Global Sourcing a Way to Reduce Manufacturing Costs if You Seize the Opportunity

Global sourcing is a term used to describe practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include low cost skilled labor, low cost raw material and other economic factors like tax breaks and low trade tariffs.

For global companies who have already spent lots to time, energy, and money in setting up manufacturing plants and distribution systems to take advantage of these efficiencies they have increased their competitive advantages over their smaller competition. This same competitive advantage can be found in companies who provide global manufacturing sourcing that can bridge the gap between the different countries and cultures. One of those knowledge based companies is Padtech based in Delta, B.C.

Padtech transformed themselves from a 20 year manufacturing company who saw the need to make the switch from a small manufacturer to becoming knowledge based global manufacturing sourcing company. What is a manufacturing sourcing company and where does it fit in the manufacturing industries? Good question, we asked Dan Lionello, President of Padtech what the concept is and how they reduce the cost of manufacturing for its clients.

Padtech combines its expertise of understanding the manufacturing process from beginning to end and using the knowledge of manufacturing workflow to develop a process to in the last several years which combines taking a client’s engineering drawings into a common manufacturing production document, with its relationship based global network of  manufacturers in foreign countries to create a “Manufacturing ecosystem” which has saved its clients anywhere from 15 to 50% on the manufactured cost of their goods.

Common examples of globally-sourced products or services include: labor-intensive manufactured products produced using low-cost Chinese labor, call centers staffed with English speaking workers in the Philippines and India, and IT work performed by programmers in India, China, and Eastern Europe. While these examples are examples of Low-cost country sourcing, global sourcing is not limited to low-cost countries.

The global sourcing of goods and services has advantages and disadvantages that can go beyond low cost. Some advantages of global sourcing, beyond low cost, include: learning how to do business in a potential market, tapping into skills or resources unavailable domestically, developing alternate supplier/vendor sources to stimulate competition, and increasing total supply capacity. Some key disadvantages of global sourcing can include: hidden costs associated with different cultures and time zones, exposure to financial and political risks in countries with (often) emerging economies, increased risk of the loss of intellectual property, and increased monitoring costs relative to domestic supply. For manufactured goods, some key disadvantages include long lead times, the risk of port shutdowns interrupting supply, and the difficulty of monitoring product quality.

It is some of these pitfalls or hurdles which have prevented many smaller Canadian companies from exploring further the potential manufacturing partnerships in other parts of the world. Padtech however, has created this system of where they become the middleman between the North American customer and its network of partners throughout the rest of world to ensuring the manufactured products live up to the specifications and quality required by its customers.

Padtech is essentially an outsourced service with a major advantage over a smaller company trying to do this on its own, it’s the relationships built by them over the last few decades in other cultures and their ways of doing business to ensure that their customers get what they want at the time they want. They have learned to build those bridges with the other cultures which in North America many companies do not take only a year to build but in some cases several years before a supplier will do business with an unknown prospect to them. Padtech simplifies the process even further by developing a framework which takes the engineering requirements and developing a blueprint which engineers in other countries can decipher and use much more easily than a standard engineering document from a company in North America. What this also does is reduce the risk in prototyping and gives more transparency to the process instead of having the whole process done in house.

For global sourcing the investigation is definitely worth the risk as globally production is growing and being able to potentially reduce the manufacturing cost while maintaining product quality might be able a strategy to improve profits at the end.

Written by Richard Wong, CMA                   Email: rwong@firstchoicecapital.ca

Padtech logo

TEC advisory group for CEOs meeting a day ago has the opinion that the economy in general that we are still in for more of the ups and downs of the stock market and economy in general.  This advisory group includes professional service providers from mergers and acquisitions specialists, human resource consultants, group insurance providers, merchant banker, investment wealth advisor, business advisory coaches, CFO advisor, to CEO mentors.

