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Guest Column: Top 10 Factors to Consider When Sourcing Globally
Think TLC, TQM and location, location, location when making international sourcing decisions
Think TLC, TQM and location, location, location when making international sourcing decisions
October 25, 2006 — So your small business is experiencing better-than-expected growth, and you're ready to take the next step and expand globally? Think about when you go shopping: more often than not, you may notice the phrase "Made in Mexico," "Made in Sri Lanka," "Made in Italy" — perhaps on the tags on your clothes, your daughter's new doll, the towels in your bathroom, the radio on your desk.
This is all part of living in a global economy. Besides fulfilling country of origin marking requirements, what are the factors behind that tag? How did the stylish wool sweater come to be sourced across the water in Italy? Or who decided Egypt would be the best place to source cotton towels? While there are multiple factors going into such a decision, following are 10 basic points companies should keep in mind when looking to source from around the world.
Total Landed Cost. It is easy to focus on the lowest unit cost and assume that's the best way to go. However, unit cost is just one of the pieces completing the total cost equation. Other factors include transportation, customs and duties, brokerage services (both at origin and destination), banking fees, financing and insurance, to name a few. Further, there could be additional, unexpected costs. If customs decides to examine the freight, you should add in charges for the examination and local coordination charges. What if fumigation is required? More charges. Any delays in the supply chain could result in expedited freight charges in order to meet the target delivery date. While these may not occur, it is best to plan for the worst and hope for the best.
Product Quality. The quality of the product has ramifications over and above the unit cost on the balance sheet. Quality needs to be defined so that both the supplier and buyer understand and are in agreement. If there are issues with the quality of the product, it is much harder to address with a vendor through cultures, time zones and geographies than if you are meeting with a local supplier. Poor quality affects everything downstream, most obviously the rate of returns by dissatisfied customers. Returns drain the business, taking up resources that should be focused on getting good product out to the market, not receiving bad product back in. Defective product may need to be sold at a discount or written off as a loss, both affecting the bottom line. A key part of an efficient supply chain is having quality product all the way through it. In some cases it may be a case of trial and error, but over the years as relationships grow, some suppliers stand out as offering a consistently superior product. These are the relationships to nurture.
Logistics Capability. All the great products and quality will mean nothing if you are unable to get the goods to market. What type of transportation is available, both domestically and internationally? After all, you've got to get the goods to an airport or seaport for transport; is there a reliable transportation infrastructure in the country? Are you relying on a well-fed yak to negotiate a tricky mountain pass to get to a major port, or is there a sound transportation infrastructure from the sourcing/manufacturing origin point to the port? Once the freight is ready for international transport, is there space or lift available? Seasonal fluctuations and weather should be taken into consideration. Last year's hurricane season hitting the Gulf Coast of the United States is a great example: Katrina affected the logistics of industry and business far beyond the immediate region. It is important to have the flexibility with service providers to quickly implement alternate plans in case the primary plan or transportation lane becomes unavailable.
Location. At the risk of sounding like a real-estate agent, consider location, location, location. The close proximity of a country may make it a more attractive source — case in point, Canada. Canada is the largest U.S. trading partner, both for imports to the U.S. market, and exports, being the largest recipient of U.S. goods. In the same vein, Mexico is the second largest importer of U.S. goods, and third as a source of imports to the U.S. market behind only Canada and China. The close proximity leads to benefits like doing business in the same, or close, time zones. In addition, common cultural differences and similarities, including language, are known, as many of the populations in the three North American countries have their origins or families in the neighboring countries. The North American Free Trade Agreement (NAFTA) has also done a lot to ease restrictions on trade between the countries.
October 25, 2006 — So your small business is experiencing better-than-expected growth, and you're ready to take the next step and expand globally? Think about when you go shopping: more often than not, you may notice the phrase "Made in Mexico," "Made in Sri Lanka," "Made in Italy" — perhaps on the tags on your clothes, your daughter's new doll, the towels in your bathroom, the radio on your desk.
This is all part of living in a global economy. Besides fulfilling country of origin marking requirements, what are the factors behind that tag? How did the stylish wool sweater come to be sourced across the water in Italy? Or who decided Egypt would be the best place to source cotton towels? While there are multiple factors going into such a decision, following are 10 basic points companies should keep in mind when looking to source from around the world.
Total Landed Cost. It is easy to focus on the lowest unit cost and assume that's the best way to go. However, unit cost is just one of the pieces completing the total cost equation. Other factors include transportation, customs and duties, brokerage services (both at origin and destination), banking fees, financing and insurance, to name a few. Further, there could be additional, unexpected costs. If customs decides to examine the freight, you should add in charges for the examination and local coordination charges. What if fumigation is required? More charges. Any delays in the supply chain could result in expedited freight charges in order to meet the target delivery date. While these may not occur, it is best to plan for the worst and hope for the best.
Product Quality. The quality of the product has ramifications over and above the unit cost on the balance sheet. Quality needs to be defined so that both the supplier and buyer understand and are in agreement. If there are issues with the quality of the product, it is much harder to address with a vendor through cultures, time zones and geographies than if you are meeting with a local supplier. Poor quality affects everything downstream, most obviously the rate of returns by dissatisfied customers. Returns drain the business, taking up resources that should be focused on getting good product out to the market, not receiving bad product back in. Defective product may need to be sold at a discount or written off as a loss, both affecting the bottom line. A key part of an efficient supply chain is having quality product all the way through it. In some cases it may be a case of trial and error, but over the years as relationships grow, some suppliers stand out as offering a consistently superior product. These are the relationships to nurture.
Logistics Capability. All the great products and quality will mean nothing if you are unable to get the goods to market. What type of transportation is available, both domestically and internationally? After all, you've got to get the goods to an airport or seaport for transport; is there a reliable transportation infrastructure in the country? Are you relying on a well-fed yak to negotiate a tricky mountain pass to get to a major port, or is there a sound transportation infrastructure from the sourcing/manufacturing origin point to the port? Once the freight is ready for international transport, is there space or lift available? Seasonal fluctuations and weather should be taken into consideration. Last year's hurricane season hitting the Gulf Coast of the United States is a great example: Katrina affected the logistics of industry and business far beyond the immediate region. It is important to have the flexibility with service providers to quickly implement alternate plans in case the primary plan or transportation lane becomes unavailable.
Location. At the risk of sounding like a real-estate agent, consider location, location, location. The close proximity of a country may make it a more attractive source — case in point, Canada. Canada is the largest U.S. trading partner, both for imports to the U.S. market, and exports, being the largest recipient of U.S. goods. In the same vein, Mexico is the second largest importer of U.S. goods, and third as a source of imports to the U.S. market behind only Canada and China. The close proximity leads to benefits like doing business in the same, or close, time zones. In addition, common cultural differences and similarities, including language, are known, as many of the populations in the three North American countries have their origins or families in the neighboring countries. The North American Free Trade Agreement (NAFTA) has also done a lot to ease restrictions on trade between the countries.
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