Barney, the Big Five, and LCCS

Earlier in the week, my wife and I left the office early one afternoon to head out to my in-laws in the suburbs. About twenty minutes into our journey, with Barney blaring in the backseat from a makeshift DVD set-up I rigged for our 2 1/2 year old son, my wife's cell phone went off. It was one of her old colleagues from a Big 5 firm who was calling from a team-room at a client site. They needed a crash course in global sourcing 101. But the irony was that they were already a number of weeks into a low cost country sourcing project that they had sold to a multi-billion dollar client. The reality was that they did not have a clue what they were doing.

You know someone does not know what they're talking about with regard to LCCS when they say "we're working on getting the suppliers to quote free on board China". Yes, a manager in the sourcing practice of a top-tier consulting firm actually came up with this phrase. I'm not funny enough to make this stuff up. But I did tell my wife after her call that perhaps she should let them know that a bunker fee is not a tax for missing the green on the 18th hole.

The major issue at hand was not whether the firm was somewhat qualified to do the work (we know full-well consultants sell things everyday that they're not exactly expert in). The issue was this team knew absolutely nothing about the basics of global sourcing (outside of the actual strategic sourcing process) or how to come up with a total cost calculation.

For example, the category they were sourcing was extremely heavy and bulky, but they did not think to ask the supplier what the best overseas transportation method was (e.g., container vs. break bulk). They also did not understand the basics of trade finance. They had started to work with a factoring company on the financial side of the transaction, but the client was a large company with good credit who could borrow better than any factoring company most likely.

In addition, the consulting team had no idea how to factor in other financing costs (e.g., letters of credit as well as inventory carrying costs and they did not have any idea about the best way to calculate accurate duties and tariffs). It was hilarious when they thought that the "financing part" would be the easy part because "they had good relationships with the finance folks inside the organization" who could help figure it out. What they had no clue on was that if the company had never sourced globally, the finance organization would be starting from the beginning just as they were.

Another clincher that the firm was not qualified to do the work was that they didn’t seem to have a grasp of what a 3PL provider could provide nor which 3PL provider they should work with. The irony is that this consulting firm invented the concept of a 4PL. But the biggest issue by far was that they probably did not have enough cost savings on the table to justify even sourcing from a low cost region. Global sourcing 101 requires accurate total cost estimates. If the total cost savings is not there, you walk away fast (or renegotiate with your supply base). My wife and her partner often compete with each other informally with their cost models to see who can get closest to total actually landed costs with their initial estimates. And this is before the actual sourcing work is done. The margin of error they shoot for is typically pennies on a unit cost basis (<1%) from estimates to implemented results.

When it comes to low cost country sourcing, this example clearly illustrates that there are few firms in the market qualified to offer advice. Yet even the biggest names in the consulting world will be happy to sell you a project team with impeccable credentials who can figure it out for you (they'll probably even have some great whitepapers and benchmark reports on LCCS to prove they know their stuff). Just give them a few weeks to come up to speed and learn what an incoterm actually is when it comes to an engagement.

- Jason Busch

Postscript (courtesy of Charles Dominick): “I love you, you love me, but you don't know how to source in a low cost country ...”