Developing An International Supply Chain
When doing business, especially in a production role, one of the most difficult things to do operationally is to establish a functional and reliable supply chain. This is true when one is developing a supply chain domestically, and it is exponentially more difficult when you are doing it across borders and continents. In addition to culture, regulations, enforcement of contracts and securing payment terms, there is simply the logistics of moving products reliably from point A to point B. While each supply chain will have its own unique characteristics and challenges, there are some general principles that one should follow when attempting to build one.
1.) Finding A Reliable Supplier.
When you don’t have a lot of experience doing business overseas, there are even more pitfalls than normal. Probably one of the biggest is looking for the cheapest supplier of whatever it is that you are looking to import. After all, you are sourcing your product overseas because it is cheaper, and the temptation to make as much money as possible is certainly there. However, if the saying “you get what you pay for” is relevant in a domestic context, it is even much more so in an international context.
It must be remembered that you are attempting to do business in a culture that is foreign to you and source supplies from an entity operating from a country that is on a different legal system than the U.S. This may not be a huge factor if you are doing business with Western Europe, a region that has a stable legal system with lots of legal and political resources to sort out potential disputes as well as general expectation of a certain quality. However, if doing business in some other parts of the world that don’t have these factors, the cheapest option is liable to be the one that has low quality and/or is unreliable. One way to ensure some level of quality and reliability is to make sure that your supplier is making money when doing business with you. While this seems to go against Americans natural inclination to maximize profit, think of the additional cost as insurance.
2.) Talking To Business Organizations.
One place to start to find a supplier is to talk to business organizations. Most of the time, there are Country X-American Chamber of Commerce type organizations that can provide resources to companies looking for overseas suppliers. Getting in touch with that country’s embassy or consulate can also be a source of information, as embassies are always trying to increase trade for their country. You may not be a large company, but usually these organizations are very good to reach out to and get involved with. If nothing else, they should be able to point you to the people you should talk to in order to source your product.
3.) Ensuring That Your Product Doesn’t Get Slowed Down (Or seized).
When talking about a product getting seized, I’m not talking about the U.S. Customs seizing it because of a regulatory violation. You will have a customs broker here in the U.S. that will take care of that. What I’m referring to is what sometimes goes on in countries that don’t have Western-style legal systems and have some ongoing low levels of corruption. In such countries, your shipment might get held up for a variety of “infractions” or “insufficient paperwork” before it will be allowed to be exported. In extreme cases, your shipment might be seized for some unspecified reason or on “suspicion” of being relevant to some criminal investigation.
One way to ensure that this doesn’t happen to you is to recognize that business in many countries is done by connections. In the U.S., you often don’t need to worry about connections that you or your suppliers have with the local authorities, and can consequently base your decision on purely economic factors. In some countries, the connections of who you are doing business with can often determine the experience that you have as a customer. For example, if the shipment has to arrive in the U.S. before the supplier gets fully paid, then it is in the suppliers interest that things go smoothly from his end. If your supplier is locally connected, his ‘friends’ will ensure that your shipments proceed smoothly to the U.S. If he is not connected, your shipments might move, but it will likely be a slow and bureaucratic process. And if your supplier is the enemy of someone who is connected, then your supplier’s shipments (including yours) are likely to have great difficulty, and nothing will be smooth. Because of this, it is highly important that you have a bit of understanding your supplier’s political position (at least as far as whether he has powerful enemies) before you make him your supplier.
4.) Finding The Right Freight Carrier.
As part of setting up your supply chain, you will need to engage a customs broker/freight forwarder. As the purchaser of the product, you will often be the one paying the freight costs, and that gives you the power to choose the carrier. The freight forwarders have relationships with the airlines and the steamship lines. They can get lower rates than you can as an individual company, and so it will be worth your while to choose one. In addition, you will need a company that can do all the paperwork associated with importing the product into the country.
To choose a forwarder, look for one that has its own office in the country that you are importing from. Many forwarders have partner companies (agents) that act on their behalf in a given country. While this does function (I have personally done this work myself), resolving problems can be more challenging when two different companies are involved, than when the problem is being resolved internally from one company.
In addition, while large freight forwarders can get you better rates, you might want to seriously look at smaller, more nimble forwarders. For a forwarder such as this, you will be more of a priority. Also, you are more likely to develop a relationship with someone inside the company who can track things on your behalf and solve problems as they arise. The downside to a smaller forwarder, however, is that they may not have one of their own offices in the market that you are doing business in. (However, if you are doing business in most of the EU, Israel, and perhaps certain select countries in South America, it might not be critical that your forwarder have their own office there.)
In short, there will be a trade-off, and whether you want to go with a larger or smaller forwarder will largely depend on your unique situation.
5.) The Perils Of Just In Time.
A number of years ago, somebody came up with the idea of Just-In-Time (JIT) supply chains. In theory, the idea is that the products show up at your manufacturing facility just as you need them. The idea is that by setting up you supply chain this way, you don’t need to carry a lot of inventory (and tie up your working capital funds). While this concept is great when it works, under the wrong conditions it can lead to a number of problems. Those in the freight forwarding industry, know how difficult these supply chains are to manage. Moving freight from one continent to another involves many people and many hands, and there are many opportunities for things to go wrong.
If you are going to set up a JIT system, I would suggest that you always have an adequate amount of inventory on hand for supply disruptions. If your freight is coming primarily via air, then 2 weeks of inventory is probably sufficient. If it is coming by sea, then 2 to 3 months of inventory on hand would be advisable. In today’s world of 2021, you might even want to have 4 to 5 months if the sea is your primary route. My sources in this industry tell me that today ocean shipments are being delayed by months due to a variety of factors, and this is likely to be the case for at least another year. So, having an adequate amount of spare inventory on hand will be critical.
In conclusion, setting up an international supply chain is time consuming. Making sure that your supplier is connected with the local authorities is key, and trying to squeeze every penny out of the system is likely to be counterproductive to you, even in the short term. When setting up the system, looking for options that might cost more but are more likely to be reliable is likely a good move since you are more likely to get better, more accessible service. Having access to individuals who can solve problems will also be key, especially in the initial years of doing business in a country. Although it will require much effort, by following some of the principles laid out in this article, you can ensure that your supply chain will be robust and reliable as you start to use it.