Theoretically, sourcing globally for inexpensive materials may seem easy. In practice, though, the process and execution is much more complicated.

The reasoning behind global sourcing has progressed beyond merely looking for the low-cost option. Today, global sourcing is more complex and organizations expect more from their global suppliers.

Businesses that source globally now expect higher product quality to differentiate themselves from their competitors. “The practice has become so widely embraced that cost savings generated no longer necessarily provide a competitive advantage,” PricewaterhouseCoopers (PwC) reported last year. “As respondents watch competitors reduce costs through global sourcing they have no choice but to follow suit.”

Although focus may be shifting from cost to quality — 90 percent of respondents in a cross-section of retail and consumer goods firms worldwide said quality is their most significant concern for future global sourcing endeavors — cost is still the main reason for global sourcing today. The top five reasons organizations sourced globally was to reduce raw material cost (73 percent), followed by increasing supply chain flexibility (37 percent), competitive response (37 percent), expanding existing offers (29 percent) and for improving quality (22 percent).

Surprisingly, manufacturers in the United States are not looking to Asia for their low-cost supply needs. A MFGWatch.com survey released in May found that most of them preferred to source closer to home.

U.S. manufacturers turned to suppliers from North America (64 percent), China (19 percent), Europe (7 percent) and the remaining 10 percent sourced from South America, Africa and other countries.

Despite (or perhaps due to) the recession, 60 percent of respondents said their sourcing volume had increased or remained the same last year. The increase was due to natural company growth (45 percent), better opportunities for savings (27 percent) and a decrease in underlying costs (2 percent).

As for 2009, most of these manufacturers (82 percent) expect to maintain or grow their businesses. Half of all respondents are in the process of looking for new suppliers and the other half don’t plan to change their supply chain.

A separate survey done by CFO Research Services showed similar results. According to that study, two out of three financial executives foresee their companies’ global sourcing activities increasing during the next three years, IndustryWeek reports.

Clearly, the practice of global sourcing is growing. In the PwC report, 46 percent of the companies projected growth rates of more than 10 percent in the next five years. Worryingly, however, many of the companies surveyed said they did not have an effective procedure for measuring and tracking their savings nor a way to set quality standards.

To succeed with global sourcing initiatives, companies must know their true cost, have a handle on the quality of their products and figure out where in the supply chain or production process things are likely to go wrong, PwC explains.

When calculating the total cost of sourcing, companies must go beyond price. Purchasing lists nine hidden costs of global sourcing. Among them:

• Internal expense — cost of flying to see overseas suppliers, increased overtime to make up for the time difference, supplier training, etc.;
• Logistics costs — price for shipping items from the foreign supplier to your plant;
• Duties and tariffs — taxes that may be imposed on the product; and
• Inventory costs — exact amount of inventory needed to keep the supply chain moving but not end up with product that sits idle in the warehouse.

(See Purchasing.com for 19 costs to consider as well as country-specific sourcing tips)

When it comes to handling quality control, PwC advises companies to set up a regular and rigorous measurement system so they can identify problems before a shipment arrives or a major problem occurs. “The key to this is ongoing and constructive engagement with the supplier,” PwC notes.

PwC suggests businesses use the following framework to effectively manage risk and ensure product safety and quality:

• Select the right partner. Perform due diligence, define risk areas and optimize contractual relationship.
• Identify risk potential of troubled suppliers. Determine major disks, measure and analyze risk data, and determine risk mitigation.
• Minimize supply chain disruption. Identify alternative suppliers, perform financial reviews.
• Stabilize the supply chain. Perform on-site assessments regularly.

“In order to be successful, organizations must treat global sourcing as they would a very significant strategic project — with its own investment, risks, costs and benefits,” PwC says. “Companies must become more sophisticated and apply more rigor in their methods to understand both the costs, risks and savings associated with their decisions.”

Related

Strategies for Cost Reduction and Risk Management

Risk Management a Top CPO Priority

Resources

Global Sourcing: Shifting Strategies
PricewaterhouseCoopers, 2008

MFGWatch Survey Takes Pulse of North American Sourcing Community
MFG.com, May 27, 2009

Increase in Global Sourcing Expected Despite Supply Chain Risks
by Steve Minter
IndustryWeek, June 17, 2009

Physical Risks to the Supply Chain: The View from Finance
CFO Research Services, 2009

The 9 Hidden Costs of Global Sourcing
by David Hannon
Purchasing, March 12, 2009

World Tour
Purchasing