Global sourcing is a strategic function that establishes the criteria, policies and tactics for evaluating, selecting and negotiating with overseas suppliers. Carried out within the framework of an integrated global supply chain and in support of the purchasing function, product sourcing activities can be categorised on a macro and micro level.
Macro level sourcing considerations focus on broader-based factors and capabilities, often-times related to a region, country and/or industry sector. Examples of macro level variables in a Sourcing equation include a country’s political system, commercial law (contract enforcement), work-force education level, labor and environmental laws, reliability of the power grid, internet access, road and port infrastructure, customs and regulations, and industry specific ecosystems (tier I, II, III vendors).
Micro level considerations focus more on individual vendors and include company size, ownership structure, production capacity, number of locations, workforce size, manufacturing expertise, price negotiations, engineering skills, use of subcontractors, product quality standards, technology know-how, experience in global trade and use of Key Performance Indicators (KPI).
In short, global sourcing is a ‘strategic business philosophy’ that coordinates the world’s most cost effective production and operation inputs such as men, materials, machines, technology, suppliers, engineering and other required facilities.
Evolution over the years
The sourcing discipline has changed drastically over the last one or two decades. Prior to the 2000s, sourcing and purchasing were often considered to be synonymous terms, especially when one considers that almost all purchasing was done domestically. As we well know, there’s a big difference between sourcing domestically versus sourcing internationally
These days we’re able to source components and ingredients from all over the world. Even something as simple as a nutrient bar has components such as citric acid from the EU, soya from Denmark, vitamins from China, guar gum from India, high-fructose corn syrup from the US, etc. We’re able to do this because we have had huge improvements in information technology and the Internet has allowed us to connect computers and systems all over the world making global sourcing and supply chains a reality.
Advantages of Global Sourcing
- Low Manufacturing costs.
- Ability to utilize skills and resources not available locally.
- Exploring alternate sources of supply, diversifying risk to the organization.
Disadvantages of Global Sourcing
- Financial and political risks associated with emerging economies.
- Risk of losing intellectual property/ patents/ copyrights.
- Difficulty in supervision.
- Unforeseen shutdowns and supply interruptions.
- Long lead times.
- Hidden costs related to different time zones and languages.
- Labour issues.
- Difficulty in monitoring and ensuring quality.
International Procurement Organizations/ Procurement Service Providers
Professional procurement services have emerged as one of the leading areas for cost savings and long-term growth in organizations across the globe. Due to the complexities and uncertainties of global sourcing, International Procurement Organizations (IPOs) or Procurement Service Providers (PSPs) are important institutions that help remove the discrepancies that have crept in the global sourcing system. The IPOs/PSPs take the responsibility of performing all functions and managing the inputs required for economies of scale. Such IPOs provide great help in country based sourcing efforts and meet the requirements of parent organizations.
For instance, in case of low cost manufacturing countries like India and Philippines, which have a large range of sub-markets for raw materials and finished goods and suppliers that span the whole value chain of goods and services, the role of partnering with IPOs/PSPs’ can be crucial. They provide all relevant and essential up to date on ground information.
Redeure offers long-term procurement and sourcing solutions for a varied set of industries worldwide. We offer leadership in all areas of procurement- from identification of needs, supplier identification and benchmarking, supplier communication ,negotiation, liaison and supply chain management. Through Redeure, clients can access reliable and knowledgeable resources on procurement in India and Asia Pacific. The teams at Redeure have extensive experience in propagating business in India and APAC and low-cost sourcing from India, Indonesia, Taiwan, Malaysia and Thailand.
Costs associated with Global Sourcing
Buying merchandise or raw materials from overseas manufacturers is full of complexities. Retailers take sourcing decisions due to cost saving opportunities and sometimes in favor of improved quality. This exercise however, is anything but simple.. While taking global sourcing decisions, a retail or manufacturer must consider following costs that will have an impact on the firm’s overall profitability.
- Import Duty
Import duty is a tax collected on imports and some exports by a country’s customs authorities. A good’s value will usually dictate the import duty. Depending on the context, import duty may also be known as a customs duty, tariff, import tax or import tariff.
Import duties have two distinct purposes: raise income for the local government and to give a market advantage to locally grown or produced goods that are not subject to import duties. A third related goal is sometimes to penalize a particular nation by charging high import duties on its products.
Therefore, a retailer before entering into international sourcing agreements must check the rate of import duty on particular merchandise or commodity in question.
- Foreign Currency Risk
In recent days, currency fluctuations have become a significant consideration while making global sourcing decisions. Currency risk arises due to change in price of one country with respect to another. For example, you are an Indian retailer and you buy merchandise from USA, as usual there exist time gap between placing the order and paying for the supplies, and now while making the payment in dollars, you have to pay more (because dollar is stronger than rupee in international market) and also there is a possibility that you would realize that no gain from merchandise buying.
- Trade Blocks
Trade blocks like FTZs (Free Trade Zones), SEZs (Special Economic Zones), EOUs (Export Oriented Units) are some designated areas in a country that don’t come under country’s applicable tariffs. Like Free Trade Zone is an area within a country where no taxes are applicable with regard to storage, inspection, packaging, assembly, fabrication or exhibition.
Therefore, a retailer while searching for foreign vendors should consider these trade blocks. Also Indian retailers should develop relations with global vendors belonging to these designated areas.
- Merchandise Carrying Cost
The cost of maintaining inventory in a retailer’s warehouse like rent, electricity expense, insurance and employees’ expenses is known as merchandise carrying cost. In another words, this is basically the cost of holding merchandise in stock.
- Opportunity Cost of Capital
Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. The idea of opportunity costs is a major concept in economics.
Because by definition they are unseen, opportunity costs can be easily overlooked if one is not careful. Understanding the potential missed opportunities foregone by choosing one investment over another allows for better decision-making.
- Logistics Expense
Because logistics can represent a significant expense, it’s important to analyze the different types of logistics costs routinely. Logistics cost management can potentially save your business thousands of dollars, but it requires plenty of research and ingenuity. Fortunately, you can make quick adjustments by learning from cost management techniques already in place throughout your industry.
Shipping and storage expenses represent the two major types of logistics costs. Once you find a source for your product or raw materials, you need to pay a freight company to deliver it. The materials typically arrive at your location in a semi truck, and it’s your responsibility to have a safe space to unload this truck and store the delivery. The volume of deliveries you expect each day determines the size of your warehouse and the number of docks available, all of which affect how much you pay in rent and utilities.
Staffing represents another critical type of logistics cost. The warehouse facility needs to be staffed to unload and organize materials, and you also need a team of logistics managers to schedule deliveries. However, a warehouse is only temporary storage; the materials still need to get to either a manufacturing plant or the end user in a process called distribution. You can either contract out this movement of materials to another freight company or hire an internal distribution team.