The US state of Ohio has prohibited the outsourcing of services to foreign countries in an
effort to stimulate the its economy.
An executive order by the state’s Democrat governor Ted Strickland last month prevents the
spending of public money on services provided offshore, highlighting “unacceptable business
consequences,” such as risks over quality, security and job losses.
The move follows the tender of a state contract in March awarded to a Texas-based firm that
ultimately used offshore labour to provide some of the service. A directive already existed to
ensure vendors listed all locations where work would be performed.
Strickland said the “incident was unacceptable” and said it prompted him to redouble his efforts to
pass this order, and the situation will “never happen again”.
“Outsourcing jobs does not reflect Ohio values,” said Strickland in a statement. “Ohioans have
been among the hardest hit by more than a decade of unfair trade agreements and trickle-down
economic policies that promoted offshoring jobs at the expense of Ohioans who work for a living.”
He added that offshore outsourcing undermined economic development and affected the US’
recovery from recession.
Strickland is no stranger to procurement reform, having signed another order in June 2008 that
emphasised a new approach to purchasing among the state government, including the
appointment of a chief procurement officer and the Think Ohio First scheme, which urges state
officials to consider contracting with local businesses.
A group of US senators are planning to introduce legislation to prevent US government
agencies purchasing goods from China.
The move is in retaliation for what the politicians see as China’s failure to join the World Trade
Organisation’s Agreement on Government Procurement (GPA). The GPA is a deal that allows
reciprocal access to government contracts.
Democratic senator Debbie Stabenow, who is proposing the legislation, told the US-China Economic
and Security Review Commission’s hearing last month that her aim was to “level the playing field”
for US firms.
“President Obama has stated this goal of doubling US exports in the next 10 years. But we will
never make it there if we can’t sell to China,” she said. “Since [China] is not a member [of the
GPA], we have very little power to get them to change their unfair policies.”
Under the proposed legislation, buyers would only be able to purchase Chinese goods when the
country is accepted to the GPA – a process that can take many years. At a joint summit between
the two nations in Beijing last month, China did agree to resubmit a request to join the agreement
by the end of this month.
Stabenow hopes the China Fair Trade Act will prevent US government agencies buying from China
until the Chinese open their market to US firms.
It is the latest step in the long-running dispute over trade between the two nations. Last year, the
US imposed tariffs on Chinese tyre imports prompting the Asian nation to complain to the WTO. In
November, the Chinese government announced that its own government buyers would have to
give preference to certain domestic goods under a new “indigenous innovation” policy.
The perception that US firms are getting rough treatment in China was repeated by one of the US
administration’s top officials, even after Stabenow had suggested the new legislation.
Speaking in front of the Senate Committee on Finance last month, commerce secretary Gary
Locke, said: “US companies operating in China are not granted the same degree of openness and
fair treatment that foreign companies, including private Chinese companies, receive in the US
market. Our goods and services are doing well in China’s market, but we know that significant
impediments continue to exist.”
The proposed bill has now been referred to the Finance Committee.
A survey of 500 businesses last month, conducted by the European Union Chamber of Commerce
in China, found 36 per cent believe regulation in the country will get worse for them in the next
two years
By Bradley Feuling
High-profile errors and recalls may have drawn attention to managing quality in the
supply chain, but buyers continue to underestimate the importance of the issue.
The past 12 months have exposed the complex nature of global supply chains today. Last year
began with an economic downturn influencing consumer demand and as a result, an adjustment to
production forecasts. This, in turn, spurred a wave of inventory reductions. Total-cost models
became a focal point to renew pressure on supplier cost reductions. Currently, in China, there is a
strong resurgence of production that has created greater uncertainty upstream in terms of
purchasing and planning. In addition, recent quality issues at some of the world’s best-known
companies have offered insights into critical supply chain dynamics.
