing them to drawings, having R&D people available, target pricing, and so on. That has worked rather well.

 

CN: It’s a step-by-step process, and it’s an advantage if you have suppliers supplying your local factory. For completely new suppliers, we have a predefined category management process where we have put all the different learnings and checklists together. From project kick-off to actual implementation it can be a year, a year and a half, maybe up to two years, depending on what products we are talking about. When we start up a new project we have a kick-off meeting with core teams, we look at success cases where we’ve done this before, and of course if something goes wrong it’s important to share that experience as well. What we are discussing right now is to introduce a sourcing committee that all new sourcing could be put through.

 

GJ: What about internal stakeholder management during the switching process?

 

LK: It’s really important to get commitment right at the top of the company to driving it through, and to keep everyone informed. Too many companies just dabble in it, it’s done behind the scenes and then it leaks out and people get worried about their jobs. You need to keep internal people, and the old supply base, in the loop. Two or three years ago we got our existing suppliers in the same room and told them that we intended to source from low-cost countries, but that ideally we’d like them to go there. Very few of those have done anything about it, so now we are going back and saying that the next phase is the exit plan.

 

PB: I don’t think the change management process is so different for us than moving from a supplier in Copenhagen to one in Stockholm. But one thing that’s interesting is the whole top line, bottom line debate, and for us to sell it into our company we have to have a longer horizon and assess the advantages we can get from low-cost countries. It’s not necessarily reducing costs by 5-15 per cent in the long run but more about improving the top line.

 

HL: Selling is the key word here. We chose from the start to have a marketing department within procurement, to market what we are doing and educate people. You have to communicate the issue, engage in dialogue with stakeholders and harvest the ideas from them, because for a company our size, leveraging our global intelligence from our stakeholders is one of our finest tasks to do. We cannot sit in Copenhagen and say we are the smart people with all the ideas. But taking them from the business, putting them into perspective into our process, then handing it back and creating value, that’s when you get the ball rolling.

 

GJ: Have you experienced resistance internally when procurement has been keen to switch suppliers?

 

HL: We have had issues with stakeholders shifting their suppliers to China. Getting people out to China to talk to the supplier, see that they are making this product like they do elsewhere and get a comfortable feeling is key in winning people over. It is procurement’s role to fertilise this and create that positive spirit. Once you have success you can build on that.

 

TK: You need a dialogue regarding the objectives, so we have agreed with each buying unit what needs to be achieved in the next 12 months, and the other is to have the commodity teams and the purchasing offices to create business cases. When they are ready, it should be almost impossible to say no, because we have to work together to reach the objectives.

 

MM: Effective selling and a solid business case are key success factors for stakeholder buy-in. Having the right profile of people who can influence and build close relationships is fundamental in our field.

 

GJ: What other issues have you faced in switching supply to low-cost countries?

 

JD: It’s also about what kind of relationship we would like to develop with our supply base. If you identify a supplier and say you are the low-cost provider, we don’t expect anything but low cost, that’s it. I think many Asian suppliers won’t accept that long term. They would like to have a close relationship, they would like to develop things together with their clients, not just be a low-cost provider. That is a challenge; we are immature as Western European and American companies in this respect, in my view.

 

MM: I think we need to be very careful when we use terminology such as “low-cost sourcing”, as for many cultures this could be perceived as a derogatory term implying a low-value relationship. Sensitising ourselves to the cultures we do business in greatly improves our ability to gain the proper trust and commitment from our suppliers to be mutually successful.

 

CN: The relationship is all important, and I think we Westerners put too little emphasis on that. If you don’t you will have more problems; if you have good relationships it makes it much easier to solve them when they crop up. You need to be the messenger internally that this is another type of business, that it puts other types of requirements on your organisation.

 

HL: It’s a 180-degree shift. We need to make ourselves attractive to the suppliers, period. And it’s not just 3 per cent off the price, it’s going out there and explaining that you are an attractive customer, whether it’s in China or India, and that you can enlarge the cake for them as a supplier. Getting their best engineers once you have problems, getting the development so you are not number 10 on the list. We are all in bottleneck scenarios and needing to get supplies from fewer suppliers, so if you don’t make that change you have a problem as a business.

 

PC: From a technology viewpoint, subtle barriers to adoption can exist across a global supply base. Language support, for example, is critical to ensure the success of such an initiative. Local cultures, too, are often assumed to represent an obstacle, although experience of our customers would suggest that this presumption is generally mistaken. Technology can actually help to reduce language and cultural challenges by codifying the process in a clear manner, thereby better managing the interaction between supplier and buyer. Using such tools, both parties have time to process information – which may be in a foreign language –and are not caught up in the pressures of a live person-to-person negotiation, either face-to-face or by telephone.

