What is Global Sourcing? Benefits, Challenges, Strategies, Global Supply Chain Management

What is Global Sourcing?

Global sourcing refers to the practice of purchasing raw materials, components or services from foreign companies. Usually, organisations procure goods from any source, both domestic and international who offer competitive price and the highest comparable quality. Organisations, today, aim at expanding their supply base and including foreign suppliers primarily for getting a better value as compared to domestic suppliers.

There has been an increase in the trend of outsourcing due to globalisation and increasing complexity of the operating environment of an organisation. Outsourcing refers to an organisation’s practice of using third parties to carry out core competent functions which are carried out in-house.

Most organisations implement different kinds of procurement strategies to make purchases from a pool of efficient suppliers who deliver good quality and cost-efficient goods on time at mutually agreed terms.

The different steps involved in the procurement cycle are as follows:

Needs analysis

The procurement cycle begins when a company identifies a need for a good or service. Recognition of the need can be either internal for materials required to run operations or external for items intended to selling goods. This stage enables organisation to draw an accurate plan for procuring goods and services in a timely bound manner and at a reasonable cost.

Purchase requisition

The requisition for the purchase starts with the process of the procurement. The request for procurement for the purchase of goods can be made in writing, through a mail or online to the purchasing department.

Listing of various suppliers

Finding the right supplier is of utmost important. The right supplier should be able to meet the company’s value and quality of goods standards. The eligibility criteria for selecting a supplier should include manufacturer’s production quantity, reputation, dependability, and customer service.

Evaluation and contract

Subsequent to selection of a supplier, the procurement team will negotiate the best price and specify terms for the purchase such as details of the goods or service, total cost, and quantity to be ordered following negotiation and signed by both parties involved, the purchase order is then given to the supplier.

Receiving the Goods and Services

Thereafter, the vendor delivers the goods and the services at a time which is mentioned. The purchase department monitors, examines the order, and informs the vendor regarding any problems or issues with the items received. Three-Way Matching: In the three-way matching the purchase orders, packaging slips, and vendor invoices are checked and reconciled for any kind of discrepancies. Once the invoices are crossed check and approved, they undergo payment process as per the organisation’s rules.

Record Keeping

This is the ultimate step after the payment is done then the records are sent for the process of bookkeeping and auditing. After which all the documents pertaining to purchase requests and approved invoices are stored at a central location

Global sourcing is one of the most widely used procurement strategy. Global sourcing is defined as the process of identifying, developing, and using the best source of supply for the organisation from the global market.

Organisations use this strategy to source goods and services from global market to ensure efficient procurement. The major objectives of sourcing globally are to lower production costs and to maintain the required quality standards of products and services. The procuring company must also ensure that the various factors related to procurement such as pricing, quality, and deliverability are sustained for a long-term.

Today, China has become a global sourcing hub and it manufactures various products that are valuable to the world using its low manpower costs while maintaining high quality in all its products. USA, European Union and Japan are the biggest trading partners of China. Recently, various tariffs have been imposed on products from China due to which India has emerged as an alternative market and these countries can import goods from India Instead of China. In short, India has become a best alternative for China.

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Why Source Globally?

The practice of global sourcing has gained enormous preference by most organisations. Using global sourcing, organisations can effectively exploit efficiencies related to product and service delivery including low cost skilled labour, low cost raw material, breaks and low trade tariffs.

Some of the most important reasons for international sourcing are as follow:

• Learning how to succeed in new unexplored markets
• Tapping skills that are not available in domestic market
• Tapping resources that are not available in domestic market
• Developing alternate suppliers
• Stimulating competition
• Supplementing the supply capacity
• Gaining and maintaining growth
• Gaining competitive advantage over competitors
• Improving product quality
• Improving product design
• Reducing costs
• Tapping better quality products as compared to domestic products‰
• Accessing world class technology

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Benefits of Global Sourcing

In 2003, Trent and Monczka defined global sourcing as the worldwide integration of procurement, engineering, operations, logistics and even marketing within the upstream portion of a firm’s supply chain.

Organisations that are able to successfully implement global sourcing strategy usually gain cost-savings, improved quality, supplier technology contribution, and supplier responsiveness.

