Taking steps to success

Launching a sourcing operation in the Far East is not always easy. Adam Woolliscroft highlights some potential problems

Littlewoods has had a presence in Asia in some form for more than 35 years, starting with a chap in a Panama hat doing some buying. More recently, changes have resulted from the merger of a series of disconnected cost centres into a single legal entity called Source Direct International.

This evolution made setting up a structure for an International Procurement Organisation (IPO) easier than starting from scratch, but still highlights the issues.

The biggest hurdle, by far, is the time, effort and, importantly, investment needed to set up a successful office structure.

Good sourcing is about delivering the right product at the right price, of the right quality, and on time. It needs to be ethically source and, ideally, it needs to be able to add value that the competition can’t.

To deliver all this, you need a good team of people. Recruitment is time-consuming, especially when you are looking for staff with particular abilities such as being able to communicate well in English.

The team also needs the skills to find the factories, rather than using agents, which can partner with your specific needs. This in itself is a mammoth task. They must merchandise the product through all the stages from brief to delivery, often with the help of some systems investment, while ideally ensuring elements of both quality assurance (prevention rather than cure) and also the final quality inspection, as it is better to identify a faulty product in Asia before you incur any freight costs.

On top of this, in order to add value and provide a better service than current agents or other UK sources, there is likely to be product design input, research and technological skills to ensure that you keep pace with market trends, latest materials and how and when to use them.

Wage costs are generally cheaper in Asia but these still add up to a significant investment. Throw in fitted-out office space, IT infrastructure and support, finance, HR and logistics resources and it all adds up.

This also assumes that just one office is needed which is far from ideal. Offices solely focused on China have had a tough six months.

First the Renminbi was revalued, effectively making Chinese products two per cent more expensive, then the quota on garments was reintroduced. Products, especially clothes, rose in price significantly.

Bangladesh has also had an interesting year, with the impact of Chinese quotas being removed, which meant that the competition’s cost prices fell, followed by serious flooding and then finally some political turmoil and repeated bombings.

In order to manage this exposure there is a need to spread sourcing offices across Asia. This is the most effective method to source the most appropriate product.

From a sourcing perspective, each country has its own specific benefits covering, for example, labour rates, availability and cost of the raw materials, manufacturing skills, accessibility for buyers or the head office and shipping time to the UK. These all need to be understood and constantly monitored.

This gives the flexibility to move sourcing of a specific product to the best country to satisfy the above criteria whilst considering fluctuations in economic, natural and other influences. Garments sourcing from China can be switched to Bangladesh, India or Sri Lanka. More offices equals more investment, of course.

The nature of the lead times involved in sourcing products from Asia means that all the capabilities need to be in place and ready for action at least nine months before the product is due to ship. Steps to establish the structure would need to begin even earlier. Entities need to comply with local legal and tax regulation which is time-consuming and potentially costly.

Finally, a profit-driven organisation needs an income to cover the costs. The income is generally triggered by shipment, representing completion of the service provided by the office. As shipment takes place six months from the start of the process, every shipment is effectively an investment six months before the associated cash inflow is received. This ties up working capital. Of course, this also assumes that there are sufficient volumes to cover the costs from the beginning, which is unlikely.

An Asian sourcing office can be established in a number of ways. It’s cheaper and easier to set up one office but this is at the mercy of Asia’s fluctuations. A fully- fledged operation involving significant cash investment and a long-term strategic view will ultimately generate greater profits.

Adam Woolliscroft is financial director of Sourcing Direct International