Direct Sourcing; Weighing Cost Savings Against Increased Risk and Hassle

Several years ago, CenTradeX was called upon to help Disney’s theme parks division, headquartered in Orlando, to explore direct sourcing.  They were spending several hundred million dollars every year purchasing branded merchandise from overseas (mostly China) manufacturers through middlemen.

This is a typical arrangement for most U.S. importers because said middlemen are veterans at smoothing and straightening the road in the supply chain management process.  They have established relationships with factories (or rather with other middlemen who have relationships with factories). They are experts at logistics: carriers, routes, costs, documentation, etc. and where to grease the wheels in the machinery of global sourcing to keep things running efficiently.

A plethora of financial pressures were shrinking Disney’s margins. Theme park visitors were less willing to fork over their Benjamins for overpriced Mickies and Minnies.  A brilliant recent hire from MIT had engineered a plan to save 15%-20% by going direct.  She was looking for a way to sell the idea to upper management.  You would think an annual savings of 30-40 million dollars wouldn’t be a hard sell, but it was.

Eliminating the Middlemen

Change doesn’t come easy within a big corporation. The veteran sourcing guys in Disney were used to making a couple trips to Hong Kong every year staying in luxury hotels, being wined and dined and entertained by an entourage of middlemen.  They really didn’t have to do much heavy lifting.  The lady from MIT was making waves and coming up against a lot of resistance.

As a test, we did a sourcing analysis utilizing several data sources, including the much referred to U.S. Waterborne import (Bill of Lading) manifest data collected from U.S. Customs.  In particular, we identified the factories that these middlemen were sourcing from as well as other customers (U.S. Importers) that the foreign factories were shipping to, in what amounts and frequencies as well as other supply chain particulars.

This type of information is only the beginning of a process to vet prospective suppliers. Notwithstanding, much can be gleaned from the data, and it provides a great starting point.  She hired an associate and friend of ours, an alumnus of our Nashville Universities: Belmont and Vanderbilt. The guy was a street smart, hard-working veteran of foreign sourcing.  He made handfuls of solo reconnaissance trips to China, staying in cheap hotels, eating local fare, traveling dusty pock strewn roads to out of the way factories to get face-to-face with prospective suppliers.  It’s really the only way to get things done.

Direct sourcing is not the right solution for every company.  Even Walmart, the largest sourcing entity in the world, has taken their time making the transition.  Considering they could net a potential savings of $20 – $60 billion a year, you’ve got to figure there are good reasons behind their caution.

For the daring and the desperate, however, direct sourcing can translate into greater profits by eliminating middlemen and significantly reducing the cost-of-goods.   Trade Intelligence is the place to start.  Otherwise, you’re likely to waste all your ammunition shooting blind or from the hip, and have your direct sourcing efforts blow up in your face.

Footnote: If you’re a manufacturer, now you can become a direct supplier to Disney without depending upon middlemen to connect you.  Apply HERE.  I guess we know who ultimately won the argument.  No more Mickey Mousing going around at Disney.