The most visible and most critical benefits of global sourcing include cost savings, quality, and availability.

However, some of other important benefits of global sourcing are as follows:

• Accessing international research and design
• Accessing new technology and capacity ‰‰
• Breaking the barriers to entry to foreign markets
• Enhancing the competitive position ‰‰
• Increasing number of suppliers
• Ensuring counter-trade obligations
• Ensuring better delivery
• Gaining faster corporate growth
• Gaining access to qualified personnel
• Redesigning business processes
• Improving speed to market
• Improving agility

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Challenges of Globally Sourcing

Just like any strategy has its pros and cons, global sourcing strategy also has certain advantages and challenges.

The various challenges related to global sourcing are discussed as follows:

Deciding whether global sourcing is right or not

Engaging in external sourcing of products can reduce the costs of sourcing drastically. When global sourcing is considered, it usually appears quite similar to domestic sourcing. However, global sourcing differs from domestic sourcing with respect to factors such as administration, communication, and higher implied costs. Apart from considering the per-unit cost of sourced goods, the organisation also needs to consider the implied costs of administration and communication

Organisations engaging in global sourcing usually have to deal with multiple issues related to different regulations and cultural differences of various countries. To deal with such issues, it is essential that the organisations contract a professional agency. Global sourcing also requires active and timely communication.

Complicated logistics

Managing logistics involves management of other problems such as transportation delays, border-crossing procedures, and longer inventory management. The procurement executives in low-cost developing countries usually lack advanced logistics knowledge; so, upskilling of logistics executives may also be a challenge in the implementation of global sourcing.

While developed countries have substantially improved their knowledge of logistics management, developing and under developed countries are usually not familiar with the different types of high-standard requirements such as sequence deliveries combined with Just-In-Time, Electronic Data Interchange (EDI) communication, and Vendor Managed Inventory (VMI).

For instance, if an American company is planning to procure some Made in India products, then they must take a stock of the logistics capability present in India. If the American organisation knows that in India, road transport is the most widely used mode of transportation, then the organisation must evaluate the condition of road transportation in India. India has an extensive road network supplemented by railways network.

However, the roads are not very well-maintained. This, along with the fact that many of the drivers are unqualified adds to problems of road transportation in India. Although, efforts are being made to resolve all these issues, they do impact the performance of the overall supply chain.

Cultural and lingual differences

When sourcing globally, organisations usually have to face cultural and language-based differences. While cultural issues are manageable, they must be handled diligently.

The language differences among countries usually obstruct communication and technology transfer. Most of the suppliers from developing countries usually employ technical staff and sales personnel who have working knowledge of English, but there are various occasions when all such personnel need to interact with experts for discussing professional technical issues.

It is possible that the personnel are not experts in using English language or some other western language. Therefore, the organisations may use translators having the technical background.

Volatile economic and political environment

For global sourcing, the economic and political environment poses extreme risks. For instance, developing countries offering cheap labour, may be experiencing uncertain economic situation. The world and especially the USA witnessed an economic depression in 2008.

A financial crisis also happened in 1999 in the Asian economy due to which currency decreased immensely over one weekend. It has been observed that after such economic crisis and downturns, the companies usually do not engage in any economic and investment activity.

Currency exchange rate fluctuations

When an organisation is engaged in global sourcing, it usually exchanges money between the domestic countries and foreign partners. When the exchange rates are stable, it is very easy to carry out international trade.

Different standards and regulations of global sourcing

Different countries of the world are in different phases of industrialisation where each country has different industrial standards. The buyer organisation may take a lot of time to clearly understand the different industrial standards which might be self-explanatory to the domestic buyers of that country.

In the current business environment, industrial standards followed by various countries differ from each other which may lead to inefficacy in global sourcing or disharmony in operation. Apart from the different standards, the governments of different countries also make specific regulations that can affect global sourcing directly or indirectly.