The majority of the advisors in the room have over 20 years business experience and have gone through some of the downturns and definitely say that the major difference today in coming out of this last recession is that no one seems to believe that we’re on our way to a major recovery, that the recovery will have hiccups and the economy will go up and come down, maybe averaging zero percent growth for the next couple of years, but potentially income taxes might need to rise in order to continue to pay for continued government economic stimulus.

For a lot of business owners they have experienced a time period where there hasn’t been either constant of great growth and their sales teams haven’t had to work really hard and make several pitches to a prospect before they become a customer.  For some regions of Canada, sales teams are being slowed down to several months before a prospect gives the okay to a purchase.  For some inexperienced sales reps this is new territory and the adage of its cheaper to get a current customer to buy than to bring in a new customer is much more relevant in today’s world.

Statistics from various agencies have shown that the economies of the world have been propped up 100% entirely from the world’s governments economic stimulus plans.  We question when the stimulus plans are done, whether or not consumer confidence will have increased to the point of taking over or whether more economic stimulus dollars will be needed.

The end result of stimulus plans will always be higher taxes, and this time around I am thinking that it will be individuals’ income taxes which will increase by a few percentage points rather than business.  We need business in order for their to be employees to pay their taxes is always the rationale behind increasing taxes for individuals.

We can hope that consumer confidence will grow in the near future so government stimulus won’t be necessary.

Written by Richard Wong, CMA     email: rwong@firstchoicecapital.ca

]]> http://firstchoicecapital.ca/2009/10/05/economy-in-yo-yo-mode-for-next-year-opined-by-a-tec-advisory-group/feed/ 0 http://firstchoicecapital.ca/2009/04/29/xenon-pharmaceuticals-ceo-interview-on-canadas-reduced-funding-part-2/ http://firstchoicecapital.ca/2009/04/29/xenon-pharmaceuticals-ceo-interview-on-canadas-reduced-funding-part-2/#comments Wed, 29 Apr 2009 23:40:05 +0000 Richard Wong http://firstchoicecapital.ca/Blog/?p=308

Part 2:  Simon Pimstone, President & CEO of Xenon Pharmaceuticals Interview

As a large part of the life sciences group in BC Simon Pimstone met with Liberal leader Michael Ignatieff on life sciences and explained the issues of funding, and you would think that it would fit in with Ignatieff’s desire to build a larger knowledge based economy and a louder opposition to the Canadian federal government’s budget would have sent that message on behalf of the life sciences community that it does have greater support, especially in the downgrade in future funding in this area.

The Canadian TV & film industry according to industry reports employed 126,900 FTE’s (full time equivalents) and the value of production was $5 billion in the 2006/2007 years.  This compares to the Life Sciences industry in Canada which produced sales of $1.9 billion but the tax breaks are not equal with the Canadian federal government and provincial government film and TV tax credits allowing up to 53.5% of BC labour expenditures on a yearly basis.

BC universities produce between 3,000 to 4,000 science graduates of which many do not find employment in Canada, yet all the life sciences is asking for is a fair share of funding to continue to find cures for different diseases that helps all Canadians and the world.    The public cost of educating students who end up working in another country is approximately $48 million (3,000 students * $40,000 expected cost of education * 40% funding from governments, estimated) .  This a huge cost only for a single province, not the entire country where the Canadian people are funding scientists to work in other countries at the end of the day.

What’s important is not providing funding on an ad hoc basis but continued basis even if its smaller amounts to foster an environment of innovation and then onto commercialization opportunities through Genome Canada, CIHR (Canadian Institutional  Health Research) and tax incentives.

Our health system is arguably one of the best in the world, some say the United States, but only if you’re willing to pay $2,000 per month.

SRED is a good funding tool starting from 1995, but really now inadequate for Canada’s life sciences sector as drug development takes much more time and money in order to recoup research funding.  It is only good for Canadian controlled private corporations, (CCPC’s) which many are not anymore because they’re too large and Aspreva Pharmaceuticals & Biovail Pharmaceuticals are some of the few companies which have profits in order to recoup some of these research that takes several years to make create a single drug.  A cap limit on SRED would even be more palatable to the sector ie. $100 million if they took off the CCPC eligibility requirement and the threshold are too low with barely any increases  since 1995.

