Global Sourcing

Global sourcing is a procurement strategy in which a business buys goods and services from international markets across geopolitical boundaries. This is done to save money by using low cost raw materials or skilled labor from low-cost countries. Global sourcing can help businesses tap into advanced skills, resources and technology not available in their home country.

Sourcing of engineered components from overseas, means that companies can often save money when compared to the cost of sourcing them domestically. The opening of the global market has meant that businesses can take advantage of lower labor and manufacturing costs in other countries. When properly managed, businesses can then increase profits.

Global sourcing involves more than just searching for products globally. It is also an effort to improve certain aspects of development and manufacturing, such as:
-Access to technology
-Supplier performance
-Speed to market
-Product costs
-Trade compliance

Levels of Global Sourcing
Level 1: Domestic purchases only
Level 2: International purchases made on an as-needed basis
Level 3: Sourcing strategy that includes global purchasing
Level 4: Centrally-coordinated purchasing across global locations
Level 5: Global coordination and integration with other functional groups

If you know where your company stands within these levels and have deployed an effective global sourcing process, you will have the opportunity to maximize your business’s long-term performance.

The Global Sourcing Process
-Identify Objectives
-Conduct Research on Supply Partners
-Vet Supplier Capabilities
-Competitive Bidding, Negotiation and Contracting
-Supplier Relationship and Performance Management

Risks of Global Sourcing

When taking risks into consideration, the obstacles that can hinder progress toward efficient integration with an offshore partner must be identified. In a foreign country, such obstacles may include the lack of government support, unorthodox laws, social, and cultural differences. In addition, extra caution should be exercised when searching for manufacturers that offer low prices.

Global sourcing has always been a challenge that requires effective strategizing, planning and coordination. While it has been a preferred practice in trade to operate at the lowest cost possible, the status quo has changed due to some massive shifts in global sourcing. The Total Cost of Ownership concept of Global Sourcing must be considered.

TCO (Total Cost of Ownership) is the overall cost of a product or service throughout its life cycle. This calculation method takes into account both direct and indirect costs.

TCO is the purchase price of an asset or product, plus the costs of operation. A TCO analysis helps businesses determine the difference between short-term (purchase price) and long-term (total cost of ownership) costs of a product or system. Knowing this total cost of ownership provides an additional opportunity for value creation.

Total cost of ownership is the sum of the purchase price of an asset plus operating costs for its lifetime. A simple example would be the cost of owning a car. You can buy a car, but you will still need to for fuel, planned maintenance, unplanned maintenance, license fees and insurance premiums through the lifetime of the vehicle.

When considering materials purchasing, the direct cost can be easily identified as the cost of the material, part or assembly. Indirect costs may not be visible initially and become more evident during the life cycle of the product.

Indirect costs may include, the cost of:
-Transportation
-Inventory
-Supporting personnel
-Quality
-Travel
-Currency exchange rates
-Bank fees

There are three components of cost that must be captured in developing a TCO model: acquisition costs, ownership costs, and post-ownership costs.

Steps in performing a TCO analysis
1)Identify the acquisition you’re analyzing. You can use total cost of ownership to estimate the costs of various products, equipment and intellectual property.
2)Define the length of ownership.
3)Consider all possible associated costs. 
4)Consider possible additional income.
5)Compare several different scenarios.