The Low-Cost Learning Curve

July 11, 2008
A good return is never guaranteed from low-cost sources, but manufacturers are learning important lessons to help improve their chances.

It might not be the best habit, but people have a tendency to categorize everything. The same often happens with low-cost country sourcing, which lumps totally diverse countries scattered all over the world into the same category of inexpensive procurement opportunities.

Many still debate whether the process itself actually varies that much from country to country. Is the strategy for sourcing from China really any different than it is from India, Turkey or Brazil? For David Hoover, vice president of strategic procurement for HNI Corp., the answer is, "No, it's not." Of course, there's a little more to it than that.

"In the end, human beings are always the ones doing the business. And everyone has an interest," notes Hoover. "The challenge, in any supplier relationship, is to understand what the other party's interests are, so that you can help satisfy them. When you do that, they will be compelled to help satisfy yours."

A few years ago when HNI, a global office furniture manufacturer, started evaluating the potential cost benefits of sourcing in China, the company took an approach that utilized its decentralized business model called "split and focus." However, while the model proved very effective on the customer side of the business to accommodate different product markets and consumer bases, the company quickly learned that the approach needed a few minor adjustments to be as successful on the supply side.

"It is invaluable to have boots on the ground working for you [in low-cost countries] -- people who speak the language and know the culture."

-- David Hoover, vice president of strategic procurement for HNI Corp.

"[Initially] we were sending mixed messages and creating confusion in the supply base, which created a lot of waste," Hoover explains. "Now we are working toward common processes intent, and developing universal systems, processes and metrics for how we manage the supply base." The new approach allows HNI to project a more "common face" to its supply base, while still respecting the operating autonomy provided within the existing model.

The transition also made clear a need to refine practices related to information sharing and how drawings and specifications were communicated to overseas suppliers. This is due to the fact that whatever challenges exist domestically can be magnified considerably when the two parties involved work 12 or 13 time zones apart and speak different languages, Hoover says.

"At the time, we thought that if we just asked the people on the other end to make it look like we said, it would all work and we would save tons of money," he explains. "And we did save some money. But in terms of the bottom-line, it didn't work out quite the way we planned."

So in 2005 the company took the next step and established an international purchasing office (IPO) located in Taipei, Taiwan, with additional offices in Shanghai and Shenzhen, China. According to Hoover, having those "boots on the ground," working to facilitate HNI's sourcing efforts in China and other low-cost countries has been "invaluable."

"It's so important to have people working for you who speak the language and know the culture," says Hoover. "HNI is a good company, but we didn't invent low-cost sourcing and we weren't the first to go to China. So the true innovation is in the relationships, and that is what will ultimately allow you to maintain your competitive advantage."

In terms of maintaining HNI's quality standards throughout these relationships, it comes back to understanding where the other companies' interests lie. Suppliers often have every bit as much appreciation for quality as a buyer does, but might not understand what standards are actually required. According to Hoover, the answer lies in taking every possible measure to ensure that your quality expectations are made crystal clear.

"You really need to invest in training efforts in order to get those suppliers to understand what your needs are. Because all over the world, we're all human beings and most people will do what you ask if you tell them what you want," Hoover says. "But you still have to learn the culture and think 'people' during your interactions with any low-cost country. Think about how people think, rather than how Americans think."

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