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.

Speaking of Trade Regulations, there are many governmental regulations that can enhance or detract from the ease of doing business with a given origin. For years there were quota restrictions on imports of textile goods from China. This restriction was removed in January 2005, leaving China trending toward sourcing up to 50 percent of the world market share of textiles. Before any sourcing decision is made, it is imperative that all trade incentives or restrictions be carefully evaluated. It is also essential to be familiar with documentation requirements for U.S. customs clearance. There are many government sponsored publications, brokers or consulting organizations available to help educate an importer in the legal requirements of international trade.

Finances. Any discussion of buying and selling would be incomplete without evaluating the financial aspect, in addition to looking at the actual cost of goods. What terms can be negotiated? What is the risk with a given manufacturer? Is more insurance required to source from a supplier in Vietnam versus Hong Kong? Can your excellent credit terms with your domestic bank be leveraged to benefit the suppliers' financial picture, resulting in less risk and cost to the buyer? How will the increased transport time — resulting in tied up inventory — affect your cash-to-cash cycle?

Time to Market/Responsiveness of Supplier. Time to market is becoming an increasingly critical factor in sourcing decisions. If one's competitor has product available more quickly, the result could be lost market share and, more importantly, lost revenue. It is important your supplier is receptive to, and able to accommodate, change. Perhaps the product needs to be tweaked slightly, or sales are exceeding expectations and production needs to be ramped up. Is the supplier in a position to do this? If the industry is subject to whims (think fashions for teenage girls, for example), sourcing in Latin America may make sense with its proximity to the end market and quicker transport time.

Value-added Services. Are there additional services available at origin to add value to the product? Is it less expensive and more efficient to have garment hang-tags attached at the factory or consolidation site prior to shipping? This can expedite the delivery in the United States by bypassing a facility to do the same work, most likely at a higher labor cost than if it was done at origin. Does the supplier guarantee they will pack the freight to ensure it arrives intact at destination? A new importer might make the mistake of cutting corners on the packaging and dunnage when importing honey from China. The result could be steel drums bouncing around an ocean freight container for 12 days on a vessel, then five more days on the rail, only to have honey oozing out of the container from leaky drums when it is opened at its Chicago destination. Such a situation, sadly not fictitious, has the consequence of lost product, lost sales and significant cleanup — all more costly than investing in the original dunnage at origin.

Communication/IT Capabilities. How will you know what has shipped? Is your supplier a real-time, Internet-savvy, information-sharing partner? Or will you be waiting for documents typed on an IBM Selectric to be pouched over in a DHL envelope? Open dialogue and communication are imperative between the supplier and buyer. Late, missing or inaccurate documents can cause delays of customs clearance and, ultimately, delivery to destination. Inaccurate product information may result in swim shorts to Seattle in September and umbrellas to Phoenix, requiring additional freight and time to correct such an error. E-mail and the Internet, and good old phone calls, can go a long way toward promoting supply chain efficiency.

Human Toll. This one is often overlooked but can nevertheless be a critical part of the decision; there is a real human effort to visit and work with suppliers overseas. In excess of the obvious costs of airfare, hotel and food, each substantial in its own right, is the cost of time away from the office and family. If someone is spending a day or more traveling, that is time away from the office and presumably the work that would be done there. Fatigue comes into play as the traveler works to get over jet lag and be prepared for meetings. In addition, cultural differences need to be thought of ahead of time in order to avoid inadvertently insulting the hosts. Don't arrive in Cairo and expect to work on Friday; don't be surprised in India if, as a female, you are told you may not use the exercise facility in the hotel during "gent's time." Be prepared to be open to different foods, dress, even toilet facilities. There are numerous publications available to coach a traveler on acceptable customs in the destination country. Being even slightly familiar with these and making the effort will be appreciated by your hosts.

The above represents a handful of key factors to consider when making global sourcing decisions. Whether you are new to importing, or just considering sourcing from new origin region, remember there are numerous resources available to help make a well thought out choice. Once an informed decision is made, there is a huge opportunity to enjoy conducting profitable business in the global market.