revenue is generated –– here in the US, if that’s the case?

Jim West: What does need to happen is for companies to apply the same rigor that they have to direct suppliers –– and perhaps more –– to suppliers further from the home office. What we advise is that if you intend to source from, say, China, you need to have a presence there, to educate local Chinese nationals on your company’s values, and let them make the sourcing decisions. They need to be trained in how to evaluate a potential supplier’s financial, operational and ethical performance, and to look at other things besides merely the piece price of the product or ingredient.

 

Companies also need to look at the total landed cost, and take a risk-based price view. If you do a risk-based price analysis, taking into account the factors you mention as well as transportation, inventory holding, taxes and tariffs, and a factor for risk, you might be surprised to find that, on balance, the competitiveness of your more traditional, more local suppliers is greater than those offshore.

Your appetite for risk also needs to be factored into the equation, because the consequences of an incident are not entirely quantifiable. If you’re talking about one of your company’s front-line, high-profile products –– especially a food product –– perhaps you decide not to take any risk, so you may decide to go with a higher-priced, lower risk, local supplier.

GMA e-Forum: How typical is it for companies to do this?

Jim West: Today, the fact is that we don’t see many companies, other than those on the leading edge, who take into account all the risk dimensions when they make their sourcing decisions. For the most part, decisions are made on piece price or total landed cost, because purchasing has been incented to get the lowest price per piece or pound. But today, given cost of transportation, the geographic and political risk factors that go into the true price of a product, it might well be cheaper to get your ingredients from a supplier in Chicago, rather than from one in China.

GMA e-Forum: Almost three-quarters of respondents to your study said that reducing costs was the main reason for sourcing globally, yet one-fourth of these noted that their companies did not know what their savings were, and half could not measure the hidden costs caused by monitoring suppliers and complying with social and

environmental standards. How is that possible?

Jim West: Many companies don’t necessarily look at all the factors that make up total landed cost –– the cost of monitoring or not monitoring, for instance, or the cost of lost shipments and damaged goods. Or the cost of sending things back across the seas or scrapping it here, because the quality is unacceptable. There are many variables, and few companies factor all of them into their landed-cost calculations. Even the most sophisticated companies rarely take everything into account.

 

In today’s world, people need to be thinking of all the costs as previously mentioned and also considering the “risk adjusted cost” of a product.

 

GMA e-Forum: Should there be a different level of risk assessment for food, or anything people put in their mouth? As you note in your report, Trader Joe’s has simply stopped stocking anything with ingredients from China. At another high-end supermarket, we recently picked up a colorful lollypop at checkout, thinking to give it to a friend’s daughter, and saw that it was “Made In China.” We dropped it instantly, as though it were radioactive. And we were disappointed in the chain for even carrying something like that; it affected our perception of the chain in a very negative way: “Why would they risk it?”

Jim West: Certainly, there should be a lot of extra due diligence when it comes to products that could pose health and safety issues –– anything that goes into the human body, or that could cause death or injury by its failure to perform as intended.

 

For example, we have worked with a consumer products retailer to carefully scrutinize a product that, if used wrongly or assembled improperly, could explode. This company is spending a lot of time working with product specifications, and doing multiple levels of testing and scrutiny, to ensure that it is safe for consumers. This same company also deals in products that couldn’t possibly harm a person, and on which this level of scrutiny is unnecessary.

 

That doesn’t mean due diligence isn’t necessary in each case. In this instance, the company’s brand is on both products, so whether simple or complex, each has to function as the consumer expects. Both must be of superior quality, and represent that company’s brand well.