In this extremely ruthless and competitive business world, only those survive and prosper who play their cards smartly. Talking of smart moves, global sourcing is steadily cementing its place in the list. Its strategy and solutions help business cut their production costs, increase profits and adopt global practices to obtain a smooth supply chain without compromising the quality of products. Numerous companies and corporate giants across the world have reaped the benefits of global sourcing. Why is global sourcing immensely popular? Read on.
What is Global Sourcing?
Essentially, global sourcing refers to a procurement strategy which businesses seek to buy goods and services from other countries other than their own. They look for the most cost-efficient locations situated across the globe for manufacturing their products or executing their services. There is a fair chance of businesses finding cost-efficient procurement opportunities in foreign countries as the development rates vary in different parts of the world which dictates their cost structures. Businesses can benefit from those countries where they can find low-cost labor, resources which are unavailable in their own country such as raw materials or skilled labor. They can also avail economic factors that include tax breaks and low trade tariff.
Significant amount of research should be done before taking the leap towards global sourcing. It has be planned meticulously and strategized efficiently to maximize the returns. Like every other business strategy and practice, you should be aware of the risks involved so that they do not come as a surprise. Being aware will help you in creating a strategy that may be able to address or negate the involved risks.
How Should Global Sourcing Strategy be Directed?
Sourcing goods and services from one’s own country can be tedious and overwhelming. When the same is extended over the entire globe, it can get too much to handle if you new to the game. International sourcing definitely sounds exciting, but it is important for you to know what your global business strategy should address. The following factors should be at the core of every sourcing strategy.
- Overall Costs: One of the primary goals of adopting global sourcing is to reduce production costs. Businesses mainly look at available labor costs while making a decision. However, only labor costs aren’t the only costs that a company has to bear. The strategy should include additional costs such as freight charges, insurance, taxes, bank fees etc.
- Language and Culture: Just because you got a great deal in some country, you should not make the mistake of jumping into sourcing goods and services from there. Make sure you are familiar with the supplier’s language and culture to mitigate the risk of miscommunication. Unfamiliar language may also lead to unfavorable misunderstandings and give rise to numerous challenges. Your strategy should include how to address the difference in language and culture, so that future transactions can be smooth.
- Laws: Any kind of global source requires the buyers and sellers to adhere to the applicable laws. They can choose from three bodies of law to apply to their contracts – it can either be based on the law of the buyer, supplier or one that is applicable under a treaty that is agreed by both the concerned countries.
- Currency: Since two different countries are involved, it is obvious that different currencies will be present. While devising strategies, it is important that both the buyer and seller agree on which currency to use for their business transactions. A decision can be made after a few discussions between the two; however it is advised that the supplier’s currency is used when buyer’s currency might strengthen as compared to the supplier’s currency between the agreement and payment dates.
- Payment Method: Once the currency is finalized, businesses should finalize on a payment method. Leaving it out of the strategy will have a severe impact when the transfer of funds has to be processed.
- Transportation: Procurement services consist of transportation as well. Global sourcing usually involves multi-modal transportation as compared to domestic sourcing’s shipping mode. Global transportation may involve a combination of air, water and ground transportation to deliver goods from supplier’s country to your country. Sourcing strategy should cover this aspect clearly on how the products will be transported and which combination would be the most cost-efficient one.
Strategic sourcing is all about maximizing profits and establishing healthy business relations with fellow countries. It is imperative to look at all the available options and choices, and accordingly make an educated decision before reaching a final conclusion.