Supply Chain Canada, the official magazine of Supply Chain Management Association (SCMA) in Canada recently interviewed Grace Zhang, our Vice President of Business Development on Global Sourcing – Risks and Costs.
Nowadays, in much of the world, you’d have to live a hermit’s life to be unaware of the multitude of goods we consume that come from “elsewhere.”
While most people don’t spend any time thinking about how those goods came to be in their possession, for supply chain people, securing those goods receives a lot of attention.
Sourcing products, materials, parts and services from suppliers around the world is a challenge: It involves significant risk, but also immense potential benefits. Clearly, manufacturers and distributors—as well as consumers—have found the challenge worth accepting; according to data from Statista, the value of the global outsourcing market grew from US$46 billion in 2000 to $89 billion in 2015, with a spike to $105 billion in 2014.
“It’s a big world,” says Angelo Crupi, a professor at Humber College in Toronto and coordinator of its supply chain management certificate program. “Going beyond national borders helps companies access cheaper and better—and sometimes unique—services, materials and products.”
Grace Zhang, VP of Business Development at Strategic Global Sourcing Ltd. (SGS Sourcing) in Vancouver, sees global sourcing as “an investigation business” that aims to reduce a company’s purchasing costs, thereby increasing its competitiveness, and help it attain products that are not available in the local market or not available when required.
Lower-price and better-quality goods certainly have strong appeal, but do the risks associated with global sourcing outweigh those benefits?
Risks Related to Global Sourcing and How to Mitigate Them
Consider the several major risks connected with global sourcing and you might be put off ever doing it again. Those risks pertain to:
- Currency fluctuation – Purchases can become more expensive than anticipated if the value of the dollar drops.
- Transportation – Shipped around the world using various modes of transportation, goods are subject to loss, damage and delay at a higher rate than if purchased in Canada, closer to their destination.
- Low health standards– Lower health and safety standards in some countries mean that products arrive for sale in Canada in a condition that prevents their sale; the use of lead-based paint on toys, for example, is prohibited in Canada but not in all countries.
- Liability and reputation– The sale of imported goods that are found to be unsafe or manufactured under conditions that violate human rights can be disastrous for a company’s reputation and profit.
- Language and cultural differences – Different social customs and ethical standards are observed in business relationships around the world. Misunderstandings in this area can put an enormous strain on a business relationship and lead to both financial loss and court battles.
- International politics and legal differences – Loss or delay of product can be caused by a purchaser’s lack of awareness of trade barriers, disputes or laws, or government instability in the country of origin.
Being aware of the risks in sourcing goods outside of Canada is an important first step in protecting your company against them. But awareness is not expertise; much more is needed.
Research and alternative plans are essential, says Crupi. Knowing your suppliers and understanding the countries from which you’re importing will help to mitigate the risks associated with global sourcing, as will having backup suppliers for all products and services. He recommends, too, that you assess the potential costs related to each risk, and manage those with the highest possible costs most diligently. If the cost associated with a risk is determined to be low, that risk requires little monitoring, especially when time is limited.
In Zhang’s view, hiring a global sourcing professional, as either an employee or a consultant, is the best way to mitigate the risks inherent in buying from outside of Canada, in particular from overseas. The right person for this role will have a strong background in and knowledge of your industry, as well as the language skills and cultural knowledge to deal effectively with manufacturers and other supply chain parties in the country of origin. “One of the biggest problems,” she says, “in dealing with overseas sourcing is communication. Most problems can be avoided from the beginning with proper communication.”
Zhang offers as an example the possibility of misunderstanding when communicating with a Chinese supplier, who might say “yes” during conversation, meaning only that he had heard what was being conveyed. It could be a costly mistake to instead assume that the supplier in such a case had agreed to whatever was being discussed.
Another option to mitigate risk is emerging, says Crupi. Competitors in an industry, mostly large companies that are all sourcing the same parts and services, are coming together to share the risks in purchasing those products overseas. This collaboration helps all of the companies meet their requirements with reduced risk.
The Hidden Costs of Global Sourcing
While costs for duties and tariffs are always part of the expense of importing goods—and so are not really hidden—they can be underestimated. For those who “do their homework,” says Crupi, these costs can be a known factor.
There are, though, costs to global sourcing that supply chain managers do often overlook, say both Zhang and Crupi. Among them are the costs for the additional time it takes to coordinate with suppliers that are overseas. Different time zones and languages need to be navigated, multimodal transportation planned, and border crossings organized. “The process is more complicated,” says Crupi.
Late deliveries caused by shipping delays can have a detrimental impact on a company’s relationships with its customers. Further, delays caused by quality issues will likely be longer when imported goods are involved. “Your production line can be stalled waiting for a replacement shipment to arrive,” points out Zhang. Monitoring the production process and regularly checking on the status of ordered goods is critical, she says. Audits of the overseas manufacturing facilities from which you source will help to cover this risk, she adds.
To limit unexpected costs, Zhang strongly recommends that buyers try to negotiate the use of Incoterms DDP (Delivered Duty Paid), which requires the seller to bear the risks and costs, including duties, taxes and other charges, to deliver the goods directly to the buyer.
Getting the Right Help to Manage Global Sourcing
Having expert help from someone who knows the risks and potential landmines that are part of global sourcing is extremely important, says Crupi. Zhang agrees.
Crupi believes that hiring professionals with the required expertise is the best solution to deal with global sourcing on an ongoing basis. It’s possible to build in-house expertise by training existing employees, he says, but those employees will make mistakes as they learn, which can be an expensive way to mitigate risk. Working with a consultant is an excellent option, but is, in Crupi’s view, the ideal solution to a short-term need. If a company requires help in developing its global sourcing process, for example, using a consultant makes sense.
Zhang, on the other hand, sees the use of third-party global-sourcing service providers as the ongoing, cost-effective approach for companies that want to focus on their core competencies. Outsourcing global sourcing, she says, simplifies the process for such organizations.
Whichever option looks better for your company, it seems clear that the complexities and risks that are characteristic of global sourcing require expert handling. With expertise, risks can be largely managed, complexities mastered. Given the tremendous benefits of sourcing out of country, the costs for expertise—and to cover all of the potential risks that sourcing involves—appear to be well worth paying.
Kim Biggar is an Ontario-based writer who specializes in the supply chain.
“Going beyond national borders helps companies access cheaper and better—and sometimes unique—services, materials and products.”
Angelo Crupi, Professor, Supply Chain Management Program, Humber College
“One of the biggest problems in dealing with overseas sourcing is communication. Most problems can be avoided from the beginning with proper communication.”
Grace Zhang, VP, Business Development, Strategic Global Sourcing Ltd.
Angelo Crupi, Humber College, 416-675-3111, email@example.com
Grace Zhang, Strategic Global Sourcing, 604-639-3198, firstname.lastname@example.org