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Publication 4/2008

Offshoring Purchasing Activities to Costa Rica

by Markus Schaefer, December 4, 2008

Offshoring of IT- and other activities have been discussed and implemented in many companies. But is offshoring also an option for Purchasing activities?

With the upcoming world economic crisis companies need to be smart to survive. Increasing cost pressure will force companies to become more productive. Action plans will foresee a cut down of workforce and increased pressure on the procurement departments who have to ensure to buy goods and services at lower costs. It will become very difficult to justify to the management that more resource in the purchasing departments are required

What can companies do in such situations actively?

I did many spend analysis and have to confirm that the famous 80/20 rule (with around 20% of the orders you are covering around 80% of the purchasing spend) applies for the majority of companies. But why blocking expensive internal resources for low value sourcing? Isn't it the low value, partly completed requisition which is costing you the majority of time? Why are you not thinking having a third party in a low cost country doing this work on your behalf?

But why Costa Rica?

Costa Rica is from a security and politcal point of view, one of the most stable low cost country, in the world! On top of that Costa Rica is having an excellent free public education system. Costa Rican experts are having a very good reputation for its strong engineering and management skills. Still the labor costs are, compared to developed countries, on a very competitive level. Other low cost countries (LCC) are rarely demonstrating such a broad range of experts.

But why CALIDA-D?

CALIDA-D is having excellent know how in procurement due its European roots and the essential infrastructure with high-speed Internet access. Our office building is equipped with state of the art IT technology. We are able to provide you with solutions, tailored to your company's processes and needs.

Learn more about CALIDA-D Services related to Offshoring and Outsourcing here:

Publication 3/2008 

Financial Crisis = Economic Crisis?

by Markus Schaefer, Oct. 15, 2008

The today’s news are full of scary notes. Renowned banks have to declare bankruptcy from one week to the other. The financial world is close to collapse, governments all around the world have to stabilize their financial systems to avoid a total crackup. Analysts are telling the nervous economy that this is just a financial but not an economic crisis. What a fool to beliefe!

The financial world and the economy are going hand in hand, meaning if one goes bad the other is suffering sooner or later as well. A good economy “health” indicator is the stock exchange. If the indices are going up respectively are high, investors are attracted to put their money in stocks of companies which, most likely, will achieve high profits to the benefit of its investors. These investments are helping the companies to capitalize their market value. In addition a high market value protects companies from hostile takeovers. What we can see today is that, initialized to the financial crisis, renowned companies were losing within a few days a lot of its market values.

But why is a Financial Crisis having impact at the Economy?

With the financial crisis the cash-flow between banks has almost come to a deadlock. Banks discontinued giving credits to other banks. This freeze might lead into the following Domino Effect:

  • It will become very difficult for financially stricken companies to get new credits or prolongate existing credits, with the result that some of them will run into bankruptcy.
  • The majority of multi-billion companies, independent of the industries, achieve immense profits at the capital markets with a one-to-one impact on the company results. Loosing money on the stock exchange will result in less profit in the books of these companies who calculated and announced this profits already in the profit forecasts. Most likely we will see soon that many of this companies have to revise their profit forecasts.
  • Lower profit forecasts are resulting in less attractiveness for investors - decreasing share prices - less taxable income - less public revenue. We better stop to continue the resulting chain effects of all these impacts.
  • In order to fill the gap of the lost financial income, planned investments will be postponed, stopped or canceled. It will be tried to cut down the costs as much as possible. An increasing unemployment rate can not be excluded.
  • The fear of becoming unemployed might finally lead in an investment stop in the private sector as well, which in the other hand might block companies to sell their goods or services. Forerunner might be the automotive industry.

What can and most likely will companies do to become again attractive for investors?

Cutting costs in order to increase their EBIT margin is one of the actions which can show positive impact within a short term timeframe. Cutting down labor costs is something many companies do. But how to ensure daily operations with less resources? Optimize Resources is the key. How this can be done please read in our section “Optimize Resources”.

 

Publication 2/2008

UN Global Compact - Tiger without teeth?

The UN Global Compact which has been established to force leaders of the industries to incorporate social and environmental components in their procurement decision, has now almost 10 years after its introduction, not significantly improved the situations in the developing countries. But why?

I think that there are just a handful of persons in the world who are saying that the 10 principles of the UN Global Compact are false and do not deserve to be considered. That the business leaders are supporting this idea in general demonstrates the growing number of companies who are signing up for it, although the success stories of significant changes in the developing countries are rare to find.

What’s in it for me?

The first, maybe hidden, question a good economist is asking if you tell him to change his business practices in favor of the UN Global Compact is: “what’s in it for me, respectively my company”?
There are just two main reasons why a company will go and change its business practice. First, the assumption to increase sales or second, the fear to loose it. With its current setup the UN Global Compact does rarely support any of these two reasons.

Let’s analyze a little more the first “change reason”

The end-customer is playing the most important role in this “game”. I am working now more than 5 years in UN Global Compact related matters. When I am telling friends what I am doing, most of them do not have any idea what the UN Global Compact is all about. When I am explaining them a little bid (most of the times using the famous Nike case) what it is they can slowly follow. This, to me, is a clear indication that the “public relation” from the UN is not targeting this group in a way that creates sufficient attention. As the end customer, who finally is buying the goods or services, is rarely aware of this program, this is not influencing their buying decision. Conclusion: If this is of no importance to the customer, the manufacturers have no reason to change. I think that this would change drastically if the customers would be sufficient informed about the program and could identify which manufacturers do support the UN Global Compact principles and who not. For example in Germany customers are aware if a manufacturer is supporting the German recycling program “Der Grüne Punkt” or if the product has been security tested and labeled with the TÜV or GS (Geprüfte Sicherheit) sign. Such labels do impact the buying decision which, at the end of the day, is paying back to the manufacturers who do follow the procedures necessary to get the respective certificate. That this is working well is shown in the circumstance that even manufactures in developing countries do certify their products with the respective certificates. Up to now no label on the package is telling the end customer, that the product he is going to buy was produced under the conditions of the 10 principles of the UN Global Compact or not.