Even if tax incentives, to entice offices in Canada such as providing tax holidays for bringing in new manufacturing facilities where they employ 200 people which are paying income tax now where they don’t pay personal income tax for the first 2 years with a commitment for 5 years residency then people would be paying taxes and spending that income in the country and province.

Allow investments earned from life science investments in 2009 and 2010 to be exempt from capital gains tax but was ignored by the federal government in the budget.   Use some of the carry forward losses that life science companies have accrued and provide a formula where say 1/2 of all carry forwards are eligible ie. 40 million and provide a cash reimbursement for 25% of the 1/2 which would result in needed funding to continue doing research to reaching the milestones.

The facts are that SRED was really designed for large company models, large drug companies, large aerospace companies, not really the Canadian life sciences sector which the majority are small companies from 5 to 150 people.  The inadequacy of updating the Canadian Scientific Research & Exploration Development tax credit system is costing the Canadian economy jobs in the short and long term, but more importantly the potential cures to the various diseases and cancers out in the world.

Written by Richard Wong, CMA     rwong@firstchoicecapital.ca

According to the BDC small medium sized businesses spend 45 to 65% of their revenue on purchasing materials and services.  This large percentage of the total costs of a business means that small savings, even 1% can mean instant addition to the bottom line but in today’s economy you can achieve even greater savings in the 10% to 20% range is possible.

Try some of the following to cut your spending:

1. Have your controller or hire a consultant do an expenses analysis
   - Review all parts of the product or service cost, break them down individually into:
   - Raw materials costs
   - Taxes, brokerage, tariffs, duties
   - Freight
   - 3rd party warehousing/logistics handling costs
   - Extra vendor charges
   - Vendor payment terms
2. Review your purchasing process on how to evaluate the best choice
   - What type of process is used for deciding to use one supplier over another?
   - How many people need to be in the decision making process, the fewer the number of people, the less the overall internal cost?
   - When deciding to purchase equipment is there a “Net Present Value” analysis of the different choices which examines the benefits over the asset’s life?
   - Have your staff included used equipment purchases as an alternative to purchasing new? Have they visited auctions?
3. Potentially sources from offshore countries
   - Start looking to buying from other countries to compare suppliers.  BDC studies show that only 42% of Canadian companies are saving money, but you could be one of them.
4. Review standardizing the number of parts in your product
5. Reduce the number of suppliers & forge strategic partnerships with a few to get better pricing, terms, or delivery.
6. Think about using technology to help track your business

Written by Richard Wong, CMA   email: rwong@firstchoicecapital.ca

Polaroid known as a maker of instant cameras and film was finally auctioned off for $59.1 million in a bankrupty protection.  This famous company had come upon hard times, but it’s interesting to note that the price tag was for the intellectual property, company, and digital and hard film collection.

Question is that does Patriarch think the company’s digital assets are worth more than the Polaroid name?  When you’ve had companies such a Sony, Hewlett Packard, and a host of camera phone makers enter in the space along with Polaroid and Kodak you would think that the Patriarch the private equity firm known for its reputation as a turn around artist it would try to leverage more of its digital assets than the previous management of Polaroid.

Written by Richard Wong, CMA     rwong@firstchoicecapital.ca

Cash flow is important anytime, but especially in today’s economic environment of tighter credit.  We know today that the credit crunch has affected the economy and that banks are now able to pick and choose who they extend credit to, how much credit they extend, what conditions they extend it to, and how they can pressure you the CEO, CFO, or owner of the business into improving your financial results to comply the banking arrangements.