The governments impose these barriers for the following reasons: 

• To promote Make in India scheme
• Making foreign goods costly to protect domestic products
• Prevent dumping of goods at a cheaper rate

Complex supplier selection

The buyer organisation should identify, select, and evaluate all the potential foreign suppliers; however, this may be quite challenging. Supplier selection and evaluation are important for supply chain performance. Selection of supplier should be objective and based on multiple criteria such as:

• Capacity
• Communication capability
• Cost
• Location
• Order system and cycle time
• Product and process technologies
• Quality
• Reliability
• Service
• Willingness to share technologies and information
• Financial stability
• Reliable delivery
• Ontime delivery
• Long term relationship potential

Time zone difference

As organisations are working with suppliers across the world, the day time for an organisation might be night time for the supplier. When the supplier working hours are over, it might be working hours for the client organisation.

Waking and working hours do not coincide, which can be a challenge when a complex situation arises. the amount of time lost due to clarifying a product related question or process might create barrier in operations.

Quality standards

Quality standards, safe and packaging regulations, and labelling regulations differ from country to country. Some countries have strict regulations regarding quality standards. Moreover, the materials or ingredients in a product offered by a supplier might be prohibited in other country, which may pose a barrier.

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Global Sourcing Strategies

In the beginning of this chapter, you studied that different organisations use different types of strategies for procuring goods and services. Global sourcing is one of the sourcing strategies.

However, even when organisations are considering global sourcing, it can pursue different types of strategies:

Cost-based strategy

For organisations making sourcing decisions, cost is a key factor. Cost is not only an important factor to source globally rather it is a threshold requirement for competing globally. Cost-based strategies are widely accepted and embraced by all the organisations to such a level that cost savings do not necessarily provide competitive advantage to companies.

Organisations have observed a global trend that all organisations try to procure at the minimum possible cost. This has become a norm and organisations usually adopt this practice as a norm and not as a specialised strategy.

According to Bernard Chandonnay, CEO of Far Group Europe, in an interview, stated that any cost advantage associated with global sourcing was already beginning to disappear. He also stated that “because all our competitors source abroad there is little differentiating value in terms of price.”

Quality-driven strategy

As organisations look forward to preparing themselves for future, they attach the highest priority to product quality. However, many global sourcing organisations are not confident about the effective management of risks associated with product safety. Therefore, now the organisations want to increase their attention towards setting quality standards and understanding the areas where things may go wrong. Also, managing product safety risks is also important.

When organisations consider the probable results that may realise as a result of product failure or product recall, organisations need to manage risk by taking the following steps:

• Choosing the right supplier
• Applying rigorous quality control procedures

Tax-driven strategy

When organisations source globally, they usually consider the impact of tax. Global sourcing activities are implemented in a manner to achieve the following:

• Ensuring the alignment of sourcing activities with profits
• Ensuring robust transfer pricing policies
• Minimising customs duties and other corporate tax exposures

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Global Supply Chain Management

You are already aware that today’s business environment is extremely competitive. Today, the competition that exists is not in the form of one company versus another company or one brand versus another brand. Rather, the competition exists among the entire supply-chain networks. It means that in today’s business environment, competition exists between one network of suppliers-brand-company and another network of suppliers-brand-company. In such a globalised environment, the success of a business depends on the ability of the organisation’s management to integrate all the members of an organisation’s network.

Supply chain management is an integration of business processes, starting from the end users through suppliers, which provides products, services and information that add value for customers. It is also a great way for managing business and relationship among all supply chain members.

Similarly, Global Supply Chain Management (GSCM) is a supply chain management that is practiced at a global level. There are three qualities that are characteristic of great supply chains namely agility, adaptability, and alignment. Agility means that the global supply chains are able to respond to sudden changes in demand or supply.

Adaptability means that the supply chains are able to adapt and change with changing market structures and environmental changes. Alignment means that the supply chain management must align the interests of all members of the supply chain network.

For successful GSCM, there must be free and uninterrupted flow of information among all the supply chain members. Information sharing is what creates a true value chain for all supply chain members. Information sharing helps in ensuring transparency within the supply chain. Information sharing within the supply chain with respect to customers and the overall market helps in gaining an insight into the market trends which helps in better planning and product development

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Objectives of Global Supply Chain

Let us now discuss the objectives of the global supply chain:

Creating value

Business organisations aim to create value for all the members of the supply chain by performing various activities such as conceptualising, designing, manufacturing, marketing, and servicing its products and offerings. All these interrelated activities are known as the value chain.

