Enterprises with offshore spend growth that is outpacing decision-making capabilities are dangerously close to spiraling out of control. But companies that accurately identify total cost of ownership factors can ensure global sourcing success.
Global sourcing, distilled to its simplest terms, is the cross-border procurement of goods. That also sums up everything that is simple about global sourcing.
Rapidly expanding sourcing opportunities in current low-cost countries and developing low-cost countries entice firms that want to significantly reduce material costs. Cost of goods reductions becomes essential both to meet internal cost-cutting goals and to provide favorable cost economics for products. Cost reductions also help sales efforts to remain competitive — and profitable — both when growing existing markets and entering effectively into new ones.
However, companies pursuing offshore spend want to know what other offshore costs exist and want to know how to ensure cost-savings promised offshore materialize. Logistics and sourcing staff know that the answers, based on an enterprise's global sourcing management process, or lack thereof, determine success or failure in identifying, managing and executing changes required for global supply management success.
But it is becoming increasingly impossible for businesses to analyze the detailed total cost of ownership (TCO) factors for tens of millions of dollars of spend using manual techniques and obsolete data: Once materials spend crosses borders, so does the range of transportation and other costs. In global trade, these costs can range from 20 percent to 50 percent (up to 80 percent in some industries) of the costs of goods sold (COGS), easily erasing savings estimates based solely on lower material costs.
When sourcing overseas, transportation costs dramatically increase. The Other Costs category expands to include import duties, taxes, fees and payments for services to ease the regulatory burdens of crossing borders. In addition, because of longer transit times and supplier distances from destination plants, costs rise from the not worth the effort of tracking closely to the significant level, including carrying costs, quality costs, supply risk and safety stock.
Firms that want to move through the global sourcing maturation process must make at least two critical decisions. First, how to create realistic objectives to accomplish cost-saving mandates; second, where to get the tools to deliver on these objectives.
The Stages of Global Sourcing Maturation
The following are common plateaus that most companies progress through on the path of global sourcing consciousness and best practices:
* Stage 1: Just Getting Started in Global Sourcing (75 percent+ of Fortune 500 firms in 2003)
Firms at this level are just starting to dabble in global sourcing. Their primary concern is usually on-schedule delivery of goods from overseas suppliers. They are primarily looking to sources in China. They are in transition from using sales agents to direct procurement activities overseas. At this point, they still buy goods on a delivery duty paid (DDP) basis (i.e. having the goods delivered to their plant by the supplier). The anticipated savings expectations here range from 10 to 20 percent.
* Stage 2: Expanding Global Sourcing Efforts (15 percent of Fortune 500 firms in 2003)
As firms expand their global sourcing efforts, they start looking to other current low-cost countries such as China, Latin America and Eastern Europe. At this stage, firms start sourcing larger quantities of product overseas. Some understanding of hidden costs is developing, and alternative Incoterms are being explored. Incoterms are the roles and responsibilities associated with any given cross-border transactions; each Incoterm defines a different set of costs and liabilities for the buyer and seller. There are 13 standard Incoterms, ranging from free on board (FOB) to DDP. Companies at this level may also have a few analysts (logistics and/or finance based) begin looking at some of the cost factors for areas of greatest spend. The anticipated savings by this group is in the 10 to 15 percent range.