Global sourcing is a term used to describe a strategy to purchase goods and services from countries other than your own so that you can access significant benefits. This is because different parts of the world will be at different stages of development and therefore have different cost structures. It may also be because other countries may possess raw materials that are not available in your own country or are in short supply.
Here are seven reasons why you should consider global sourcing.
1. Access to raw materials. If your company uses raw materials that are not abundant in your own country, then you can reduce your supply risk by sourcing globally if the availability of those materials is greater elsewhere. Economies of scale in extraction can also mean lower prices even allowing for the additional cost of transportation and tariffs.
2. Access to cheaper wages. Labor-intensive manufacturing processes can be obtained more cheaply in countries where wages are lower than in your own country. This is particularly true if the technology used has a life cycle. As the technology matures, high wage producers tend to move to the new technology, as the features and benefits it provides can be used to charge a premium price that offsets the higher labor costs. Low-cost countries thus tend to adopt older technology to produce products for the “late majority” of price-buying users. Even without this technological effect, some services can be operated at lower cost abroad due to lower wage rates, for example the number of call centers and software developers now found in India and Eastern Europe. .
3. Reciprocal trade. Global sourcing works both ways, as it involves both a buying organization and a selling organization. If your business sells its products to a country that can also supply the products you wish to purchase, then there may be an opportunity to make a deal that offsets your sales and purchases to give you better overall economic benefit.
4. Learn to do business in another country. Getting to know the culture and ways of working in other countries can be a significant benefit when you want to sell to them. Buying in those countries can be an effective way to learn how to do business with that country before beginning your sales and marketing effort to win business there.
5. Stimulate competition at the national level. Sometimes suppliers from your own country can become complacent if they think they have a significant part of the local market. Finding alternatives abroad can be a good way to attract new entrants (or simply threaten to do so) and shake up the local market.
6. Increase supply capacity. If there is a current or potential shortage of a key material or component for your own manufacturing operation, then you may be at serious supply risk. Finding alternative sources of supply abroad can increase available capacity and therefore reduce risk.
7. Take advantage of having a global organization. If your own organization is global, sourcing through your subsidiaries can be a great way to access global sources that may be difficult to tap on your own.