Here are 5 hints to Improving Cash Flow:

1. Invoice ASAP & Follow up next day to double check client has received the invoice

• Get in the habit now of invoicing as soon as the job is done and getting it into the hands of the customer electronically, either by fax or email or if handwritten invoices spend the time after delivery to now write the invoice earlier in the day before delivery, rather than “I’ll invoice you later.” Most accounting software from Simply Accounting & QuickBooks to Microsoft Great Plains, Sage ERP, to Oracle and SAP the email invoices feature can simply be turned on.

• Now considered a best practice, be proactive you don’t want to find out 30 days after the invoice date that the customer hasn’t received it.  Customers may find this irritating at first, but you can always tell the customer that you are just trying to ensure they are happy with the product or service they received and that there aren’t any issues with the invoice.  You can say that you’re trying to improve your customer service at this time.

2. Ask for a Retainer or Deposit

• Depending on the industry or whether it’s a new client or old this is one worth trying as if you can get a deposit for goods/services ordered then paid in installments is better than waiting for the payment to come 30 days after the job or product has been delivered.

3. Offer Cash Discounts for Quick Payment

• If you haven’t offered a cash discount for payment within 10 days, ie. 2% 10, net 30 means that the customer gets a 2% discount off the total invoice if  “they pay within 10 days only” or the customer has the standard of paying within 30 days.
• Think of it as a sales discount you’re willing to give to be able to get the money in your hands earlier rather than someone else’s hands.

4. Become a Pit Bull of Receivables (Keep after them!)

• Start reviewing your aged receivables reports weekly if you don’t have a Key Performance Indicator system (KPI’s for short) and seeing if you have late paying customers how late they are get your receivables people to start action right away by either emailing them right away then calling them the next day.  Some customers need to be reminded, that’s why if you’re proactive and invoice right away and follow up to ensure they have received the invoice and processed them you’ll have to do less collections work in the end.
• Why wait, it’s your money?

5. Pay Invoices Only When Due

• Review those vendor contract terms to see when those invoices are actually due for payment rather than paying them right away because you want to get them out of the way.
• Setup online banking payments so you can schedule when payments are due and you are able to download electronic information to your accounting software.

In summary, these are some quick things to implement to improve your cash flow and also at the same time improve your customer service and satisfaction.  Protection of cash should be the CEO’s biggest concern nowadays and any ways to improve the order to cash cycle should be attempted.

Written by Richard Wong, CMA     Email: rwong@firstchoicecapital.ca

Cash flow is one of the most important things to keep an eye on at any time, but especially in difficult economic times.    Think about suppliers to Nortel and the auto industry wanting to get paid earlier than usual and you understand how these suppliers are trying to stay on top of their cash flow.  Here are 5 things you can do to conserve your cash flow.   If you’re a small business or multi-national conglomerate the need to conserve cash is important in these times.  Equity funds and venture capitalists are hoarding cash waiting for the right opportunity to invest in those opportunities which fit their profiles at this time.

1. Prepare cash flow projections going out at least 2 years.

• It’s better to be proactive, to understand what happens if your cash flow drops a few per cent andbe able to take action early.

2. Review and tighten credit policies

• Review the payment histories of late paying customers and see if they’re stretching their receivables with you.
• Start flagging late paying customers and re-do credit checks on them.  Credit is a privilege, the restaurant industry is very quick to change their credit to C.O.D. if customers don’t pay on time, other industries could use the same policies.

3. Invoice for services provided or goods delivered when they’re complete, don’t wait, the extra few days or week adds up.  Start emailing and faxing invoices instead of snail mail.

• Follow up the next day after invoices to double check customers have received their invoices.  Waiting till the end of the month to check on invoices will delay payment.

4. See if you can extend suppliers’ terms to over 30 days.

5. Renegotiate contracts with banks, landlords, telcom carriers, etc. especially if the contracts are coming up for renewal within a few months.

In summary its easier to spend money than to collect so its even more important today to try to conserve cash and collecting accounts receivable is paramount today.  By tracking your cash flow it easier to make sure you don’t get unpleasant surprises.

Written by Richard Wong, CMA  rwong@firstchoicecapital.ca