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November 21, 2011

Local Sourcing Gaining Ground

Last fall, IBM announced that it had partnered with six other companies (AT&T, Caterpillar, Bank of America, Citigroup, Pfizer, and UPS) in an initiative called Supplier Connection. The purpose of the initiative is "to promote the use of local small businesses by large procurement organizations." ["A Bold Initiative to Support U.S. Suppliers," SupplyChainBrain, 6 October 2011] The quoted article highlights information drawn from an interview conducted by Robert Bowman, Managing Editor of SupplyChainBrain, with two IBM employees (a video of the interview can be seen by clicking this link -- registration required). The article continues:

"Chet Karwatowski, senior technical staff member with IBM, calls the program 'unique.' It draws on the supply chains of large corporations in an effort to spur job growth in the U.S. The idea is to channel a portion of supply-chain spend to local small businesses. ... Supplier Connection was announced in September of 2010; since that time the partners have worked aggressively to create a portal for small businesses to register and join a thriving buying community. The system went live in February of 2011. As of August of 2011, just under 200 small businesses had joined, according to John Dischinger, program director for Supplier Connection."

The article states that Supplier Connection defines a small business "as one with either 500 employees or less than $50m in revenue. That description covers some nine million U.S. companies, Karwatowski notes. Beyond that, Supplier Connection is targeting 13 commodity areas that are key to its sponsoring membership." Clearly, not all nine million U.S. small businesses are suppliers or fit into one of the 13 commodity areas embraced in the program. Nevertheless, I found it surprising that less than 200 small businesses had taken advantage of the program. One reason for this modest number might be the fact that are some hoops through which suppliers must jump before being accepted into the program. "As part of the registration process, small companies learn what it takes to be a supplier to a large business. They go through nine sections, covering areas such as security and electronic business. Sponsoring companies also provide assets to help applicants improve their position." Another reason is that IBM hasn't actually announced the formal availability of the supplier portal. The article concludes:

"The new initiative differs from past efforts in its focus on small business based in the U.S., Karwatowski says. It requires that members know much more about their suppliers than might be the case with a mere listing service. Each business fills out a comprehensive application – 'like a college admission,' Karwatowski says – and that form becomes available to all members."

Although getting registered may be a hassle, the upside potential of being a member of Supplier Connection looks large. Importantly, there is no fee associated with this initiative. To learn more about the program, go the Supplier Connection site. IBM believes that Supplier Connection will help boost U.S. job creation, but it also recognizes that sourcing locally has sustainability implications as well. The site states:

"The promotion and growth of small businesses have been identified as crucial components to improving the economic vitality of the United States. Giving small businesses the opportunity to market their goods and services to supply chains of large companies could potentially serve as a key source of revenue to be leveraged for expansion and job creation."

As I've pointed out in previous posts, analysts claim that, for every manufacturing job created in a country, eight supply chain jobs are also created. That means that Supplier Connection could benefit from the creation of more manufacturing jobs in the U.S. as well. John Westerveld, a demo architect for Kinaxis, reports, "The on-shoring or near-shoring movement is gaining speed. This is the idea of bringing manufacturing back to where the demand is." ["Will on-shoring be the trend for 2011/2012?" The 21st Century Supply Chain, 15 June 2011]. He continues:

"Let's look at some advantages of putting manufacturing where the demand is:

  • Time to market can be significantly improved
  • Less risk to intellectual property
  • Lead times are reduced and are more consistent
  • Given reduced and more consistent lead times means inventory levels can also be reduced.
  • With fuel prices going through the roof, reducing the overall distance traveled for our manufactured goods can only help the bottom line.
  • Reduced product travel also impacts the overall carbon footprint for the product, a factor that is starting to become more and more important in the eyes of the consumer and governments.

"I've always been in favor of manufacturing near where the majority of the demand is (See my blog post from last year here). I think when companies look at the overall costs associated with offshore manufacturing, more will realize that manufacturing where their market is just makes sense (and dollars too)."

Westerveld cites a post written by Clare Goldsberry in which she refers to a study by Accenture. ["Offshoring loses some glamour, or how JIT became 'just-in-case'," Plastics Today, 10 May 2011]

"[According to management consulting firm Accenture,] 'Companies are beginning to realize that having offshored much of their manufacturing and supply operations away from their demand locations, they hurt their ability to meet their customers' expectations across a wide spectrum of areas, such as being able to rapidly [meet]increasing customer desires for unique products, continuing to maintain rapid delivery/response times, as well as maintaining low inventories and competitive total costs,' and that 'managing supply operations that are separated far from where demand occurs has weakened their overall operational planning, forecasting and general flexibility, while in some cases driving up costs with the need for complex network management. In some cases, this situation has limited the companies’ competitive advantage.'"

