Byaddressing

customeranxieties,

supplierscanbetter

positionthemselvesin

the globalmarketplace.

ByQuintusR,Jett

DavidF.Pyke,and

M, EricJohnson

In recent years, many minority and women

business owners in the United States have seen

significant contracts with their customers fade

away. With relentless supplier consolidation

and offshoring, contracts to low-cost suppli-

ers abroad have increased, and extensive out-

sourcing has become a standard way of doing

business in many industries. This is unlikely to

change in the foreseeable future.

MBE January/February2008 37

r

CompetitiveStrategy(continued)

Low-cost suppliers in distantcountries provide a competitivealternative, and many of these sup-pliers are also run by entrepreneurs ofcolor.Yet, corporations that are a ma-jor source of contract opportunity forU.S. minority- and woman-ownedbusinesses still seek suppliers thatcontribute to higher performance,lower costs, and increased profits.So, how can domestically basedbusiness owners respond? Whatapproaches can be substituted forresignation or a futile retreat fromglobal competition? We offer oneproactive strategy: Minority andwomen business owners can andshould confront the "fear factor" in

global supply chains.What is the fear factor? In many

corporations and industries, man-agers experience significant fearthat their supply chains will bedisrupted or that supplier qualitywill degrade. Operational and mar-ket performance are very much atstake, such as when an extended

delay in supplier delivery results inproduct shortages or poor service tofinal customers. This anxiety oversupplier performance can extend tofinancial markets and the public at-large, especially when supply failuresinvolve quality issues such as productsafety or contamination.

Therefore, the concerns that

corporations have about suppliersin distant countries can sometimes

be significant. Although managerscan experience late deliveries, poorquality, and other difficulties withdomestic suppliers, there are morefactors to consider when suppliersare based on the other side of the

world. For example, we know of onerelatively small U.S.-based companythat paid more than $200,000 in airfreight when its supplier in Asiagave notice that a delivery would betoo late for the prime selling season.Political risk, currency fluctuations,

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38 January/February2008 MBE

labor strikes, and other factors can

also suddenly increase the cost ofsourcing from distant countries.

Because of these added concerns,

some procurement managers arebucking the trend and reconsideringshifts back to domestic suppliers.The recent wave of Chinese-made

product recalls-affecting every-thing from dog food to toys totoothpaste-has made product ori-gin a very public issue and created

such as these reveal the full cost of a

distant, foreign supplier that mightinitially go unnoticed.

Although they may see greatvalue in global outsourcing, procure-ment managers almost always havereal concerns about the risks and

potential costs involved. By payingclose attention to these concerns,a number of minority and womenbusiness owners have begun to re-consider the value proposition they

The Real Concerns About Global Outsourcing"IWhat is the risk (and cost) of late deliveries due to long-distance

transport?This concerns every procurement manager we have encountered.

"IWhat Is the risk of poor quality from a distant, low-cost supplier?Many procurement managers are concerned about the remedy and costs,when products or services from abroad do not meet their company'sstandards and expectations.

"IWhat if there Is a major supply disruption caused by an armed conflict,a natural disaster, or a health disaster such as SARS or the avian flu?The potential for these disruptions are not far-fetched today, and their

scale and severity might be unprecedented. Procurement managers might

not always voice it, but they are concerned.

an opportunity that U.S. minorityand women entrepreneurs can, andshould, seize.

Identifying the Fear FactorOutsourced suppliers abroad can

seem very low cost compared to do-mestic suppliers. However, the totalcosts-real and potential-of usingglobal suppliers can be quite high.Differences in languages, regulations,business customs, and legal/politicalstructures rarely contribute explicidyto the cost of a contract. And yet thecosts of global outsourcing can be ex-orbitant when things go wrong dueto these differences. A late deliveryfrom a distant supplier requires airfreight and expedited shipments.The risk of poor quality requiresadditional inspection. Either prob-lem might cause line shutdowns,lost sales, ill will from customers,and loss of future revenue. Factors

offer to customers. Some are startingto ask, "If it is becoming infeasibleto compete as before, due to globaloutsourcing, what other ways mightwe more profitably deliver valueto our customers?" Identifying thefears of procurement managers andhelping them manage the associatedrisks and costs is emerging as an effec-tive solution.

While the unit cost offered bya U.S.-based minority or womansupplier will often be higher thanthe unit cost offered by a low-costsupplier from China, a domesticsupplier will have some advantagesthat the distant supplier lacks. Forinstance, a minority or woman sup-plier that is regional or local mighthave more opportunities to gainup-close knowledge of customerpreferences.

In our examination of strategiesfor minority suppliers-done for a

..

white paper sponsored by the U.S.Department of Commerce'sMinor-ity Business Development Agency(MBDA) titled "Mastering theSupply Chain: A Perspective"-we encountered a California-based

supplier called Intraline, Inc. Itspresident and CEO, Pete Varma,described to us how his company

QuintusR. Jeft is a senior researchfellow at the Tuck School of Businessat Dartmouth College. He specializesin emerging forms of strategy and or-ganization. Jett is also affiliated withthe Glassmeyer/McNamee Center forDigital Strategies at Tuck.

focused on what it could do to

"take away the buyer's pain" in theprocurement cycle, whether it wasthrough on-demand services, man-aging logistics, or managing waste.Faced with increasing customerrequirements and competition,he created contract opportunitiesby developing an intimate under-standing of the potential buyers'most significant supply concerns.He identified special services hiscompany could perform, when the de-livery of value, rather than the lowestprice, was the overriding concern.

