Canadian companies are feeling the pressure of the increasing cost of doing business with their reputation for on-time delivery of high-quality products and services being on the line. To adapt, some procurement and supply chain management teams have been rebalancing their sourcing strategies among global (offshore), regional (near-shore), and local (onshore) suppliers. Others have expanded from single to multiple sources for components and stock. And some companies have switched from “just-in-time” inventory management to stockpiling critical inventory.
In this world of change, there should be one constant, according to supply chain management experts: Keep a clear line of communications open with your vendors – especially internationally – and use it early and often.
There are basic questions a business should always ask overseas suppliers, both before and after signing any contract, to choose the right supplier and keep the partnership working smoothly. Choosing the right supplier can positively impact your business’ cash flow among other advantages. Read below for tips on assessing your own oversea supplier needs and navigating supplier risk management to choose the right partner for your business.
Questions to Ask Yourself About Overseas Suppliers
Before quizzing overseas suppliers on how their local environments, capacities, resilience, and projections might be changing, procurement experts suggest asking yourself key questions to set the stage:[1]
· How is your own customer demand changing? Especially in turbulent times, demand should trump historical sales patterns when making supply chain decisions, so keep close tabs on customer demand, or you’ll end up with excess – or insufficient – inventory. Retail sales are expected to grow to 3% in 2023, for example. That’s down from 4% growth last year, according to Trading Economics. Do you have visibility across your supply chain? Communications are essential, whether automated in a digital supply chain, conducted in person-to-person conference calls, or (ideally) both. What’s going on in your supply chain and where are bottlenecks developing?
· How flexible is your sourcing? Single-source arrangements may have benefits such as volume pricing, but they can also create a single point of failure in your supply chain. Even sourcing from multiple suppliers in the same country or region may not be flexible enough to avoid local risks, exchange rate shocks, and other issues. Be sure, though, to weigh the benefits of adding new suppliers against the costs.
· Which of your suppliers might pose a risk? Do your research before discussions with your suppliers, to ask informed questions – about possible risks in their country, market sector, finances, operations, staffing, and their own supply chains. You should also ask about their contingency and business continuity planning.
Risk Management Questions to Ask Overseas Suppliers
Buyers’ and sellers’ supply chain risks will vary by size, market sector, and other factors. And the term supplier is a broad one. A supplier, or vendor, might manufacture a product to your specification or sell you its raw materials, components, software, or services. Regardless, your company’s dependence on that supplier raises similar types of risks, which generally increase with the complexity of cross-border logistics in global supply chains.
“Once you’ve identified the risks in your supply chain, you can use that information to address them by either diversifying your sources or stockpiling key materials or items,” writes Harvard Business School Professor Willy C. Shih.[3] Or, you could reduce the variety of products you make or sell.
But first you’ve got to pinpoint potential problems. Here are four risk-related questions to ask overseas suppliers:
1. How flexible is your supplier’s own supply chain? You could be vulnerable if your supplier sources or produces a critical component in only one country, according to Prof. Shih. You should also ask about their inventory levels and safety stock.
2. What’s their approach to communications? Your overseas suppliers should have ongoing communications and progress reports. Is your supplier open to this? If so, establish performance indicators that both parties can track, combining automatic data feeds and shipment metrics with regular one-on-one performance reviews. Can you and your supplier view the same data in real-time on a shared digital platform? Is there a responsive, day-to-day arrangement for contacts across time zones? A crisis communications strategy? Will language be a problem?
3. How well does your supplier protect against cyberattacks? Supply chains are attractive targets to cybercriminals, who might first attack a “little fish” supplier to infiltrate a bigger buyer. High-profile ransomware attacks have lately shut down major supply chains. And, for instance, scammers often pose as vendors requesting payment, by taking over a supplier’s email account which can result in financial losses. In 2020, the Canadian Anti-Fraud Centre reported over $30 Million in losses from business email compromise attacks.
4. What is your supplier’s environmental, social and governance (ESG) policies? Your business reputation could be on the line if your overseas supplier falls short of upholding ESG standards, which are today more important than ever to consumers, regulators, investors, and other key stakeholders.
Basic Questions to Ask Overseas Suppliers
While the newly elevated level of global risk should prompt the deeper discussion described above, that doesn’t mean it’s OK to ignore the standard questions that define supplier management. Here are basic questions to ask overseas suppliers:
1. What’s the current lead time? Questions about shipping times have leapt to the top of the agenda. Average lead times for construction materials, for example, have climbed to up to 6-9 months for certain items.
2. Which payment method will be used? Typical methods for paying foreign suppliers include advance payment (shipment only after payment is received), open account arrangements based on forward contracts (shipment based on an agreement to pay a specified price at a future date), and letters of credit (where a bank guarantees payment for you).
3. What currency will be used and how would any foreign exchange (FX) fluctuations be handled? FX risks can erode profits. Supply chain experts suggest establishing ground rules from the start, to avoid “win-lose” situations in which a supplier may seek to gain financially from currency volatility.
4. How are returns managed? For the average retailer, 16% of sales resulted in merchandise returns last year, according to some statistics [6] The cost of reverse logistics can be high, if proper arrangements aren’t in place to move returned goods back from the end user to the retailer, distributor, or manufacturer.
5. What are the supplier’s quality standards and controls? Visiting overseas suppliers for inspections and supplier audits has been hindered by travel restrictions in recent years. In their place, you might request samples, research suppliers’ ratings, and integrate vendors as active participants in your company’s quality assurance program.
6. What’s the price? Any discounts? Most trade experts suggest that price shouldn’t be your top consideration, but it’s still a key one. Are there discount programs for volume purchasing or annual contract renewals? Be sure to understand the total “landed cost,” including transportation, duties, taxes, and inventory on top of the product price.
7. When does the ownership transfer occur? This might determine whether you or the supplier carries the costs above and the risk of loss for goods in transit.
8. How will delays and lost shipments be handled? Contracts often include penalty clauses for delays (unless caused by uncontrollable events, such as natural disasters). Suppliers are also expected to replace lost and damaged goods, depending on the answer to question No. 11, and are often insured for such incidents.
9. Which tariffs, taxes, or trade restrictions might apply? The rules of international trade are always evolving, which can impact costs and delivery times. Tariff hikes raise product prices. Inaccurate paperwork causes customs delays at the border.
10. Has the vendor done business in Canada before? With companies like yours? It can help eliminate supply chain friction to have a supplier that understands Canadian product standards, trade rules, and logistics issues specific to your market segment.
11. Can the supplier provide references? Learn straight from a customer’s mouth how the supplier has been to work with in recent years, both positively and negatively.
The Takeaway
Keeping your business on track means keeping your supply chain flowing, but these days that’s more difficult than ever – especially when you source internationally. Having a good list on hand of questions to ask overseas suppliers – early and often – can help avoid the many potential issues that can arise.
This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.