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Global Sourcing

Procurement 201 Sourcing 201 Global Sourcing

Global sourcing decisions are having an enormous effect on product development, cost management, exploration of new technologies, delivery reliability, increased flexibility, and the balance of trade among nations. Using suppliers throughout the world has become a necessity for many businesses looking to sustain and grow their competitive advantage
Engaging in an international purchasing decision requires purchasers to pursue a global sourcing process.

  • Sourcing decision. Once the inventory plan has been drafted, buyers must begin determining whether internal, domestic, or global sources should be used. Reasons for selecting a global source are cost and lack of capability to produce internally, unavailability of product in domestic markets, lack of internal or domestic quality or technical competencies, search for alternative suppliers, and search for lower-cost alternatives.
  • Supplier selection. Locating global suppliers has become easier in today’s Internet-connected world. A critical part of the process is deciding whether purchasing is direct from a foreign supplier or indirect through a trading intermediary. If the latter is chosen, the partner will perform the administrative and legal functions. If purchasing is direct from a foreign supplier, it will be the buyer’s responsibility to manage such activities as supplier search and financial validation, verification of production requirements, ability to maintain inventory levels and meet delivery times, and willingness to enter into long-term partnerships. This step ends with returned RFQs from the identified suppliers.
  • Supplier negotiation. It is critically important in the negotiation to firmly determine the supplier’s capability to meet quality, volume, and delivery targets for the cost proposed. Other points of negotiation must confirm such issues as transportation, duties, security restrictions, copyright protection, taxes, insurance and broker costs, inventory carrying costs, risk of damage or spoilage, fee for documentation, terminal and port costs, letters of credit, environmental concerns, and more.
  • Sourcing terms. The outcome of the negotiations should be firm statements regarding the operating and administrative terms of the relationship. Of particular concern is currency valuation and management of fluctuations in exchange rates. Also, shipping terms, transfer of ownership, and method of payment (cash, bank draft, letter of credit, or direct bank debit) must be finalized. Another concern is the payment of tariffs or duties on imported goods. Finally, the outcome of the negotiation is the establishment of a good deal of understanding and insight about the supplier’s country and customs.

Global Sourcing Advantages/Disadvantages

Engaging in international purchasing contains benefits and risks

Advantages

Disadvantages

Access to a wider range of products and services

Increased product and delivery risk

Access to high quality

Longer lead times

Increased continuity of supply

Decline in quality

Access to lower material, labor, and overhead costs

Variances in currencies and exchange rates

Access to advanced technologies

Potential cultural conflict

Access to foreign markets

Higher channel inventories

Access to new suppliers

Extension of communications

Ability to engage in countertrade

Domestic social and labor issues


Higher cost of doing business

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