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What Should You Consider While Implementing Global Sourcing Solutions?
While considering implementation of global sourcing solutions, you need to understand that the primary objective is to reduce costs. Therefore, you will be able to decrease production costs that will directly affect the bottom line. One basic strategy to achieve this task is to move production of services or goods to places where labor is quite cheaper, like IT services to India and production services to China.
Sourcing opens up a lot of new markets and provides new opportunities through “spot” purchases of services and resources. However, there are some important factors you need to consider. These have been explained below.
Currency Risk – It is very important to consider the currency which will be used in various transactions. This will help you mitigate the risks. It is always better to use the supplier’s currency, when the buyer’s currency is going to strengthen between the payment and agreement dates.
Lead Time – While implementing global sourcing solutions, you need to understand that lead time for all kinds of global purchases is much longer than domestic purchases. Therefore, you need to consider lead times for air freight vs. sea freight and even add some extra time for local warehousing, customs clearance and delivery. This is one of the most important considerations.
Legal Issues – Sourcing solutions require suppliers and buyers to choose a body of law to the contract. There are three options, which include:
● Law in the supplier’s country
● Law in the buyer’s country
● Law accepted by a treaty between both countries
The law chosen by both parties needs to be documented and addressed in the contract.
Culture & Language – For smooth implementation of sourcing strategy, you need to overcome certain complexities related to the human aspects like culture and language. If you’re unfamiliar with your supplier’s language or culture, it increases the risk of misunderstandings, communication challenges and uncomfortable encounters. Therefore, you need to understand and identify these challenges early in the process.
Transportation – Most of the time, sourcing solutions require multiple mediums of transport. In order to identify a streamlined solution, you should consult supply chain specialists. In fact, it may even mean combining water, air and ground transportation. You may also need to combine certain aspects of warehousing to receive goods from your supplier to various delivery points.
Other Risks – If you’ve been sourcing in emerging markets like India, China and other Eastern European countries, you will experience greater risks. In addition to culture and language challenges, there are also other risks like logistics costs, high insurance, packaging considerations and quality concerns. For instance, intellectual property theft has been a major concern in China and slow response rate is experienced in Eastern European countries.
Although there are some risks to global sourcing solutions, they still prove to be quite beneficial for business organizations. In order to maximize benefits of global sourcing, you need to focus on a highly structured, integrated and cross-functional sourcing strategy which receives appropriate human capital and executive support. If you work with the correct processes, teams, people, executive support and technology, there’s no doubt you will reap full benefits.
- License: Creative Commons image source
About the Author
Somchai Voranai is a business writer from Bangkok, Thailand. For more information about global sourcing solutions visit www.tradegood.com.