As global markets regain stability, companies expanding in low-cost country purchasing must
consider factors extending beyond simply product cost. An understanding of integrated supply
chain management or competitive metrics such as quality-error rates, service levels and lead times
is evolving in China. But many companies continue to underestimate these significant areas. Indepth knowledge of inventory management, procedural quality, and production capabilities all play
an important role to ensuring product quality is maintained.
Quality and inventory management
Inventory placement creates a ripple effect throughout the supply chain. As in all companies, a
drastic lowering of future forecasts creates higher supplier pressure to reduce costs. This forces all
supply chain contributors to lower their inventory, creating longer lead times. As Noha Tohamy,
vice-president of supply chain research at AMR Research, says: “Many manufacturers have cut
inventories to the bone. This has made supply chains more susceptible to disruptions, as inventory
is typically used to mitigate risk.”
The problem, especially when buying from China, is inventory level variability. Most Chinese
manufacturers lack a sophisticated level of supply chain knowledge. When demand-shocks
influence production, work-in-process inventory builds up. This inventory, when left to sit for longer
periods of time, only further increases the risk of quality issues. In many cases this is due to poor
material handling.
The opposite is also true. If inventory at a China supplier is not adjusted as global production
capacity shifts, the risk of running out of stock increases. Inefficient replenishment policies not only
lead to an increase in transportation costs, but also the risk of material substitutions. Material
substitutions have lead to product recalls, which have eroded the value of brands significantly.
Cost reductions for China suppliers also commonly lower the oversight of quality. Sridhar Seshadri,
a professor at the McCombs School of Business, says: “The sudden growth and swings in volume
and rapid increase in variety, accompanied with significant pressures to stay profitable have
resulted in stress on the supply chain.”
The immediate requirement is for all suppliers to be involved in supply risk assessment. But, at
present, few companies have involved a majority of their China operations in such evaluations.
Communication breakdown affects quality
If we look beyond material flows in the China supply chain, the transfer of information becomes
equally important. Many suggest Chinese manufacturing is solely to blame for recent quality issues.
But in their research, Toy Recalls and China: Emotion vs. Evidence, academics Paul Beamish and
Hari Bapuji identified a different reason. “In 2006, about 1 per cent of all the toys imported from
China were recalled for design flaws, whereas one-twentieth of 1 per cent were recalled for
manufacturing flaws,” they found.
Demand and production planning must be aligned to further reduce costs and lower the risk of
product quality errors. This involves improved coordination with suppliers in terms of technical
requirements, along with cycle-time planning and lead-time mapping. Overall companies can
increase their visibility, which is an important element of total quality management.
The challenge often relates to distance, where few companies truly have an “on the ground”
presence in China with sophisticated knowledge to execute in these areas.
“There are short-term price advantages by outsourcing to distant, low-cost countries. But when
manufacturing is segregated from a company’s design/engineering core and its customer base, or
the design/engineering responsibilities are abdicated to suppliers that are farther and farther
removed from the intellectual culture, those benefits can be quickly and efficiently obliterated,”
reports sourcing agent MFG.com. Supplier management and product quality in China continue to
lack a harmonious integration mainly because of this reason.
Are your suppliers working too hard?
The discussion of quality and cost reduction must also include operational efficiency. In China,
many manufacturers operate 24 hours a day, seven days a week. In procurement, the common
concern is capacity. Rarely are production utilisation and the effects of over-utilisation taken into
account in the discussion of quality.
Factories with lower machine utilisation also tend to have lower error rates. More frequent use of
machines creates greater wear, often negatively affecting the quality of products produced over
time. Switching to cellular manufacturing – a process in lean production – has greater benefits.
Where appropriately applied, productivity increases, lead times are shortened, costs attributed to
inventory flows are reduced, and quality is higher. Waste and negative impacts on the environment
are often also lower. Again, most Chinese manufacturers aren’t aware of this, so information and
knowledge transfer is critical to advancing quality practices with China-based suppliers.
With the financial crisis, companies were forced to closely examine their supply chain costs. More
recently, production capacity has been the main concern. In both cases, supplier quality must be
interwoven into the global supply chain discussion.
