With global procurement no longer the domain of just multinational retailers but also increasingly that of local retailers, the pace of global procurement has reached record levels and volume is expected to grow over the next several years. The result is a seismic shift in the global economy. But few companies seem yet able to manage global sourcing effectively. The main challenge for global sourcing is that consumer preferences vary by market.
Elsevier Food International Vol.8, No.4, November 2005
Len Lewis

Global sourcing and procurement is being adopted as a competitive strategy by supermarket chains. But will it continue to grow and what will it take for retailers to manage it effectively?

School and office supplies from China, apparel from India, produce from Mexico, seafood from Chile, home electronics from Korea, beauty care products from France, British beef and Australian lamb. Welcome to the global mall where the shopping aisles are virtually endless and retailers, frantic for bargains, are filling up their carts.
The pace of global procurement has reached record levels and volume will continue to escalate over the next several years despite such pitfalls as erratic delivery schedules, foreign exchange management, tariff and quota restrictions, unstable political regimes and economic and social turmoil.
Why put up with the hassles? Simply, global sourcing is just unavoidable and a matter of survival. Retailers and manufacturers have been forced to take advantage of low labour and production costs in overseas markets because it can lower their costs anywhere from ten per cent to 35 per cent, while providing better margins and a broader portfolio of branded and private label goods. Mark-ups alone make imports worth the effort. For example, for every dollar of import value from China, US businesses add US$3 or US$4, according to some analysts.

Locals go global
“Global procurement is no longer the domain of just multinational retailers,” said Ethan Sinick, vice president, Europe, Management Ventures, London. “More and more we see local retailers developing sourcing offices in key countries or having a central sourcing desk at headquarters. Ten years ago, they may have had an office in Hong Kong. Now it’s common to have multiple offices in China, India, Bangladesh and Latin America.”
In fact, global sourcing is now going beyond passive buying. In the chase for savings, major retailers like Carrefour, Metro, Wal-Mart, Target and others have set up global sourcing centres in China’s interior provinces and others in the southern city of Shenzhen. Furthermore, some retailers are now teaching Asian sources how to design and manufacture goods for the US market. The result is a seismic shift in the global economy and massive restructuring of production with jobs moving from Europe and the US into Asia’s tiger economies.
Some experts believe that China alone accounts for 80 per cent of all seasonal goods and is being described as the “factory for the world” in apparel production. This is underscored in a recent global procurement study by A.T. Kearney, which found that 72 per cent of the 275 companies surveyed expect to source from China by 2009, compared with 30 per cent in a similar 1999 survey. Additionally, 59 per cent plan to source from eastern Europe and 50 per cent from India by 2009 – triple that of the 1999 study.
In order to handle the increase, Target Corp. is building a 186,000 square meter import warehouse in Savannah, Georgia, a rapidly growing international port. The facility, slated for completion in 2007, will initially employ 200 people and several 100 more after the first few years.
In the UK, Wal-Mart-owned ASDA will be improving the logistics and distribution of imports with a dockside import centre at Teesport in northern England. The proposed facility will receive 70 per cent of imports and save the chain two million miles a year on the roads, according to a report in Planet Retail. At present, ASDA receives imports at Southampton and Felixstowe in the south, then ships products north.
Even Asian companies that are net exporters are beefing up imports. This is the case with Lotte Mart in Korea that is hoping to reduce the cost of goods by 15 per cent to 20 per cent by increasing direct buying from China.
However, few companies seem prepared to manage global sourcing effectively. Only 53 per cent have category strategies that indicate a clear understanding of the supply chain and logistical costs associated with emerging market alternatives. Only 41 per cent make emerging market skills and language capabilities a high priority for their sourcing organisations and only 39 per cent plan to increase their supplier base from global sources. John Blascovich, vice president of A.T. Kearney and study leader noted: “Companies are chasing savings through overseas sourcing, but their internal structures are likely to prevent the full benefits of these savings from occurring. […] They need a sharper understanding of new markets and waiting too long to develop the right strategy could mean losing access to scarce, capable resources and the competitive edge they provide,” he said.
As such, the study also found that 60 per cent of respondents are using global procurement to set corporate strategies and two-thirds are actively pursuing product innovation. The latter is particularly important among CEOs who see global procurement as a way to create value beyond just cost reduction.

Wal-Mart’s world
Wal-Mart, among other multinationals, is a perfect example of active participation in foreign markets. The world’s largest retailer acquires more than US$15 billion in goods annually from Mainland China and, accounts for over ten per cent of all Chinese imports into the US – mainly in such categories as toys, electronics and shoes. At last count, the Bentonville, Arkansas chain had procurement offices in Dongguan, Shanghai and Putian as well as in Shenzhen and nearly 600 people in China to negotiate prices and buy a wide assortment of goods.
If Wal-Mart were a country, it would be China’s eighth largest trading partner, ahead of Great Britain and Russia, according to estimates by David Lampton, professor of China studies at Johns Hopkins School of Advanced International Studies in Washington, D.C.
However, this pervasive presence can be a negative. Recently, the International Labor Rights Fund in Washington, D.C. filed suit against Wal-Mart, accusing the chain of failing to insure that suppliers in five countries adhered to the chain’s own Code of Conduct for fair labour practices. This includes such labour rights violations as forced labour and denial of minimum and overtime wages at factories in China, Bangladesh, Indonesia, Swaziland and Nicaragua. At press time, Wal-Mart was looking into these allegations.
“Overall, I think we need to promote ethics in business. Globalisation gives you the chance to make big money quickly without the responsibility and retailers are growing so quickly that they are being held responsible by consumers,” said Bernd Hallier, an economist and executive member of the European Retail Academy, a Cologne-based academic network, set up as a catalyst for high-level retail research and education.
“Fifty years ago, small mom and pop stores just sold brand goods and if something was wrong, the focus was on the industry that produced it. Now, the focus is on the retailer,” he said, noting that this can be dangerous when it comes to overseas purchasing of food products or even just products by companies within the European Community.
Moreover, the issue is more than just ethics. “If a retailer is importing strawberries from Spain and someone in Munich takes samples at 6 a.m. and finds chemicals, the news gets out immediately and no one buys strawberries from Spain. Worse than that, people think a retailer who is selling strawberries from Italy is relabelling the product. This can be disastrous since sales of all strawberries break down no matter where they’re from,” said Hallier.

