Global sourcing: Top factors to consider

POSTED ON September 16, 2021

Today, a large number of organizations resort to global sourcing to reduce their manufacturing costs. However, the decision to globally source should be based on careful considerations. Global sourcing does bring cost advantages, but there are risks that must be evaluated as well. In some circumstances, global sourcing may prove too costly for a business and you may lose instead of gaining anything out of it. Here are the key factors that must be evaluated before they choose global sourcing:

Monetary risks

The primary reason why a business sources from another country or outsources their manufacturing to another country is cost saving.  However, there are certain risks associated with global sourcing that can impact the costs. Some of the common risks include:

  • Sudden increase in shipping costs
  • Costs of delays
  • Loss of goods in transit
  • Transport delays
  • Storage costs
  • Third party quality inspection costs
  • Documentation fees
  • Sourcing agent fees
  • Project management fees
  • Changes in taxes, duties, tariffs
  • Costs associated with time zone differences

All these costs should be taken account when formulating the company’s global strategy as these costs can quickly eat into the expected savings, leaving you with no or very little monetary benefit.

Language barrier and Cultural Differences

Cultural and language differences can make communication extremely difficult and lead to issues such as incorrect orders, quality issues and shipping delays. Global sourcing can become more of a hassle due to language difference. Lack of cultural sensitization can cause miscommunication, misunderstandings and several other issues.  So, unless educate yourself about the cross-cultural differences, you cannot achieve success with global sourcing.

Logistics

After the manufacturing is complete, the next crucial step is transportation of goods. While transportation costs are already estimated during the preliminary research phase, but there are certain variables that no one has control over. It is not uncommon for transportation costs to increase suddenly or sometimes due to heavy rush it may not be easy to get slots and you may have to pay a premium to get one.

Characteristics of goods to be Sourced

The characteristics of goods that you wish to source may impact a lot of things. It impacts costs such as duties, taxes and tariffs. It also affects logistics such as storage, handling and transportation requirements. You must carefully analyse the product characteristics and how they will impact the sourcing process.

Laws and Regulations

Each country has a different set of laws, rules, regulations, standards and business practices. This can impact your sourcing strategy, as what is considered legal in one country may be illegal in another country. Also, compliances may lead to additional costs and can affect the overall margins.

Intellectual property rights

When you choose to outsource manufacturing to another country or get new product development done in another country, protection of intellectual property rights can be a major issue. If you think your intellectual property is your only competitive advantage, global sourcing may not be the best option for you unless you choose your suppliers very diligently and have strict IPR protection clauses in place. On the other hand, if cost is your biggest competitive advantage, then global sourcing can help you lower costs considerably.

Quality Issues

When you are sourcing from a country where you have no local presence, quality control may be difficult. When you are sitting hundreds of miles apart in different time zones, it becomes difficult to keep a tab on quality. Poor quality can lead to a lot of problems such as loss of customers, write-offs and loss of reputation. So, unless you can quality control mechanisms in place, global sourcing may not work out too well for you.

For businesses looking to enjoy major cost advantages and have very low time-to-market, global sourcing is the way to go. However, when you choose to source from a faraway country, you are also taking some risks. These risks can be easily managed by a having a local project manager working for you. If you are looking to set up a virtual project management office manned by local, fully qualified and experienced professionals, get in touch with us. Give us a call now to discuss your project requirements.

 

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