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Global sourcing is a strategic sourcing strategy that effectively broadens the scope of the procurement process to include companies that operate in other countries. Strategic sourcing is the internal business process used to manage the bidding and vendor selector process. Procurement is also known as purchasing and refers to the laws surrounding fair and equitable bidding opportunities.
The use of global sourcing has been the driving force behind the development and expansion of the global economy. Including suppliers from around the world in the bidding process for large contracts reduces prices and increases competition. The creation of this type of infrastructure allows firms to create subsidiary offices in locations around the world. There are three main industries that are ideal for this strategy: manufacturing, skilled services and telephone call centers.
Manufacturing costs vary internationally due to currency conversion and the cost of living in different countries. The costs of labor and materials are lower in developing nations than in North America. This difference translates into significant savings in salary and benefit costs.
Skilled services such as purchasing, engineering, information technology professionals and consultants are a growing area of global sourcing. The level of skill and knowledge held by these professional allows them to provide high quality services to their employers. Due to the lower cost of living in different nations, many firms are building their professional services departments outside North America.
Telephone call centers have grown exponentially in India and other countries where English is the primary language. The staff, equipment and construction costs for these facilities are significantly less than in North America. In addition, there is a large pool of potential employees who are interested in this type of employment opportunities.
Global sourcing has both benefits and risks. The benefits of sourcing for the employer include lower labor costs, less government oversight and a larger pool of potential employees and customers. For the employees, the benefits include a higher wage, improved working conditions and learning transferable skills. The risks include higher costs due to cultural and language related issues.
Diversifying business operations across different countries increases business travel and local management issues. Most companies prefer to transfer knowledgeable staff to global locations for senior management positions. In addition, they limit local management hiring to the supervisory levels.
Logistics and transportation issues are critical to sourcing decisions. Any company considering international suppliers must create an infrastructure of staging and storing locations in these nations. Contracts with shipping and transportation companies add to the costs of global sourcing for manufacturing plants.
This can lead to an increase of supply chain risk as regards quality assurance while trying to reduce cost structure. The major reasons for global sourcing are to take advantage of the low cost of labor, but this low cost is not always low, as it disregards the costs associated with a higher inventory to increase buffer, transportation costs, obsolescence costs and the general costs of administering business relationships abroad.
The compatibility with just in time sourcing poses a great challenge for companies that engage in global sourcing, because of the risk of response time, loss of trust among supply chain partners, loss of intellectual property and increased vulnerability.
Companies need to weigh the possible advantages and disadvantages of global sourcing before investing their resources to avoid brand crises.
@ Alchemy- Your post leads to another possible disadvantage to global sourcing. Global sourcing helps foreign companies develop their technology, and become more efficient in their operations. This creates increased long-term competition for the established firms sourcing their products globally.
Companies that practice global sourcing are training foreign workers in their processes, and giving them insight into operational practices that the company uses to garner market share. Often this is inadvertent, but just as often this is due to corporate espionage. Almost any country you go to, the people who work there will be more loyal to their own countries and companies than they are to a foreign firm looking to exploit their countries cheap resource prices, cheap labor force
, or lax laws.
While a company develops these foreign markets, innovation on domestic technologies and resources begins to taper off. Less investment in our own economy leads to its weakening.
Domestic companies that practice global sourcing will always pay a premium over companies local to the foreign market. This is due to increased supply chain costs, regulations and tariffs favorable to local companies, and the logistics of managing operations overseas.
Global sourcing can also lead to quality control problems. Global sourcing of manufacturing processes can lead to poor quality control standards as well as the perception that the goods are of lower quality.
This used to be true of products made in China. However, this has become less of an issue in some manufacturing sectors lately. With higher standards though come higher prices, making global sourcing to these areas less attractive.
Some Chinese brands are even gaining international recognition and market share because of their quality standards and product affordability (Lenovo, Haier).