 

PS: One other aspect that’s important to be successful is to have a clear sourcing strategy and to communicate that to the supply base. As an example, we helped a company source exterior rubber where it had had 30-year relationships with suppliers and had a lot of internal challenges to confront. But when there was 50 per cent on the table by going to Eastern Europe, it communicated a sourcing strategy that basically said that for the total volume it would have two long-term partners that would split 80 per cent of the volume, with the remaining 20 per cent split between three players. These would have the chance to become one of the top two. The effect of that was that one of the existing 30-year-old suppliers lowered its prices by 30 per cent. A new supplier from Eastern Europe was introduced to one of the remaining positions, with the goal of building the relationship, proving the quality of the parts, and keeping that dynamic for some time. I think it was very important to give the suppliers that carrot. 

 

EB: For Nycomed it’s a cost issue, and we do not accept price or cost increases. Every year we have to find bottom-line savings, as we do not have the opportunity to increase the prices of our finished goods. The prices of those are going down and costs have to follow them. That is a real challenge. We do not make long-term agreements with Chinese or Indian suppliers; as a general rule it’s not more than 12 months. As soon as we have signed an agreement, we start looking for better opportunities; moving from one manufacturer to another. Buying chemicals is not complicated; there is some bureaucracy in Europe in switching suppliers, some things that you have to teach Chinese manufacturers, and there is a language problem, but we don’t let that stop us.

 

GJ: Is that a strategy you plan to continue for the next few years, or can you see a point where you will have exhausted all those opportunities?

 

EB: I am quite sure we will continue doing this for the next few years.

 

CL: This is very different from industry to industry. If you build networks, as we do in telecoms, you can’t really change supplier every now and then. If you want to increase the competition, you have to do it in a geographical area or where you have standardised equipment.

 

GJ: To what extent are supplier discovery, qualification and auditing still major issues for your procurement function, and how have you addressed these?

 

JE: A couple of years ago it was more difficult to find new suppliers, but I don’t see that we have that problem right now. We have a pre-qualification process in Autoliv that is working pretty well. The key success factor to get a supplier approved is to have a cross-functional team, so quality is in the project, sales are aware that their customers will get products with components from this new supplier. The challenge we often have is that we approve a new supplier but are not quick enough to load it with business from our manufacturing sites in higher-cost countries, as Per was saying earlier. In terms of audits, we have a supplier development team that works with long-term, strategic suppliers that are not meeting our quality requirements. That’s normally a
1-2 year programme. In Asia, we have about five suppliers on that at the moment. We recently held a seminar in Bangkok with Asian suppliers where we asked two of these to explain what they have done with Autoliv and what the results were. That was a very effective message about the importance of continuous improvement and teamwork.

 

OB: Our problem is that we have too many suppliers. When it comes to the challenges in China, what we have done is set up an office there that primarily deals with the whole qualification process on behalf of our business units in Europe and the US; looking at sustainability, the code of conduct, and pre-qualifying suppliers. Those are the ones we are then working with, we’re looking at opportunities and then marketing that internally, rather than the demand coming from the units themselves.

 

PB: Our company is very driven by social and ethical concerns, and we are seeing a dilemma now going to countries where it’s not as developed as it is in Western Europe. Should we be rigid and make the same demands, will it benefit the society at large? It’s weighing up whether it’s wrong for young people to work 10 hours, compared to if they don’t work at all. Issues like this we are definitely discussing a lot in our company. We haven’t come to a conclusion yet.

 

EB: Child workers are not acceptable, but as long as people are following local rules, local laws, we find it OK. But there are some exceptions, and child workers is one of them.

 

JD: It comes back to what kind of relationship you have. My experience is that if you go there and ask for certificates, in some parts of the world everything is for sale and so you can get yourself a certificate. But if you want to do something together with this supplier to develop their quality, their environmental, social or ethical side, that’s a different story. Just going on a pre-arranged audit doesn’t bring anything.

 

GJ: What measures have you implemented – or do you plan to implement – around people, process and technology to scale up your global sourcing activity over the next couple of years?

 

CL: We will use the same processes, the same evaluation templates for suppliers in emerging markets that we would use for all other suppliers. Of course we will need to make sure we have the right competence; you cannot send everybody to China, but when we do they will be experienced people with a broad range of competencies to evaluate those suppliers.

