By John Brockwell
Is global sourcing really worth it?"
For a variety of reasons, executives at many companies are reconsidering whether or not they should be buying products from international sources. Companies are facing higher than expected costs of materials and labor, a declining U.S. dollar and rising fuel prices, while some are experiencing the persistent quality issues that we continue to read about in today's headlines.
Concerns regarding quality affect consumer choices. A Reuters/Zogby poll recently released on September 19 found that 78 percent of Americans worry about the safety of Chinese imports, and 25 percent have stopped buying food from China. In the poll, 35 percent of respondents were "very worried" and 43 percent were "somewhat worried" about the safety of Chinese goods.
Not only must executives be concerned with the quality and reputation of their own products and brand, but now there are risks of being associated with a larger brand — "Made in China." At a time when China has become the largest source of imports for the United States, company executives are evaluating their reliance on China-based suppliers. Though the government of China is working to improve their brand image by instituting and enforcing quality standards, it might not be enough to stave off buyers from reconsidering their sourcing decisions. International sourcing and procurement can have high rewards, but those rewards bring additional high risks.
Advantages of Global Sourcing
Many companies are still making procurement decisions based primarily on unit cost. The global explosion of connective technologies, well-educated workers and capital has made it possible to, almost literally, have the entire world compete for the opportunity to sell to your business. And with that competition comes a tremendous opportunity to reduce costs, especially labor cost. Of course, many companies procure goods from global sources for other reasons as well, including:
- Access to fresh research, design or specialized intellectual capital.
- Availability of new technology and capacity. Many companies source overseas because domestic suppliers lack the capacity and are not making the necessary investments to stay competitive.
- Plans to sell or service locally. Some companies source locally to help break the barrier to local market entry. Or their customers have now moved manufacturing processes to that country and want to be serviced locally.
- Proximity to raw materials.
- Superior quality. Many companies praise the quality of international source product compared to U.S. products. This is typically due to supplier investment in technology and capacity to attract global business as mentioned above.
Five Critical Questions
So how can procurement, supply chain and operations executives help their companies reap the rewards and mitigate the risks of global sourcing? By asking five key questions executives can make a richer decision about the initial transaction while establishing a framework to regularly evaluate the total product lifecycle:
1. What are the specific parameters and assumptions of this transaction that make this a good business decision?
- Payment Terms: What are the Incoterms and payment terms? Do the payment terms support our goals for Days Payable Outstanding? Do the payment terms negatively impact the supplier's working capital structure?
- Direct Costs: What are the cost of raw materials and labor that go into the process?
- Delivery Costs: What will be the total landed cost or delivered cost?
- Planning: Do the planning processes and information flows between our company and the supplier align (i.e., forecast, change orders, order lead times, lot sizes and set-up times, transit times, etc.)? How about between our supplier and their suppliers? What is the critical path set of parts we need to be concerned with?
- Working Capital: Will there be any additional working capital requirements for holding more inventory?
- Flexibility: What is the ability of the supplier to react to upside demand? What is the downside risk if the forecasts don't materialize?
- Quality: What are the required quality standards and where in the process does it make sense to inspect for quality?