Long-Term Global Sourcing Strategy
During recent decades, global sourcing volume has grown exponentially. The number of containers crossing borders has increased almost 30 times since 1950. Consumers enjoy more choices and relatively lower prices thanks to “best-sourced” products and components from overseas suppliers. And as a result, many workers in producing countries have enjoyed an increase in their own quality of life.
In an ideal world, supply-chain managers would source components and finished goods from any location to take advantage of the lowest delivered cost. Without existing trade tariffs and barriers, visible and invisible, the cost of an imported product would simply be the ex-works price plus the cost of freight to equal a fully landed cost.
In truth, global sourcing is not so simple and requires careful analysis of critical factors. These include freight-cost fluctuations, currency fluctuation, cost of labor trends, duties and other port charges, lead-times, and reliability. Politics and potential retaliatory and antagonistic trade measures can also muddy the otherwise clear waters. Selecting a specific source for a key component or product can suddenly backfire as economic, monetary, and political situations fluctuate.
However, the benefits of a long-term global sourcing strategy usually outweigh the risks. Careful planning, accurate and anticipatory sales projections, mutually understood objectives, effective communication, and a secondary sourcing plan can minimize the potential for serious supply disruption.
Detailed evaluations must be conducted to determine the long-term reliability of a potential foreign supplier. Face-to-face discussions should establish a mutual comfort-level prior to any test run and trial period that will determine the feasibility of the new supply source. Elements such as order lead-time, minimum production levels, payment terms, and import documentation must all be worked out before production and shipments can.
Scheduling and Forecasting
Accurate forecasting and a firm understanding of production and transit times are the fundamental elements of global sourcing. Because there are so many more variables in dealing with overseas suppliers and manufacturers, ensuring continuity of supply becomes more challenging.
As protection against disruption, a precise calculation of safety stock levels is required.
Safety stock levels are the levels below which in-house inventory should never fall in order to ensure that sufficient volumes are always on hand. Given the distance and time involved in overseas sourcing, these levels will tend to be far higher than with domestic sourcing. Safety stock levels are based upon three factors:
- lead-time length (time from order placement to delivery)
- lead-time reliability (potential for unforeseen events to disrupt transit time)
- demand variability / accuracy of forecasts (volume projections)
Variable lead-times can be further lengthened by disruptions, such as weather, additional import inspections, improper paperwork, accidents at sea, port labor disputes at either end, production disasters, or many other catastrophic or political events. One solution is to retain a secondary supplier to act as a contingency, even if for a long time, while the variables of lead-time are narrowed.
Once an international source is identified, the process needs to be tested for reliability. Do not “burn your bridges” with existing suppliers in case unworkable obstructions occur in the global sourcing plan. Once a new supplier and the shipping regimen are proven to be reliable, more volume can be shifted to the new supplier. But the process must be monitored and measured continually to ensure that the correct decision has been made.
Sales Forecasting Accuracy is Crucial
Timely and accurate marketing forecasts are most critical in global sourcing. Because of the longer lead times, the challenge to create accurate sales forecasts becomes even more daunting. And, besides addressing projected demand, minimum volumes for production scheduling at the producer location may be a consideration.
Accurate forecasts of normal, seasonal and promotional volumes are required to ensure continuity of supply. In the case of projections for limited-time promotions, marketing forecasters must ensure sufficient inventory will be on hand for the length of any scheduled promotion. And, ideally, the supply will run out precisely on the day the promotion ends. With a longer lead time of two months, for example, this is a very difficult task.
A long-term global sourcing strategy can be very beneficial, but only if the pitfalls are fully understood.