Global Sourcing: Levels and risks

Global sourcing is an issue that executive management needs to be cognizant of these days because the repercussions of ignoring global sourcing could be devastating to the future health of an organization. The opportunities to strengthen an organization’s position are there for the taking if the company will invest in them.

Where should one begin, though? There are so many things to consider when evaluating where your organization stands in terms of its global reach, not just to its customers, but also with its suppliers. Issues that management should be aware when it comes to global sourcing include:

• The distinction between Global Sourcing vs. Global Procurement
• Levels of Global Sourcing

• Risks

Global Sourcing vs. International Purchasing
First, a distinction needs to be made between global sourcing and international purchasing. Global sourcing places an emphasis on identifying opportunities to “improve quality, lower prices, or gain efficiencies on a worldwide or regional basis. Global sourcing helps identify opportunities, coordinate initiatives and make programs available to merchants worldwide (1).” Global sourcing is very complex in its nature, because it aims at integrating the purchasing function as a vital role. This emphasizes working closely with suppliers to ensure that the needs of the customer are being fulfilled.

On the other hand, international purchasing can be viewed as a function within global sourcing, where product is imported for sale within a country and there is little involvement with the company supplying the product. This is more difficult than purchasing domestically. However, international purchasing can be viewed as more of a tactical function than as a strategic function.

Wal-Mart has been actively pursuing a strategy that emphasizes global sourcing. For example, Wal-Mart identifies common products used throughout the world and “determines whether there is an opportunity to improve quality, reduce costs and, by working with a best-in-class supplier, achieve better replenishment and new item introductions (1).” For instance, Wal-Mart has worked with its copy-paper sales supplier to offer new products and more value to customers throughout the world. By actively working with these suppliers, Wal-Mart has realized sales increases of 46 percent in England, 94 percent in Germany, 38 percent in Canada, and 25 percent in U.S. discount stores, and a 13 percent increase at Sam’s Club stores (1).

Levels of Global Sourcing
Knowing where your organization stands in terms of its global network of suppliers influences how much improvement your company can achieve. According to Robert Trent and Robert Monczka — leading academics who have done extensive business consulting — there are five different levels of purchasing that an organization can operate:

Level I identified by domestic purchases only

Level II described by purchases internationally on an as needed basis

Level III represents a shift in sourcing strategy to include international purchasing

Level IV involves central coordination of purchasing across global business locations

Level V achieved through worldwide integration and coordination with other functional groups (2)

Recognizing where your organization stands within these levels will provide the opportunity to capitalize on improving your company’s long-term performance. With this information, you are now equipped to make informed decisions about how the organization should improve its performance.

One organization that has capitalized on global sourcing is U.S.-based Santek Chemicals. Caught in an extremely competitive market with little chance to differentiate, Santek re-evaluated its sourcing strategy to lower its operating costs by 30 percent to remain competitive. Previously, Santek operated its global facilities with a customized approach that did not utilize any coordination between facilities. Recognizing the need for better integration, Santek’s executive management initiated a centrally coordinated global sourcing process.

Santek now carefully examines each global project “to identify areas of commonality and synergy in procurement and design.” This process of review has progressed from focused commodities to other areas of the business to include Santek’s global projects for services and telecommunications. After three years, the result for Santek was, on average, a 20 percent savings on its global initiatives compared to the regional approach previously employed (2). Effectively, Santek realized a shift from a Level 3 organization to a Level 5 organization.

Risks
When considering risks, one needs to identify the hurdles that can impede progress toward quickly and smoothly integrating an offshore supplier. In an offshore destination these hurdles include inadequate government support, unorthodox country laws, and cultural differences. Proactive involvement with the government and strong understanding of the laws of the land can mitigate the headaches associated with outsourcing (3).

It is also strongly recommended that an organization hire an outsourcing advisor to guide the organization through the sourcing process. This can dramatically reduce the costs associated with outsourcing. According to a study conducted by Ross Research, a market research firm, 62 percent of respondents claimed that using an external advisor helped shorten the sourcing process by one to six months. Eight percent indicated a seven to 12 month reduction, and eight percent realized a time saving of one to two years (4).

Another dangerous path organizations often follow is the road to low prices. “You get what you pay for” is a phrase often used to describe the incredible “bargains” that some suppliers offer to win business contracts. Though the price per part may in fact be low, the price paid in quality issues can quickly exceed what an organization can handle financially. A company should conduct site visits to ensure that the supplier is competent, even though it is expensive to visit worldwide locations. The cost of not making these trips could begin to snowball out of control due to sub-par quality. Therefore, when conducting these reviews, an organization “should perform due diligence by acting as if it were purchasing the supplier rather than the supplier’s output (2).”

If a company performs due diligence, it can minimize risks. According to David Cowell, chief procurement officer at bottling company Coca-Cola HBC, it is more important to identify whether a potential supplier was low-risk rather than how competitive it was in terms of price. In addition, ensuring that suppliers are not consumed with all the risks will help to secure a more stable supply chain (5). In the long run, organizations will realize significant savings, without damaging customer service, by performing detailed analyses of global outsourcers.

References:

(1) Anonymous. (2002). Sourcing Synergies Facilitate Cost-Effective Expansion. Chain Store Age, August, 2002, 79-80.

(2) Monczka, R. M. and Trent, R. J. (2002). Pursuing Competitive Advantage through Integrated Global Sourcing. Academy of Management Review, vol. 16 no. 2, 66-80.

(3) Verma, Nishant. (2003). Risk Management for Offshore Deals. NeoIT.com

(4) Ross, Lisa M. (2002). Getting an Outsourcing Deal That Works: Buyers’ Perceptions on the Value of Using External Sourcing Advisors. NeoIT.com

(5) Parker, Robin. (2001). Manage Risks in Emerging Markets. Supply Management, October 18, 2001, 13.