Want More Profits? Score Your Supply Chain
February 22, 2012 The volatility in cotton prices over the last three years should have taught everyone involved in cotton, textiles and apparel a very important lesson: namely, that understanding, managing and scoring the supply chain accurately is critical to the survival and profitability of every business.
Far too often, sourcing decisions have been made based on only one dimension – nominal price, or “first cost.” But price becomes meaningless if the delivery is not made. A common refrain in 2011 was that the brand or retailer couldn’t get delivery of the garment, because the contractor couldn’t get the fabric, because the weaver or knitter didn’t get the yarn from the spinner, who didn’t get the cotton from his supplier.
There are multiple factors involved in making sourcing decisions, and they are interactive. While sourcing decisions are different for each region, product and company, there are some common rules that should be followed. Sourcing executives should make informed decisions after carefully considering all of the factors, the component parameters of those factors, and the way they interact with each other. This article offers a “Sourcing Scoreboard” for making informed decisions about scoring the supply chain accurately.
This model is built for the sourcing decisions a U.S. brand or retailer would make for the supply of jeans, but the principles can be applied to other products and regions. This example considers three potential sourcing regions:
1. The Western Hemisphere (WH),
2. China (which is so big it should be considered a region unto itself), and
3. Other emerging Asian countries, such as India, Pakistan, Bangladesh, Cambodia and Vietnam.
The model does not attempt to give an absolute score on each parameter, but rather a relative score. For example, 1 is best, 2 is next best, and 3 follows. It then combines the scores on all parameters into a “spidergraph” that reflects how each region scores for each factor.
In a spidergraph, closer to the center signifies “better.” Think of it as being close to the pin in golf, or being “in the right orbit” in the solar system. If you’re too close to the sun, you burn up, but if you’re too far away, you freeze to death. The model considers each factor and all of its parameters, and then shows the sum of all factors.
Look beyond Initial Costs
Cost is usually the first consideration in sourcing. However, sourcing managers should be looking at total cost, not just first cost. Total cost is made up of many components, such as first cost, logistics, duties, finance costs, inventory/mark-down risks, and costs of replenishment. As the first spidergraph shows the red line for Other Emerging Asia (OEA) is best on first cost, but worst on all of the other components. China leads in logistics, and comes in second on other components. The WH is worst on first cost, second on logistics, and first on other components.
Speed to market is a critical factor. In uncertain economic times, leaner inventories with higher turns lead to better profits. WH is best on innovation and production lead times, and second on other factors. China excels on access to inputs and supply chain integration. OEA lags behind the other two regions on all parameters of speed to market.
Quality is obviously important. WH leads in consistency, testing protocols, and amount of seconds or rejects. China excels in redundancy, which is defined here as having backup capacity to continue production in the event of power outages, natural disasters, etc. Again, OEA lags on all individual components.
Reliability might be the most important factor. If no garments are delivered, price is immaterial – or, if the shipments arrive late and miss the season, they will have to be discounted heavily. As a region, the WH excels on financial strength, rule of law, reputation and past performance, security of inputs, the ability to control costs, and risk management. China is second, although the rule of law may be even harder to enforce there than it is in other parts of Asia, where English or French laws were at least partially adopted. Again, OEA generally comes in third.
Social responsibility increases in importance each year, and rightfully so. WH leads on labor and environmental compliance, education, medical care, and independent monitoring. China is judged to be second on all parameters except perhaps environmental compliance, while OEA is third on most measures.
The Summary spidergraph shows that when all factors are considered, the Western Hemisphere outperforms the other two regions on total cost, speed to market, reliability, quality and social responsibility.
Again, these are simply relative scores – 1, 2, or 3 – and they may differ for each company and product. However, this scoring tool provides an accurate and convenient mechanism for sourcing managers to input their own values to see how their supply chain compares to other alternatives. Please visit our web site at www.pcca.com/SourcingScoreboard to calculate your own supply chain scores.
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