Now let’s have a look in the second “change reason”, the fear to loose revenue

As far as I see, the main driver to consider the 10 principles of the UN Global Compact is laying in this reason. Product boycotts in the past and action plans taken by affected companies are confirming this theory. With other words, the UN Global Compact is nothing else as an additional subject in the supplier risk management. This circumstance is shifting the execution from the “sales department” into the “purchasing department”.

Problematic

The main objective of a purchasing department is usually to get the goods or services needed to the lowest possible costs. Normally the success of a buyer is measured in savings he could achieve. This target can be contradicting to a company’s commitment to the UN Global Compact as products from “secure” vendors might be more expensive. On the other hand, the buyer is having just very limited resources and ways to ensure that his suppliers are also following the 10 principles of the UN Global Compact, but why? The answer is simple. At no point the Global Compact is delivering measurable figures which allow a buyer to check a supplier’s compliance. For example, child labor. No age has been defined up to which a human is considered to be a child. Is it 18, 17, 16, 15 years (who votes less…)? To find a solution for this, several industries went ahead and defined measures for the principles which also allow a company being audited against. As these codes are industry specific it can be that for example a construction company is compliant with the rules when he is constructing a building for the textile industry but is none compliant when he is building the same for an automotive industry partner. Aligning these “sub-codes” into one ultimate code is something which should to be done. Once this step has been performed, it could be considered to introduce an UN Global Compact certificate.

 

Publication 1/2008

Purchasing - World in Transformation

by Markus Schäfer

The traditional role of purchasing and buyers is going to change. In many companies the purchasing department was a "transactional" instance within its supply chain. Its strategic role was mainly to get the necessary goods and services, in-line with the requested requirements, in time with the ordering date, to the lowest possible price. Nowadays purchasing is getting in addition to that a role as "Company Image Protector".

What has the image of a company to do with its supply chain?

That dubious companies are frequently getting attacked from various organization such as e.g. Greenpeace once they discover illegal or inhuman practices from companies or institutions is nothing new. Thanks to that many companies are thinking well how to conduct their business. A new stage was reached when serious companies, like e.g. Nike, Mattel, GAP etc. were getting attacked because of dubious business practices from there suppliers. Next to the heavy damage of the company's reputation, sales boycotts brought some companies into serious difficulties.

The UN Global Compact

To avoid inhuman business practices, the former Secretary-General of the United Nations Kofi Annan introduced back in 1999 at the World Economic Forum in Davos to representatives of various industries the so called "Global Compact" to make them aware of their social responsibility in respect of:

  • Protection of Human Rights
  • Environmental protection
  • Labor practice
  • Anti-Corruption.

At this forum, the invited leaders of the industries and the representative from the United Nations agreed on 10 principles which should be considered when doing business.

How can compliance from a Supplier be ensured?

At a first look, the actions to be taken to implement the UN Global Compact are sounding simple. Agree to the principles of the Global Compact, committing the company to the principles and sign off the Global Compact,  and establish respective policies and guidelines. But it is not done with just these actions. First of all do the 10 agreed principles leave room for interpretation e.g. when it comes to child labor practices. No age has been defined which is telling you until which age a kid is still a kid! Some industries took this issue and defined own Industry Codes which are defining on a more detailed level such unclear points. But this practice leads to other questions. Which code does apply to whom? Supplying goods or services to one industry group might be compliant but selling the same products for another industry group might lead to none compliance. Other questions are comming up. Are country specific or industry specific variations of the Global Compact allowed? Are exceptions allowed and if yes to which degree are they acceptable?

How far need to be gone with the commitment to the Global Compact?

This question is leading to discussions. Is it just applicable for the own operations or is it also mandatory for its supply chain, meaning its suppliers? But wasn't exactly this what the initial idea was all about?

Implementing this 10 principles in an own organization is fairly easy. For ensuring compliance to it companies have to take 8 basic steps:

  1. Commitment to the Global Compact
  2. Align company vision & mission
  3. Imbed the 10 principles in existing company policies and guidelines
  4. Inform employees
  5. Perform training programs to employees and associates
  6. Analyze existing processes on compliance to the 10 principles
  7. If necessary, take corrective actions to become compliant
  8. Monitor compliance

But how can compliance to the Global Compact be ensured when it comes to a company's supply chain?

Once you are reaching this point the real challenge is starting and many questions are coming up. What kind of actions need to be taken to get this issue under control? You might say that this is not an issue, simply make the rules of the Global Compact part of your general terms and conditions in your contracts! Honestly, this solution is all other than sustainable as it is failing the initial idea and spirit of the Global Compact - the Corporate Social Responsibility. Given you would follow the mentioned solution. What will happen if once just one of your key suppliers is a proven "black sheep"! A simple phrase in your contract will not protect you for negative press, boycott requests, damage of the company image etc.

What can be done? How to find out if one of your supplier is not conform with the 10 principles? What to do if such a supplier has been identified? Many more open questions are coming up once you are going deeper into the topic.

To reduce the risk of a public accusation because of none compliant suppliers (e.g. Nike) different tools and mechanisms need to be introduced and implemented. How to mitigate or minimize this high risk needs special expertise which CALIDA-D can offer to you.

To learn more about the service CALIDA-D is offering in respect of the UN Global Compact click here: UN Global Compact or click UN Global Compact in the header line.