An organisation can gain competitive advantage as against competing organisations if it is able to provide a similar product to its buyers at lower cost having a comparable buyer value. The organisation can achieve lower costs by performing activities more efficiently as compared to competitors or by creating differentiated products that can command a premium price.

Organisations may use Michael Porter’s value chain (used to understand how value is created within organisations) to carry out these interrelated activities.

In Porter’s value chain model, there are primary activities and support activities. The primary activities include the following:

• Inbound logistics
• Operations (manufacturing)
• Outbound logistics
• Marketing and sales
• After-sales services

The secondary activities include the following:

• Firm infrastructure
• Human resource management
• Technology development
• Procurement

Two primary activities namely inbound logistics and outbound logistics relate to supply chain. Inbound logistics involves the procurement of raw materials, parts, related services, etc., whereas outbound logistics involves activities that help in delivering finished products to the end customers.

The organisation must understand that its competitive advantage depends on its ability to organise and perform all the related activities competitively. The amount the buyers are ready to pay for the products and services of an organisation decides the value created by a firm. The organisation can become profitable if the total costs are less than the value of performing the required activities.

Achieving and Maintaining Global Competitiveness

Global Supply Chain Management is an important function that can help in achieving and maintaining global competitiveness. For instance, Global Supply Chain Management is extremely important for global retailers and e-commerce retailers such as Flipkart and amazon.

GSCM emphasises on minimising and eliminating wastes by vertically integrating all functional activities required for supplier management, customer management and scheduling management. Vertical integration in case of global supply chain aim at integrating and managing the following major sub-systems namely suppliers/sub-contractors, transformation/manufacturing, and distribution as shown in Figure:

Supply chain can be optimised if all the members of the supply chain namely suppliers, manufacturers, and distributors work closely to achieve lowest possible lead-time at lowest cost while maintaining quality. An integrated supply chain involves a smooth flow of materials, finances and information from purchase to transformation to distribution.

Some of the major tenets related to the concept of supply chain management are as follows:

• SCM aims at achieving cost economies and efficiencies.
  
  
• SCM relates to all the functional activities that relate to the flow of products and materials from procurement to operations to end-user delivery.
  
  
• SCM identifies the entire process starting with the procurement of materials till the delivery of goods and services to the end consumer.
  
  
• SCM vertically integrates all the supply chain members and their operations.
  
  
• SCM activities are coordinated using an information system. SCM helps in ensuring the achievement of objectives of all the supply chain members.

Ensuring Efficient Logistics (Planning and Implementation of Supply of Goods)

Today, logistics has become an important and integral part of supply chain. Logistics refers to the entire process starting with the acquisition of resources, storage of materials, and transportation of these materials to their final destination. Global supply chains use international logistics that involve conceptualisation, design, and implementation of a system which can be used to transport goods and services across borders of countries.

Logistics also involves implementation of a strategy for procuring inputs making the goods and services available to end customers after the production process. International logistics must be able to ensure transport of goods swiftly, reliably, and at lowest possible costs. This is essential for the integration of global supply chains.

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Make or Buy Decision

Before carrying out a procurement process, most organisations are usually confronted with an important strategic decision called make or buy decision. In this decision, the organisation needs to decide whether it should produce a good or provide a service in-house or it should buy the good or contract out the service to external suppliers.

An organisation must be able to understand what are their core competencies and the activities that they can carry out with a relative competitive advantage over competitors. If an organisation has a relative advantage over competitors, the organisations should undertake such activities internally.

Let us consider an example. While running an airline, the airline owners can take the aircraft and crew on lease and they can buy the ground-handling and check-in services. The airlines may also contract out sales and customer interface. It is more economical and intelligent to buy or contract out products and services in which an organisation lacks experience or technology or efficiency. Buying and contracting are features of mature supply markets having significant competition that helps in obtaining goods and services at a lower cost than the cost the organisation might have incurred when it used its own resources.

For instance, if the core competence of the airline lies in planning a network, i.e., deciding where to fly to and from, obtaining the slots from the relevant airports, negotiating with governments, buying aviation fuel, and developing and promoting their brand, then they should conduct these activities themselves.