What is global sourcing and why is it so important? Because companies sourcing from both inside and outside their country borders are better able to compete.
The global reality
As international demand grows for more and better products and services, competition becomes more intense. Firms must keep up with rapidly changing technology while also lowering their costs, increasing quality, and improving customer service at all stages of the value chain. This is the reality of international trade.
What is global sourcing – really?
It is the process of sourcing goods and services from the international market across geopolitical boundaries. It aims to exploit global efficiencies such as lower cost skilled labor, cheaper raw materials and other economic factors like tax breaks and low trade tariffs. Examples are call centers in the Philippines, clothing and shoes manufactured in China and Thailand.
Starting a global sourcing initiative
Many companies use an outsource solution, especially in the beginning when they are inexperienced. International procurement organizations (or IPOs) are often used as agents to source from “low cost” countries. They can and do identify and develop key suppliers across many sourcing categories in large and complex countries such as China or Brazil.
What is global sourcing – the advantages?
Some advantages of global sourcing are learning how to do business successfully in a new market, finding and developing alternate supplier sources to reduce costs and stimulate competition. The opportunity exists to locate scarce skills and resources not available or unproductive at home thereby increasing manufacturing capacity and other technical capabilities.
What is global sourcing – the disadvantages?
There are also disadvantages. Monitoring costs go up and there are hidden costs relating to the effort and time spent learning about different cultures and time zones, especially in the beginning. There is exposure to financial, political and legal risks, often in emerging economies. In the service industries there is also a real risk in losing a grip on your intellectual property.
Global sourcing of manufactured goods
Many variables come into play when sourcing manufactured goods or component parts from another country. The supply chain is long and fragmented and the main challenges are long lead times, the risk of disruptions in transportation and the difficulty of ensuring the specified product quality.
What is global sourcing going to do to challenge me?
Firstly lead times for delivery are significantly longer than with domestic sourcing and these costs have to be factored into the selling price.
Secondly, prudent financial management is key. Currencies fluctuate daily and the price and the currency need to be fixed upfront as global sourcing often involves payment using a letter of credit.
So what is global sourcing going to do to benefit me?
Walmart*, the US based international retailer, sums it up well “ By realigning our resources, leveraging our scale, and restructuring our relationship with suppliers, we ……..can offer even more competitive pricing on merchandise and provide our customers a clear and compelling assortment of better quality products at lower prices."
Companies that have implemented global sourcing have leapt ahead of the pack reducing the cost of goods, accelerating the speed to market and improving the quality on a consistent basis.