Improved cargo transportation and better international trade laws have made global sourcing a popular procurement strategy across the industry. There was a time when only multinational corporations would source products and services from the global market. Today, even enterprises without a worldwide footprint are also embracing global sourcing to improve their business outlook.
However, it is important to understand that global sourcing is not an unconditionally right procurement strategy. With all its benefits and advantages, it also has some downsides. This post will try to impassively dissect global sourcing for all its advantage and drawbacks. This discussion will help you to develop a learned and cautious approach towards this domain of strategic sourcing.
Upsides of Global Sourcing
Leverages Low-Cost Production
This is the first and foremost reason for most organizations to embrace global sourcing. There are many countries where enterprises can get their materials and labor-intensive raw products ready at lower costs. For instance, China is one of the largest hub and facilitator of low-cost manufacturing. Much of its economic turnaround is about offering low-cost production to businesses all over the world.
Allows Procuring Hard-to-Find Resources
All the resources are not distributed equally among all the regions. This imbalance of resources plays an integral role in determining the viability and profitability of different businesses in different regions. For example, a traditional factory setup can’t run efficiently if it’s located in a region where coal, gas, and oil are not easily available.
Global sourcing has removed that constraint from the industrial landscape. Enterprises everywhere can source hard-to-find resources to continue their operations without a hitch. The industrial revolution owes a lot of its success to this upside of global sourcing.
Offers an Entire Pool of Alternate Suppliers
If an enterprise manages to make success foray into global sourcing, it can develop an entire pool of alternate suppliers. As a result, a shortage of any item/material in the local market won’t send the manufacturing operations into a frenzy. The enterprise can always leverage its connection with international suppliers to bridge that shortage.
Helps Developing Global Business Skills
Dealing with international suppliers, understanding international trade agreements, and working out respective import/export laws – all these things add up to improve an organization’s global business acumen. Its procurement team improves and expands its skillset. Its accounts department becomes more efficient while handling international transactions. In short, an enterprise improves its collective skill level when it deals with global sourcing.
Stand Out Among Competitors
Last but not least, global sourcing offers you multiple avenues to stand out among competitors. Acquiring low-cost production, procuring items that are not locally available, developing a network of international suppliers, and improved business skills can help an organization outshine its peers and competitors.
Downsides of Global Sourcing
Approaching any opportunity or a scenario without bias is crucial for business success. Just like many commercial activities, global sourcing also has downsides that decision-makers should be aware of.
Difficult Coordination with People from Different Backgrounds
Global sourcing involves establishing partnerships, dealing with stakeholders with different cultural backgrounds, speaking different languages, and being conscious of different social values. Making a quick connection is always difficult when two parties have such stark dissimilarities. For instance, it may require more effort and groundwork to establish a partnership with an international supplier compared to a local vendor.
Time Zone Constraints
Working with global manufacturers, vendors, and suppliers means you have to take into account time zones as well. In many cases, the business hours of international business associates don’t match. Therefore, they have to set up separate desks/teams that work round the clock to overcome time zone constraints. In other words, you have to put in more effort and resources to ensure your business correspondence and activity don’t get affected by the difference in time.
Complying with Local Rules and Regulations
Global sourcing is not like ordering an item from an international e-commerce website. There is a list of international trade rules, local customs laws, import regulations that you need to tackle when sourcing items from overseas suppliers. For many enterprises, dealing with all these multilayered regulations gets quite overwhelming.
Risking IP, Patents, and Copyrights
If your transactions with international suppliers also involve patented and copyrighted materials, there is always a risk of infringement. To begin with, you have less control of things when it involves international dealings. Also, every country doesn’t have effective laws against IP thefts and copyright infringements.
Then, some countries have a very poor implementation of those laws. Therefore, enterprises with patented technologies and products have to tread the rope of global sourcing very carefully.
Extended Lead Times
Despite all the technological progression, global sourcing still involves extended lead time. The majority of international cargo is still transported using sea vessels that take significant time to reach their destinations. Therefore, global sourcing is not suitable for organizations that need items with a quick turnaround.
Difficult Supervision
When things go international, spanning different countries, rules, and stakeholders, the supervision gets difficult. Poor or loose supervision of the processes might hurt the objectives you want to achieve with global sourcing. For instance, you can’t fully determine if your international suppliers share the same values as you. Similarly, it is pretty difficult to identify if your international suppliers comply with universal labor laws and ethics.
Global sourcing refers to buying the raw materials, components, or services from companies outside the home country. In a flat world, raw materials are sourced from wherever they can be obtained for the cheapest price (including transportation costs) and the highest comparable quality.
Today, the pattern of global sourcing continues as a way to obtain commodities and raw materials. But sourcing now is much more expanded; it includes the sourcing of components, of complete manufactured products, and of services as well.
There are many companies that export to a country while sourcing from that same country. For example, Apple sells iPods and iPads to China, and it also manufactures and sources components in China.
Best Practices in Global Sourcing
Given the challenges of global sourcing, large companies often have a staff devoted to overseeing the company’s overseas sourcing process and suppliers, managing the relationships, and handling legal, tax and administrative issues.
In global sourcing, although transporting goods by air and truck has a high carbon footprint due to the fossil fuels burned, ocean transport doesn’t. Also, the carbon-footprint measure doesn’t just focus on distance; it looks at all the fossil fuels used in the manufacture of an item. For example, when one looks at the total picture of how much energy is required to make a product, the carbon footprint of transportation may be less than the carbon footprint of the manufacturing process. Some regions have natural advantages. For example, it is more environmentally friendly to smelt aluminum in Iceland than locally because of the tremendous amount of electricity required for smelting. Iceland has abundant geothermal energy, which has no carbon footprint compared to generating electricity by burning coal. It’s better for the environment to smelt the aluminum in Iceland and then ship it elsewhere.
Similarly, it is more environmentally sound for people in the United Kingdom to buy virgin wood from Sweden than to buy recycled paper made in the United Kingdom. Why? Sweden uses nuclear energy to make paper, which has a much lower carbon footprint than electricity in the United Kingdom, which is generated by burning coal. Even though the paper is recycled, the electricity costs of recycling make it more harmful to the environment.
Perhaps one of the most-effective changes companies can make to help the environment is to work collaboratively with their trading partners. For example, an agreement between potato-chip manufacturers and potato suppliers eliminated wasted resources. Specifically, the physics of frying potato chips requires boiling off the water in the potato, which consumes a large amount of energy. Although boiling off the water would seem to be a requirement in the cooking process, Potato-chip manufacturers buy potatoes by weight. Potato suppliers, to get the most for their potatoes, soak the potatoes in water to boost their weight, thus adding unnecessary water that has to be boiled off. By changing the contracts so that suppliers are paid more for less-soggy potatoes, suppliers had an incentive to use less water, chip makers needed to expend less energy to boil off less water, and the environment benefited from less water and energy waste. These changes had a much more beneficial impact on the environment than would have been gained by a change in transportation.