If it makes sense to manufacture near where demand is, it also makes sense to source near where manufacturing takes place. That applies to manufacturing anywhere in the world, not just in the United States. Steve Hall asserts that some critics believe that local sourcing is simply a buzzword. He believes, however, that local sourcing has "value of which businesses are becoming acutely aware." ["Making local sourcing and local content a business imperative," Procurement Blog, 28 September 2011] Hall discusses an interview he held with Tim Bass, CPO for BP in Angola.

"'There are tangible gains and intangible ones,' he says. On the tangible side – the sort of results that can make the business take notice: 'We can get better safety and operating risk performance, faster response times and ultimately lower long term costs. Ultimately, we see these strategies as creating long-term value.' Intangible; it adds value for stakeholders and builds trust among the people BP Angola works with, not to mention provides a key prerequisite for entry into Angola."

Tim Burt believes that through local sourcing "businesses and procurement make a real difference in the world." ["Local procurement winning hearts and minds", Procurement Blog, 23 June 2011] He explains:

"One of the key presentations at the [Procurement Leaders Forum in London] came from Andrew Hinkly, CPO at Anglo American on local procurement. He spoke about Anglo American's initiatives ... and how [they are] not only increasing its involvement in local procurement but also developing local suppliers, which is improving the lives and communities in which Anglo American operates."

Burt, premium content writer for Procurement Leaders magazine, also references an article by Ross Tieman in the Financial Times in which Tieman claims, "The procurement policies of multinational companies can shape the prosperity of communities, regions and nations." ["Procurement: Groups use purchasing power to combat poverty," 22 June 2011]. Tieman continues:

"Many [multinational companies] are now trying to use their purchasing power to combat poverty, but the task is complex. Demand is only half the equation. In emerging economies, they have also to nurture capacity among small farmers and entrepreneurs even as they offer them a market. When they succeed, the effects can be striking."

Tieman goes on to provide examples of how local sourcing has made a significant difference. He indicates that these local sourcing initiatives are "driven by enlightened self-interest: the need to refresh a flagging supply chain to ensure its sustainability." In his article, Tieman also talks a bit about the fair trade movement. He writes that more and more companies are selling products that carry "the label of the Fairtrade Foundation." To learn more about that movement, read my post entitled Wages at the End of the Supply Chain. Tieman continues:

"Paul Willgoss, head of food technology at [Marks and Spencer, the UK-based retailer], notes that procuring Fairtrade tea, coffee, wine or green beans, which are popular with customers, does not let multinationals off the hook in terms of social responsibility. 'We have a set of global sourcing principles that we apply across our business, regardless of whether the product is Fairtrade or not,' he says. But when companies work directly with suppliers that invest in schools, healthcare and buses to get people to and from work, 'there is a danger of developing a paternalistic arrangement', says Mr Willgoss. The Fairtrade system puts matters in the hands of the community, empowering local leaders to make the development choices. Yet amid the focus on poor farmers, the capacity of multinationals to boost wider economic development is often overlooked."

Tieman also interviewed Andrew Hinkly, who was mentioned above and is group head of supply chain at Anglo American, the mining group. Hinkly told him that the success of the company's initiatives "shapes Anglo American's approach to enterprise development in Chile, Brazil and elsewhere." Tieman continues:

"'Our focus is on leveraging our procurement spend,' [Hinkly said, '] which was more than $10bn in 2010, to build resilient local supply chains that foster economic and social development in the countries where we operate.' David Noble, chief executive of the Chartered Institute of Purchasing & Supply (CIP&S), says governments have noted such achievements, and 'in Africa are imposing local sourcing requirements where they can'."

IBM and its partners in Supplier Connection obviously believe that local sourcing is not just beneficial for developing countries. In developing countries, however, exactly how local sourcing initiatives are best implemented remains unclear. Tieman concludes:

"Aided by a joint United Nations-CIP&S programme that is training procurement officers, many states are also trying to strengthen their own ability to buy locally. The power of procurement to create prosperity is now widely recognised. But companies, communities and governments are still learning how to use it to best effect."

The Supplier Connection initiative will also learn lessons as it grows. Nevertheless, more and more analysts are coming to accept that local sourcing initiatives can play a major role in improving local, regional, and national economies.

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