Global Sourcing: Opportunity or Risk

Winds of Change

Global sourcing has been a factor, for decades, for many products such as electronics, auto parts, and consumer goods. Recent arrivals to the party include medical ingredients, chemicals, and food.

The moves occurred for many reasons. For some companies, it changed their role in providing goods to their customers. Supply chain management became the core focus of some companies as they eliminated all manufacturing.

Let’s review the issues involved in global sourcing by taking a closer look at the opportunities and risks associated with the phenomenon.

Opportunities

Seeing the opportunities, for global sourcing, has driven many companies to reconfigure their supply chains.

A few of these opportunities and other reasons include:

• Cost reduction: consumer goods, in particular, saw the movement from domestic production to Korea, China, and other low cost countries
• Follow the competition: as some companies saw their competitors move to global sourcing, the “me too” directive came down from the executive suite
• Only option: as time goes by, certain products, such as electronic components, become available only through sourcing from low cost countries
• New markets: Apple phones are a great example on how producing in China opened up a new market to sell millions of phones inside China
• Pollution: a less than ethical approach, is moving to a country with weak environmental regulations – some claim it lowers the cost

Risks

The movement to global sourcing does come with risk.

Some risks are obvious, while others can be a hidden disaster waiting to strike.

A few of these risks include:

• Brand damage: finding your company name on the front page for child labor issues, conflict minerals, or corruption can be devastating – think about how Nike has gotten into hot water
• Supplier certification: inspecting suppliers is an expensive and never-ending process – and often extends into the need to inspect the suppliers of your supplier
• Lead time: this can often mushroom, from mere days for a local supplier, to six months or more – this brings the challenging need to forecast the mysterious future
• Ability to respond: any challenge in meeting customer needs will quickly translate into air freight – wiping out the expected cost savings
• Product life cycles: developing new products becomes more difficult and the phase-in/phase-out process is much more complicated
• Costs change: a low cost country will often evolve to higher costs as their economy grows – and places with weak environmental regulations change their tune on pollution
• Global catastrophe: all of us now know the chance of a pandemic is not 0% – Covid-19 has shown how fragile and risky many supply chains have become

Case Study

After a reorganization, I inherited a product which had a 40% failure rate. Our quality engineering group isolated the issue to a specific integrated circuit. This part was something we had recently changed to a new supplier in our effort to score big with global sourcing. The enticing benefits of low cost was just too tempting to pass up.

Discussing the failure, to meet our quality expectations, with the supplier was an eye-opening experience. Their response was to remind us how, during the negotiation phase, we only cared about getting the lowest price!

They went on to explain there was an alternative integrated circuit they could provide. It would cost about a dollar more, for a much higher quality product. The warranty costs were considerably more than the dollar and the damage to our brand reputation had been enormous. We went with the higher cost and higher quality part.

The change to global sourcing had saved us nothing.

Remember how I was new to the job. The person before me had gotten a nice bonus for finding that big (fictional) cost reduction.

Summary

Global sourcing requires people to understand the implications of the impact of their decisions.

It requires effort to do it right the first time and a continuing effort to stay on top of things.

The opportunities are real and often very enticing. The risks are less obvious.

To succeed with global sourcing requires a company to up-their-game in terms of supply chain management capabilities. To do otherwise is a recipe for disaster.

About Larry Simon

Larry is an experienced supply chain professional who has helped companies improve performance and align their supply chain to the company’s vision and strategy. This includes the ability to see when it is best to outsource or use internal production capabilities.

Larry has two passions outside of professional activities. One is to give back to others such as working with student organizations at Northern Illinois University and Southern Illinois University. For example, he has helped them compete against other schools in competitions based upon The Fresh Connection business simulation. His second passion is bike riding, logging over 1,200 miles in each of the last two years.

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