Chain of Thought

Change Rules in Your Supply Chain Game

The need to source and sell globally is running up against rising transportation costs. However, necessity being the mother of invention, I believe rising oil prices in the next year will result in shippers being able to take advantage of some game-changing supply chain options.

We're already hearing how logistics service providers (LSPs) are offering ways to help clients get around the “pay me now, get your goods much later” requirements of overseas suppliers. For example, Amerinada Distributors, LLC, a U.S.-based hydroponics supplies and accessories company, sources 60 percent of its annual inventory from a single Chinese supplier. This supplier requires payment upon order fulfillment, which can tie up Amerinada's working capital for weeks while their goods travel to them on a slow boat from China.

Amerinada is now working with UPS Capital, the financial services arm of UPS, to improve its cash flow by using that in-transit inventory as collateral. In other words, it borrows against those imports before they arrive. According to UPS, because Amerinada uses its ocean freight services, UPS can not only give the company visibility and control over the goods, but access to the value of these goods as well. That resulted in Amerinada more than doubling its revenues in 2010, according to UPS.

Tompkins Associates, supply chain consultants helping clients establish trade relations with China, notes that supplier management is a cultural process as well as a contractual process. In a new whitepaper on how “China is Changing Supply Chains Around the World,” Tompkins' principal of global supply chain services, Greg Hazlett, notes that even the best supplier relationships will suffer setbacks associated with East-West cultural differences.

Of course that leaves the door open for Hazlett to make the case for your using a logistics service provider to help identify more effective ways to work with Chinese suppliers who “might feel more comfortable conferring with on-the-ground resources to report problems or raise issues, thus enhancing the overall relationship.”

So you can not only work with a service provider to make sure your money is working for you while your goods are being shipped, but a service provider on the ground in China can also make sure that before those goods are shipped the supplier will meet its delivery dates or will institute contingencies early enough should due dates slip.

“As China's inland transit capabilities have improved, global shippers are now reevaluating commercial terms with suppliers, and in some cases, electing to take control ex-factory instead of ex-port,” Hazlett writes. “Currently, inland transport costs are likely buried in the cost of goods. Duties are levied on these product costs, and there is little to no transparency to the transport component. Managing goods ex-factory [rather than ex-port] can reduce duties, decrease transportation cost and increase cycle-time reliability as product pickup and delivery times provided by the LSP are communicated real-time via the web.”

But there's another way tables are turning in these relationships with overseas suppliers. It's conceivable that a small U.S. manufacturer with domestic markets could someday become the supplier to a Chinese company doing business in the states. Hazlett tells of a Chinese manufacturing company that developed a renewable energy wind farm in the U.S. The U.S. Steelworkers Union was able to bang out an agreement that required a significant portion of the materials to be sourced domestically in the U.S.

“Even five years ago this scenario would have seemed impractical,” Hazlett writes. “At that time, the expectation was that an American company would win the job and the components and raw materials would be sourced wherever they were least expensive – most likely China. Instead, now, Chinese manufacturers are winning large projects in the U.S. and only through bilateral negotiations does American labor and manufacturing find a way to play a supplier role. Chinese companies are also looking for a long-term domestic supplier as they continue to develop additional projects. In this case, the role of supplier and customer seem to have been completely reversed from what was expected only a few years ago.”

Global supply chains are changing radically thanks to market forces. Whether you find those forces creative or destructive depends on your next move.

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