131002_Vietnam Supply Chain Congress 2013_How challenging is business outsourcing in Asia?
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Mr Jeffrey Bahar, Deputy Chief Executive Officer of Spire Research and Consulting, was honored to be invited as a guest speaker. In his presentation, Bahar spoke about trends gaining momentum in the outsourcing sector in Asia. He highlighted how it is crucial to understand risks involved and plan for crisis management as well prior to setting-up business offshore.
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131002_Vietnam Supply Chain Congress 2013_How challenging is business outsourcing in Asia?
- 1. 1 How challenging is business outsourcing in Asia? Prepared for: Vietnam Supply Chain Congress 2013 Prepared by: Jeffrey Bahar Deputy Chief Executive Officer Spire Research and Consulting
- 2. 2 Business outsourcing landscape in Asia The trend of outsourcing businesses and manufacturing hubs to Asia is gaining momentum Tighter governance Outsourcing of shared services Shifts in outsourcing pricing models
- 3. 3 Overcoming Concerns in Asian Market Businesses looking for more effective and low-cost sourcing other countries Asia provides an opportunity to: Reduce costs Take advantage of skilled workforce Improve business processes Crucial to understand risks involved and plan for crisis management Communication is key to doing business, while keeping cultural differences in mind Ensure availability of expertise in each country Address regulatory compliance and quality control in the agreement
- 4. 4 Doing Outsourcing Vendor Selection and Evaluation Outsourcing should be viewed as an extension of OEM’s (Original Equipment Manufacturer) strategy. The competitive environment compels businesses to manufacture quality products at a reasonable price range. Vendor selection is based on productivity level / output of the supplier Careful analysis and evaluation is required for the selection of vendors
- 5. 5 Vendor Management The Process Identify business requirement Evaluate business case – SWOT analysis Define specification to initiate RFP process Allot timesheet and tracking of payment Manage asset Identify vendor Manage contract Evaluate and select vendor Measure real-time performance Optimize vendor portfolios and enhance best practices
- 7. 7 Vendor Selection Location is Key The choice of location impacts other variables , including: Proximity Closer proximity enables frequent trips between local management and offshore center. Training Real-time training can be addressed through the option of video- conferencing. Effective momentum Common business hours would improve productivity levels and efficiency. Legal system Transparency of legal system determines the smooth enforcement of contractual terms. Privacy laws Local privacy laws would impact the protection of sensitive data and information.
- 8. 8 Vendor Selection Asian Countries Score High in Location Index Financial Attractiveness People Skills & Availability Business Environment Total score Change in rankings (09-11) 1 India 3.11 2.76 1.14 7.01 0 2 China 2.62 2.55 1.31 6.49 0 3 Malaysia 2.78 1.38 1.83 5.99 0 4 Egypt 3.10 1.36 1.35 5.81 2 5 Indonesia 3.24 1.53 1.01 5.78 0 6 Mexico 2.68 1.60 1.44 5.72 5 7 Thailand 3.05 1.38 1.29 5.72 -3 8 Vietnam 3.27 1.19 1.24 5.69 2 9 Philippines 3.18 1.31 1.16 5.65 -2 10 Chile 2.44 1.27 1.82 5.52 -2 11 Estonia 2.31 0.95 2.24 5.51 5 12 Brazil 2.02 2.07 1.38 5.48 0 13 Latvia 2.56 0.93 1.96 5.46 14 14 Lithuania 2.48 0.93 2.02 5.43 5 15 United Arab of Emirates 2.41 0.94 2.05 5.41 13 Note: Weight distribution for the three categories is 40: 30: 30. Source: AT Kearney, Global Services Location Index, 2011 Business briefing series: 20 issues on outsourcing and offshoring
- 9. 9 Vendor Selection Overcoming Risks from the Asian Perspective • Incur increased costs and disrupt business flow, due to delays in vendor selection process. • Communicate criteria for evaluating bidders’ responses against each potential vendor. Choice of vendor • Adopt a co-operative approach to improve chances of a successful deal. • Provide details on business objectives, scope of services and responsibilities as well as the pricing model. Negotiate • Establish an effective management framework to prevent poor management and miscommunication. Ensure clarity on operational, financial and strategic requirements • Engage senior management to solve problems Relations • Run risks terminating an outsourcing process • Specify different types of risks in the contract. • Update the agreed exit plan regularly and the associated costs. Exiting
- 10. 10 Vendor Analysis Reviewing Performance Reviewing vendors’ performance Process-based evaluation Performance-based evaluation Assessment based on vendor’s production or service process Assessment based on objective measures of performance