 

OB: Logistics is a challenge for us, which means we haven’t made up our mind for the long-term solution, but we need to get volumes up so that we can build a business case for putting a logistics system in place. So it’s a little bit chicken and egg right now. In a project business, part of the challenge is to get your hands on the demand, because by definition a project starts and then it stops, so aggregating spend, getting that visibility and at least being able to see what the potential is, then being able to transfer that into execution, that is really our challenge. We are running initiatives right now on spend visibility and measurement. That should help to support what we want to do in lower-cost countries.

 

JD: Our experience in China is that people’s loyalty to stay in companies is a different ballgame from Latin America and Europe. We train them, we develop them and then they disappear. Then we do it again. That’s something we have to tackle in one way or another; we have to go through local people, but we have to be able to attract and retain them and that seems, at least in some parts of China, to be very difficult. If you can handle moving around as an employee you can have quite a nice development of your income, and that’s very used.

 

TK: I’m struggling with the same thing, but I don’t have a solution.

 

CN: I had some discussions last week with our sourcing office director in China, who is coming back to Sweden, so I’m looking for a replacement. We discussed how to recruit people and he preferred networking to headhunting, because those people don’t seem to stay.

 

LK: I think networking is preferred, because in China if someone brings someone else in they don’t want to lose face. Three times is now the average number of times people move jobs in a year in China, I think, so everyone is going through this pain at the moment. Networking and bringing in friends of friends can reduce this, but of course you can lose too. Some people want to bring their friends in because there’s a mafia-style relationship. So you have to be careful otherwise you can end up with one family and when one member leaves, they all leave. But personally I found it even worse in Mexico.

 

PC: Scaling of low-cost country sourcing activities, and coping with the day-to-day management of the resulting global supply base, is the key current challenge we see across our customer base. Technology’s role is to overcome some of the added complexity that is inherent in the definition and execution of an LCCS initiative. By improving co-ordination among different buyers and suppliers, industrialising the sourcing process, and acting as a central knowledge base to store and share all supply-related data, supply management platforms should add a dimension of stability and certainty to LCCS that is often lacking today.

 

GJ: What are your main lessons learned in making global sourcing work really well? And what advice would you offer to other procurement leaders starting out on this journey?

 

MM: It’s about people first, setting aggressive but achievable targets, and acceptance that this is a journey with many bumps along the way that will require determination and resilience to overcome. Inspire and reward your personnel so that the right level of passion exists.  And have fun.

 

EB: Identify the people and the companies that you would like to see, go out there and have a look and meet them. That is a good starting point. This is not a desk activity, you have to go and see.

 

TK: You should go for local people and train them, then it’s a matter of doing your homework to make sure you have clear specifications and that you communicate clearly. You also need to have patience, because it will not happen on day one.

 

JE: It’s very easy to get quick wins, but you must not let those divert you away from your long-term strategy. You must also avoid it being a purchasing activity; it needs to become a company activity that all your colleagues understand and support.

 

CN: It’s important that you have people with the right competence and the right mindset, who are business orientated and who can build relationships. Then it’s about having a target and a cross-functional plan, and choosing the right categories. You need local support, a local company that can assist you and that has relationships with suppliers, or you have a sourcing office. That will make your life much easier, because if you use trading houses you will have no control.

 

LK: I think personal relationships and building up trust are the most important things. You need people there for a time. Bringing in expatriates to begin with is appreciated, as these companies need their experience. But local people need to know their career path after that, they need to understand the training that’s required and where they are going to go, and then you won’t get this turnover of staff.

 

AC: Make sure your own house is in order first. We all know there are opportunities out there in global sourcing, but make sure you get buy in from the company, make sure that the people, processes and technology are matched up with the long-term strategy. You’re going to need a lot more people than just yourself and your group in order to find the right solution.

 

PC: The mindset needs to be business as usual, only probably more complex and deeper in terms of processes and technology. There are really five challenges you need to look at here: opportunity identification and spend visibility; understanding your cost bases and the business case for transferring spend to emerging markets; the evaluation of these more complex criteria, in terms of quality and risk; the scaling of this operation in day-to-day management of suppliers; and longer-term compliance and management of their performance.

 

JD: From the old world we have a tendency to underestimate people from the new world. We shouldn’t think we have all the answers; they can do things in a different manner than we have been doing for many years. It can be as efficient, and even better. If we come with what we think are all the answers, we are considered arrogant. So have humility and realise that it takes time to do things. This is a journey, not a quick visit.

 

For edited transcripts of our recent debates in London (on world-class procurement) and Amsterdam (on savings opportunities), visit www.cpoagenda.com/debates

 

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