Lured by the lower costs of offshore material, manufacturing and labor, and advanced by desires to penetrate emerging markets, enterprises have been testing the waters of offshore supply since the 1980s. In recent years, trends such as globalization, outsourcing and cost reduction pressure have accelerated the need for businesses to leverage offshore suppliers.
According to research by Aberdeen Group, the use of foreign suppliers will nearly double by 2008, with offshore sources expected to account for 27% of the typical company's total supply base. Manufacturers and large enterprises will rely even more heavily on offshore suppliers.
The path to successful overseas sourcing of suppliers is strewn with rocks, though. Qualifying suppliers, negotiating agreements and actually achieving the expected cost benefits are not trivial tasks.
Qualifying foreign suppliers is hands-down the leading challenge cited by supply managers, according to the Aberdeen study. Supplier qualification is a linchpin to successful global sourcing. The better a company is at identifying and qualifying suppliers, the lower the supply risk exposure.
Once qualified buyers have been found, the negotiation process will be complicated by more than just language, time zones and cross border legal details. Supply managers also find collaborating and negotiating with foreign suppliers extremely challenging, according to the survey.
Several companies rely on a mix of online and offline sourcing "technologies" to exchange documentation and collaborate with suppliers, such as e-mail and fax. The overlap between these two media suggests some suppliers -- especially those in emerging countries -- do not have access to, or cannot yet afford, the basic Internet access necessary for more advanced online collaboration and communication.
Once a supplier has been found, and the financial details discovered, buyers have to undertake a comprehensive financial analysis of the true costs and benefits of overseas sourcing. Supply managers tempted by the siren song of low-cost country sourcing must be aware of the rocks that lie beneath what, on the surface, appears to be a low-cost supplier. In fact, there is often a direct inverse relationship between the price reductions available from low-cost country sources and increases in other costs such as shipping, taxes and inventory carrying.
Companies must effectively manage these costs and risks. To do so requires segmenting them into six categories:
- Material costs
- Transportation costs
- Inventory carrying costs
- Cross-border taxes, tariffs and duty costs
- Supply and operational performance
- Supply and operational risks
Supply managers must stay abreast of tariffs, trade regulations and geopolitical landscapes that are constantly in flux if they are to understand and manage these categories.
To avoid unpleasant surprises, the sourcing and contract negotiation phases must be a team effort. Although the sourcing search will be led by supply managers, global sourcing requires coordination and input from multiple internal functions.
Manufacturing, finance and business unit executives must also play prominent roles on global sourcing teams. Others involved in global sourcing initiatives include import-export compliance officers.
In addition, certain roles and responsibilities will need to be upgraded. Due to the cross-border nature of these activities, logistics professionals play a vital role in global sourcing efforts. While low-level logistics clerks may serve domestic-oriented organizations well, venturing overseas requires additional skills.
Logistics managers provide valuable insight into transportation costs, as well as tariffs, value-added taxes and delivery lead times. Logistics managers can also help determine the optimal International Commerce Terms (or Incoterms; the roles and responsibilities of a buyer or supplier for managing and paying for cross-border shipping) to use in particular source engagements.
Effective global sourcing requires companies to coordinate sourcing requirements, activities and decisions across the enterprise to maximize buying leverage and supply performance across all geographies. A company cannot maximize the value of its global sourcing initiatives without reliable procedures for calculating and managing landed costs. Many will likely look to existing partners for global sourcing services.
Also key to global sourcing success is the level of automation applied to the process. Companies utilizing online sourcing (e-sourcing) tools find fewer challenges and greater satisfaction with their global sourcing initiatives compared with companies using manual or marginally automated procedures.
For more information on the June 2003 report, "The Global Sourcing Benchmark Report: Balancing Supply Cost, Performance and Risks in an Uncertain Economy," contact Aberdeen Group: www.aberdeen.com (617) 723-7890.