With the increasing complexity of material, information and financial flows, ensuring long-term
competitiveness will determine which companies are market leaders. Procurement teams must
carefully review risk management strategies, but also supply chain metrics and, notably, quality
procedures. Operational improvements are critical to sustainable processes as global competition
intensifies.
The rate of European IT outsourcing deals is set to increase, according to research firm
Equaterra.
A survey of 750 firms found 84 per cent satisfaction, up from 70 per cent last year because
procurement teams have become more skilled in sourcing and managing their vendors. Service
level agreements with suppliers are now more realistic when established because purchasers have
a better understanding of what is possible from third-party outsourcing providers.
Stan Lepeak, managing director of Equaterra, told IFPSM ezine: “On average, as the scope of
outsourcing expands, outsourcing gets more complicated. Satisfaction levels are going up despite
this increasing complexity. Supplier relationship management is more complex because managing
an internal team is not the same as managing a third party in a contractual arrangement.
Procurement teams seem to be getting better at achieving what their business needs.”
More automation as a result of greater use of IT software tools for outsourcing and the
appointment of staff with experience working with outsourcing providers has also helped.
Most of the European firms - 73 per cent - say they are satisfied because outsourcing targets such
as cost savings, quality improvement and harnessing good, third-party skills have been achieved.
As a result, 54 per cent of buyers said they plan to outsource more in the future. And a high
proportion, 86 per cent, would be willing to recommend their current vendor to another
outsourcing buyer.
Equaterra’s research into IT services outsourcing satisfaction, now in its eighth year, examined
more than 2,000 contracts with total annual value of €20 billion.
The Do’s and Don’ts of Procurement Outsourcing
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By Andrew Miller, president of ACM Consulting
According to the Black Book of Outsourcing report published recently, procurement outsourcing is
the fastest-growing back office area of business process outsourcing (BPO). The market is forecast
to expand to $1.1 billion market this year - from $700 million in 2008 – and by 2012 it is expected
to pass the $3.5 billion mark, representing a 41 per cent compound annual growth rate.
Many companies realise outsourced procurement is the future, but do not know how to take the
proper steps to maximise value in these relationships. Here are 10 do’s and don’ts when
considering moving to a outsourced buying model:
Do …
1. Research potential outsourcing providers
This should include talking with their existing customers to develop a sense of how clients are
treated and the benefits that they are achieving.
2. Develop a detailed transition plan for your organisation
A transition plan should identify how staff transition will be handled, which roles will move to the
outsourced provider, which will remain in-house and which positions become redundant.
3. Retain someone to manage the relationship
Outsourcing relationships can become complicated and time-consuming to manage so you need to
retain someone with the appropriate expertise to manage the relationship.
4. Identify specific service levels to be met
You need to understand what service levels you will be receiving and what courses of action you
have if they are not being met to your satisfaction.
5. Develop a business case
Analyse the costs and the benefits - both short and long-term - to ensure that outsourcing is the
right move for your organisation.
6. Determine the scope of what is to be outsourced
Which operations do you want to outsource and which (if any) do you want to retain? The scope of
the agreement should be based on the response to this question.
Don’t ...
1. Regard this as a quick fix to your procurement problems
Outsourcing will not fix all of your internal procurement problems, so clean up your own backyard
before moving.
2. Sign a contract that has not been reviewed by someone you trust
Outsourcing agreements are long and complicated and should be reviewed by a trusted source who
can advise you on risks of the agreement.
3. Choose a company without a proven track record
You want to ensure that the outsourcing provider you select has shown proven benefits for other
clients, and can leverage their experience to improve your results.
4. Get caught up in the latest trend
Procurement outsourcing should be a strategic decision and requires a great deal of thought, as
well as being prepared for a cultural shift within your organisation.
Outsourcing arrangements can be very beneficial if organisations perform due diligence
beforehand. Following the list above will help to identify areas of concern before moving forward.