One of the major supply chain developments of recent years has been the expansion in the proportion of products and (occasionally) services which businesses are willing to source from outside their home country; this is called global sourcing. It is the process of identifying, evaluating, negotiating and configuring supply across multiple geographies. Traditionally, even companies that exported their goods and services all over the world still sourced the majority of their supplies locally. This has changed companies are now increasingly willing to look further afield for their supplies, and for very good reasons.
Most companies report a 10 percent to 35 percent cost savings by sourcing from low-cost-country suppliers. There are a number of other factors promoting global sourcing: •The formation of trading blocs in different parts of the world has had the effect of lowering tariff barriers, at least within those blocs. For example, the single market developments within the European Union (EU), the North American Free Trade Agreement (NAFTA) and the South American Trade Group (MERCOSUR) have all made it easier to trade internationally within the regions. Transportation infrastructures are considerably more sophisticated and cheaper than they once were. Super-efficient port operations in Rotterdam and Singapore, for example, integrated road–rail systems, jointly developed auto route systems, and cheaper air freight have all reduced some of the cost barriers to international trade. •Perhaps most significantly, far tougher world competition has forced companies to look to reducing their total costs. Given that in many industries bought-in items are the largest single part of operations costs, an obvious strategy is to source from wherever is cheapest.
There are, of course, problems with global sourcing. The risks of increased complexity and increased distance need managing carefully. Suppliers that are a significant distance away need to transport their products across long distances. The risks of delays and hold-ups can be far greater than when sourcing locally. Also, negotiating with suppliers whose native language is different from one’s own makes communication more difficult and can lead to misunderstandings over contract terms.
Therefore global sourcing decisions require businesses to balance cost, performance, service and risk factors, not all of which are obvious. These factors are important in global sourcing because of non-price or ‘hidden’ cost factors such as cross-border freight and handling fees, complex inventory stocking and handling requirements, and even more complex administrative, documentation and regulatory requirements. The factors that must be understood and included in evaluating global sourcing opportunities are as follows. Purchase price – the total price, including transaction and other costs related to the actual product or service delivered.
•Transportation costs – transportation and freight costs, including fuel surcharges and other costs of moving products or services from where they are produced to where they are required •Inventory carrying costs – storage, handling, insurance, depreciation, obsolescence and other costs associated with maintaining inventories, including the opportunity costs of working capital. Cross-border taxes, tariffs and duty costs – sometimes called ‘landed costs’, which are the sum of duties, shipping, insurance and other fees and taxes for door-to-door delivery •Supply performance – the cost of late or out-of-specification deliveries, which, if not managed properly, can offset any price gains attained by shifting to an offshore source