The general consequence ofcompeting with low-cost suppliersabroad is that U.S.-based minorityand women business owners must,more than ever, focus on total value

to the customer, not solely on price.This means mastering the funda-mentals of supply and procurementoperations: flawless execution andperformance, short lead times, costefficiencies, and excellent quality. By

paying attention to the fear factorsof procurement managers, minoritysuppliers can deliver the servicesthat potential customers will mostvalue. Due to global outsourcing,procurement managers are gettingvalue from reduced unit and service

costs. However, they are likely tak-ing on additional risks and potentialcosts in other areas. Minority andwomen suppliers who help ad-dress these tradeoffs can turn the

threats of global outsourcing intobusiness opportunities.

Enhance YourValuePropositionFor many minority and women

suppliers, helping customers over-come the fear factors of globaloutsourcing will involve raising

and services in this market segmentto foreign suppliers, a domesticsupplier can focus on specializeddeliveries with timing and at ascale optimized for the customer,such as offering frequent delivery orconsolidation of vendor shipments.

(2) A domestic supplier can serveas a customer's "domestic insurance,"

providing a competitive alternativeto foreign suppliers. One NativeAmerican entrepreneur explainedhow her company approached po-tential customers. She told them, in

effect, that "We will be your China.We know that you're fearful of therisks of buying from China, andyet you want the low unit costs. Weoperate on a reservation, and ouroverhead is very low. But our quality

"M

" "

d ' "

znonty an woman supp zers

that help address these tradeoffs can

turn the threats of global outsourcing.b " ." "

znto usznessopportunztzes"

standards. Competing on total valuerather than lowest cost has alwaysbeen important for winning con-tracts. However, low-cost suppliersfrom abroad are elevating this gameto a new level. Proposing how toincrease value to customers and then

delivering on that promise is nowmandatory for domestic suppliers.

We have seen at least three ap-proaches to enhancing a domesticsupplier's value proposition, in orderto adapt to the widespread use oflow-cost suppliers abroad:

(1) A domestic supplier can de-velop a profitable niche by providingcustom services. For instance, manylow-cost foreign suppliers have largeminimum order quantities that relyon economies of scale for low-cost

transportation over long distances.Conceding low-margin products

is high, and our lead times are veryshort. Look at the full cost and risks,

and consider us as your low risk, lowcost, high quality alternative."

(3) A domestic supplier can

DavidF. Pyke is the Benjamin AmesKimball Professor of the Science ofAdministration and associate dean ofthe MBA program at the TuckSchool.His sessions on supplychain manage-ment, e-business,operationsstrategy,and global sourcing are curricula es-sentials in many of Tuck's executiveeducation programs, including thosefor minority enterprises.

MBE January/February 2008 39

CompetitiveStrategy(continued)

M. Eric Johnson is professorof operations management anddirector of the Glassmeyer/McNamee Center for DigitalStrategies at the Tuck School.He specializes in the impact ofinformation technology on supplychain management.

I

partner or contract with foreignsuppliers who have received out-sourcing business from the UnitedStates. A different Native American

entrepreneur, Karlene Hunter ofLakota Express (see page 22) inSouth Dakota, implemented thisapproach. Her company took partin a joint venture, in which quality

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checks were performed on the out-put of a Chinese supplier. VerifYingthe work of the Chinese supplierbefore it was delivered to the final

customer in the U.S., her companymanaged the potential quality riskwith the distant supplier and, as aresult, the associated fear factors ofthe final U.S. customer.

How you can productively enhanceyour company's value proposition inresponse to global outsourcing willvary. Some minority and womenbusiness owners have used their

understanding and recognition ofcustomer fears to lead their com-

panies toward the most profitableemerging opportunities. Compet-ing with low-cost suppliers abroadis a challenge that can be used todevelop new prospects, if there isfresh thinking about a company'sbest value proposition and if youhave the operational capabilities toexecute the strategy.

Customers will always have fears,although the nature and sig-

nificance of them will differ. While

companies rely on suppliers andprocurement processes, there willbe managers who have reasonableconcerns about purchased productsor services lacking in quality, beingdisrupted or late, or becoming toohigh cost for escalating competitionand consumer demands.

Global outsourcing has no doubtchanged the game. The increaseduse of low-cost, foreign suppliersis a major shift in business-onethat changes expected performance,associated contracting advantages,and the kind (and significance)of different fear factors affectingprocurement managers. Helpingbuyers overcome the fear factorsof outsourcing is an opportunityfor value creation that minorityand women business owners cannot

ignore. .

If all the players on a team were exactly alike,

how successful would it be?Valuing differences in approach, background and expertise of our suppliers has helped

Lehman Brothers drive exceptional results in all our business processes, worldwide.

It's why we are committed to supporting the growth of minority business

enterprises in all areas of our supply chain.

LEHMAN BROTHERSCapital Markets I Investment Banking I Investment Management

Lehman Brothers is an equal opportunity employer M/F/DN. @2008 Lehman Brothers Holdings Inc. All rights reserved.

40 January/February2008 MBE