Why Companies Partake in Global Sourcing
In today’s global supply-chain environment it is worth asking ourselves when and why organizations are sourcing on the global scale? And more importantly should you be following suite? Before we can examine why an organization might partake in Global Sourcing it’s worth defining what exactly we’re talking about
What is Global Sourcing?
Global Sourcing: as defined is the practice of sourcing from the global market for goods and services across geopolitical boundaries with the goal of exploiting global efficiencies in the delivery of a product or service.
In layman’s terms it is utilizing the unique characteristics that a country may have in order to maximize the added value in your product or service offering.
The primary focus of International Sourcing Initiatives has been to achieve cost reducing efficiencies and thus increase margins.
Now it’s worth stating that cost is not everything, there are many other factors which would make a country more or less of an ideal fit to source from.
When it Makes Sense to Globally Source
- Closer distance to raw material inputs
- Access to specialized technology not readily available in native country
- Abundance of suppliers relative to domestic base
- Access to ample labor inputs
- Regulatory benefits for your specific product or service, including tax incentives
So, what’s the catch? All those things sound nice in themselves, but you must take a deeper look into the increased risk due to this new global exposure.
Increased Risks from Managing International Trade
The uncertainty that can be caused by an increase in distance between vendor and buyer results in increased risks while global sourcing. Distance risk can further be divided into two categories for easier understanding, physical distance and non-physical distance.
Physical Distance Risk Explained
Physical Distance risk is associated with the actual infrastructure and travel required for your product to enter your desired market from your supply country. It also includes the risk associated from ease of transportation, in large part due to infrastructure in the supply country. It can also include the added risks of not being able to directly inspect both your products and facilities on a regular basis. It is worth noting that in many cases working with a domestic supplier bypasses or mitigates these potential complexities.
Some questions you might will want to consider are: is the country you are supplying from land-locked? Do they have access to a national port? Is there effective infrastructure in place to get your product from the supplier to your desired shipment method? Are there viable shipping options for you both in lead timing and cost structure? Are there options for expediting a shipment both with production and shipping? What does that cost look like?
Non-physical Distance Risk Explained
In addition to the physical distance, this risk is associated with the more subjective elements of interborder connectedness. Generally, this will include disparities due to cultural differences, language barriers, difference in customs and business practices. It is worth noting that these differences will be felt on both sides of the arrangement and need to be managed by both organizations for maximum success.
Questions you will need to consider here are: Do we have a team member who can converse in native tongue with our supplier? How different are the customs in this country? What implications will these differences have on your current strategy and implementation of a global sourcing initiative?
What Does it Mean to Your Organization?
These types of questions at face value may not mean a lot but, unpacking them you will soon realize that globally sourcing increases your overall exposed risk in many ways. As such, the increased risk must be managed in order to have success in your sourcing initiatives. More than likely this will involve taking a deeper dive into each country you’re considering before global sourcing will become a viable alternative.