- 11. 11 Vendor Analysis Types of Evaluation Systems • Involves the categorization of selected vendors performances in specific areas defined by relevant performance variables. Categorical method • Evaluates vendor performance using standard cost analysis. Total cost of each purchase is calculated as its selling price in addition to the buyer’s internal operating costs. • These costs are associated with quality, delivery, and service elements of the purchase. Cost-Ratio method • One of the most commonly used methods. • The most commonly used factors in goods purchases are quality, service (delivery), and price. Linear Averaging method
- 12. 12 Vendor Analysis Rating System Benefits • Evaluate overall performance based on quality, delivery time, assembly complaints and services • Track performance over a specified time period Scope • Vendor Rating System can be easily integrated with any ERP (Enterprise Resource Planning) and legacy systems in an organization Features • Categorize and search vendors geographically • Gain flexibility in report selection • Approve vendors database based on merit rating. Objectives • Reward vendors who demonstrate continuous growth • Conduct continuous evaluation to track performance and measure efficiency levels in productivity
- 13. 13 Challenges in the Asian Market Challenges in the Asian Market Fragmentation Misalignment Lack of innovation Lack of standardization Sub- optimization
- 14. 14 Future Outlook The Asian market is emerging as the new hub for outsourcing businesses Apt conditions that attract businesses to the Asian region include: Labor cost savings Rapid economic growth Skilled workforce Vendor management is crucial for the successful set-up of any offshore business Vendor selection and analysis will enhance business process Selecting a vendor will become less cumbersome
- 15. 15 Spire Research and Consulting Pte Ltd 6th Floor, Phuong Tower 31C Ly Tu Trong, Ben Nghe Ward, District 1 Ho Chi Minh City, Vietnam Telephone: (84 8) 3521 8735 Fax: (84) 3521 8736 Email: vn.info@spireresearch.com www.spireresearch.com
Notas del editor
- 3 key trends are emerging:Tighter governance to ensure effective ways to handle compliance, legal and financial risk.Economic constraints has resulted in shifts in outsourcing pricing models. The volatile business landscape is constantly evolving leading to outsourcing businesses to clearly define pricing structures as well as contractual terms and conditions.Outsourcing of shared services will rise as businesses begin to see the value in centralizing work within the same organization.
- Global downturn has created challenges and forced businesses to look for more effective and low-cost sourcing other countries .Multinational corporations are on expansion mode in the region supported by positive economic conditions.This region provides an opportunity to reduce costs, take advantage of skilled workforce and improve business processes.Crucial to understand risks involved and have a plan for crisis management for future challenges.
- Outsourcing should be viewed as an extension of OEM’s (Original Equipment Manufacturer) strategyThe competitive environment compels businesses to manufacture quality products at a reasonable price range where the emphasis is on product quality.Vendor selection is based on the productivity level/output of the supplier and not necessarily on the competitive process. Careful analysis and evaluation is required for the selection of vendors who outperform competition for final shortlisting.
- The choice of location impacts other variables which include:Proximity – closer proximity enables frequent trips between local management and offshore centerTraining – real-time training is impeded by distance but can be addressed through the option of video-conferencing.Effective momentum – common business hours would affect productivity levels and improve efficiency.Legal system – the smooth enforcement of contract terms will be determined by the transparency in the legal system.Privacy laws – local privacy laws will impact the protection of sensitive data and information.
- Choice of vendorUnforeseen delays in the vendor selection process could lead to increased costs, disrupting flow of business in general resulting in no concrete objectivesIdentify business requirements to assess current services, systems and associated costs.Communicate a criteria for evaluating bidder’s responses with attention to each potential vendor.NegotiationsOutsourcing is a long-term business therefore it is vital to adopt a co-operative approach to improve chances of a successful deal.To prevent delays and miscommunication, provide details on business objectives, scope of services and responsibilities as well as the pricing model.Commercial decisions must precede contract drafting. Clarity is vital.
- Vendor evaluation is a key function in the procurement process of every organization. Therefore, an audit at the vendor’s site to assess the capability level in the supplier’s system is conducted in general.