What Is Global Sourcing?
Global sourcing is the act of searching for a domestic or foreign manufacturer to produce a product.3 min read
Global sourcing is the act of searching for a domestic or foreign manufacturer to produce a product. Besides giving businesses a chance to reduce their manufacturing costs, this strategy offers many other advantages and possibilities, ranging from product improvement to compliance to regulations. However, it also comes with certain risks.
What Is Global Sourcing?
Global sourcing refers to a procurement strategy that a business uses to find the most cost-effective location for manufacturing one or more of its products. For instance, if a toy manufacturer discovers that it is more cost-efficient to have its products manufactured in a foreign country because of the lower wages of employees in that country, it may shut down its factory and outsource its manufacturing to a foreign manufacturer instead. Global sourcing involves more than just searching for products globally. It is also an effort to improve certain aspects of manufacturing, such as:
- Supplier selection and performance
- Speed to market
- Estimation of product costs
- Trade compliance
Global sourcing may also refer to acquiring components or raw materials that go into products from other countries, not just the country where the company is headquartered. For instance, Starbucks purchases its coffee from places such as Colombia and Guatemala. The main advantages of global sourcing are lower cost and higher quality. It offers many possibilities for companies, from purchasing the finest cocoa beans for producing chocolate to buying high-quality yet low-cost aluminum from Iceland.
Levels of Global Sourcing
There are five levels of global sourcing, including:
- Level 1: Domestic purchases only
- Level 2: International purchases made on an as-needed basis
- Level 3: Sourcing strategy that includes global purchasing
- Level 4: Centrally-coordinated purchasing across global locations
- Level 5: Global coordination and integration with other functional groups
If you know where your company stands within these levels, you will have the opportunity to maximize your business's long-term performance. This information enables you to make informed decisions to take your organization's performance to another level.
Risks of Global Sourcing
When taking risks into consideration, you need to identify the obstacles that can hinder progress toward efficient integration with an offshore supplier. In a foreign country, such obstacles may include the lack of government support, unorthodox laws, and cultural differences. In addition, you should exercise extra caution when you are searching for manufacturers that offer low prices.
Global sourcing has always been a challenge that requires effective strategizing and coordination. While it has been a preferred practice in trade to operate at the lowest cost possible, the status quo has changed due to some massive shifts in global sourcing.
According to an Accenture Strategy study conducted in 2017, sourcing for suppliers in low-cost countries is no longer a feasible long-term strategy for businesses. With strict regulations in place, supplier onboarding and management are now equally important. You also need to obtain and maintain current sample and costing information in order to fully understand the costs of materials and meet product requirements. Even if you are able to do this, you may still face some major problems if you decide to chase low costs.
Brexit, NAFTA, and RCEP
The U.K. has decided that it will depart from the European Union (EU) on March 29, 2019, a move commonly referred to as “Brexit.” Many global trade professionals are assessing the changes, adjusting their procurement strategies, and preparing for a smooth transition. Following Brexit, the U.K. will have to deal with the consequences of being excluded from EU free trade agreements and preference programs. It has to renegotiate other existing trade agreements and form new ones.
As for the North American Free Trade Agreement (NAFTA), there are many more questions than answers. Where do the Americans currently stand? What are the implications? Will the agreement entirely cease to exist?
The Regional Comprehensive Economic Partnership (RCEP) is comprised of Japan, China, India, South Korea, Australia, New Zealand, and all the countries belonging to the Association of Southeast Asian Nations. Over the past few years, there have been ongoing negotiations that can significantly impact the apparel and textile industry in 2018. An improved free trade agreement can result in a more integrated regional apparel and textile supply chain among the members and reinforce the role of China, Japan, and South Korea as the main suppliers. This will lead to more competitive pricing and increased demand from the region.
If you need help with global sourcing, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.