Sourcing Strategy – 7 Reasons You Should Consider Global Sourcing
Global sourcing is a term used to describe a strategy for buying goods and services from countries other than your own so that you can access significant benefits. This is because different parts of the world will be at different stages in their development and so have different cost structures. It can also be because other countries may own raw materials that are not available in your own country or are in short supply.
Here are seven reasons you should consider global sourcing.
1. Access to raw materials. If your company uses raw materials that are not abundant in your own country then you can lower your supply risk by sourcing globally if availability of those materials is greater elsewhere. Economies of scale in extraction can also mean lower prices even with the extra cost of transport and duties factored in.
2. Access to cheaper wages. Manufacturing processes that are labour-intensive can be sourced more cheaply from countries where wages are lower than in your own country. This is particularly true if the technology used has a life cycle. As the technology matures, high wage cost producers tend to move on to new technology as the features and benefits it brings can be used to charge a premium price that offsets the higher labour costs. Low cost countries then tend to adopt the older technology to produce products for the “late majority” of users who buy on price. Even without this technology effect, some services can be operated at lower cost overseas due to the lower wage rates – for example, the number of call centres and software developers that are now located in India and Eastern Europe.
3. Reciprocal trading. Global sourcing works both ways as it involves both a buying organisation and a selling organisation. If your company sells its products to a country that can also provide products that you want to buy then there may be an opportunity for doing a deal that offsets your sales and purchases to give you a better overall economic benefit.
4. Learning how to do business in another country. Knowing the culture and ways of working of other countries can be a significant benefit when you want to sell to them. Buying from those countries can be an effective way of learning about how to trade with that country before you start your sales and marketing effort to win business there.
5. Stimulating competition domestically. Sometimes suppliers in your own country can become complacent if they think that they have a major share of the local market. Finding alternatives overseas can be a good way of attracting new entrants (or just threatening to do so) and shaking up the local market.
6. Increasing supply capacity. If there is a current or potential shortage of a key material or component for your own manufacturing operation then you may have a serious supply risk. Finding alternative sources of supply overseas can increase the available capacity and so reduce the risk.
7. Take advantage of having a global organisation. If your own organisation is a global one then sourcing via your subsidiaries can be an excellent way to access global sources that may be difficult to tap into on your own.