Breaking down borders
Even though European countries are close together, they still have different languages and laws that affect trade. It is far different than it is in the US. “The first step in global sourcing is to do something about Europe. I think we have to pull down borders in Europe that are upheld for protection,” Hallier said. “I’d say that 90 per cent of the negative messages about British beef in the wake of the news about Mad Cow disease was pushed by farmers who said that anything from outside Germany might be dangerous. The French did the same thing.”
As long as Europe was dealing with lower levels of globalisation, such as adding a few countries at a time to the EU – integration and new regulations could be dealt with quickly. ”But suddenly we have ten new countries in the EU. I don’t see increases in tariffs and import restrictions at the moment – but there could be. Also, if imports from developing nations continue, we could get more political pressure. It could even lead to communism,” he said, noting that “if global competition leads to unemployment, people could think longingly of times when they had a job under communism.”
As such, global sourcing could increase or decline depending on the economic outlook in other countries. “But we have to slow down bureaucracy. It’s a terrible idea to leave things up to politicians and bureaucrats,” he said.
Management Ventures’ Sinick agreed that bureaucracy can put a damper on the flow of goods. “From a customs and processing perspective, it may be harder to get product in than it used to be. In Europe recently, certain retailers were having problems getting product in from China because they exceeded their quotas for the year.”
However, some barriers to global sourcing and the complexity of doing business internationally are rapidly breaking down. “You no longer have to fly people over to visit factories. There are so many trusted intermediaries to handle logistics and all kinds of clearing houses to facilitate business that didn’t exist five or ten years ago,” he said.

B2B exchanges
This includes the B2B trading networks such as Globalnetexchange. “The exchanges have helped a little bit but not as much as they’d hoped or dreamed about four or five years ago. But we are seeing more and more Internet auctions and dotcom sourcing is growing and becoming more important. It’s just not taking over the world,” Sinick said.
There are not really any negatives associated with B2B trading. “The issue is more about moving from strategy to process. Dotcom sourcing groups were set up as project teams within purchasing, logistics or IT. But there still aren’t many retailers in which B2B is fully integrated into the buying process,” according to Sinick. “It’s also created some confusion within retail. You have a project team that’s trying to drive this through and a buying team that has its own way of doing things. The two are not always aligned on how the process should work.”
As such, B2B has not fully levelled the playing field between large and small retailers when it comes to global procurement, but has reduced the gap. Additionally, it has not eliminated face-to-face meetings. “Value-added manufacturers still have to talk about marketing programmes and the value of their brands. That can’t be done online. On the other hand, procurement can be accelerated. We get a more efficient use of time when retailers and manufacturers sit down together and talk about new initiatives rather than just negotiating price.”
Asked about organising global sourcing at retail, Sinick said there is no simple answer. Retailers like Costco, Aldi or Lidl which run narrow assortments, can handle it on a semi-informal basis by having regional offices with access to the best source of supply take the lead in negotiations. For retailers running tens of thousands of items, global procurement has to be more systematic and centralised. “This is the Tesco, Auchan, Metro, Carrefour, Wal-Mart model. It’s centralised and able to flag item purchases in multiple geographies,” Sinick said. “In these cases, it’s more efficient mathematically to have one person coordinate the category globally, versus people in local markets.”

Meeting local preferences
However, the fundamental challenge for global sourcing now and in the future is that consumer preferences vary by market. The question then is what can a chain have that is common globally and what needs to vary by market? “In some cases, you can procure globally for products like batteries, film and light bulbs. But even something as simple as a toothbrush can have significantly different configurations. “You can’t become so obsessed with lowering cost that you fail to meet local preferences,” he said.
ASDA is steering clear of this trap by building business with one local supplier as well as imports. The company has a local sourcing team at headquarters and 90 per cent of stores now sell about 2,500 products sourced locally.
“As a retailer, one of your core competencies has to be what to buy for your shoppers. The most basic pitfall is the desire to buy a single product for the world. But in the end, a retailer makes money not on what they buy a product for but the difference between what they buy and sell. Ultimately, it’s about units and having the right product. Getting that right is the hardest thing to do globally,” Sinick said.
Sinick, as other observers, firmly believes that global sourcing will continue to grow. But he conceded that the supply chain can only be stretched so far. “A lot of apparel retailers in Europe, for example, are starting to move supply back from China to eastern Europe because the fashion cycles are so fast they can’t get product turned around fast enough from Asian sources anymore. Moreover, as you look at the global distribution network, there’s a finite amount of container capacity available.”