What is Global Sourcing?

  • Written by Peter Needle
  • Published on 13 September 2018
  • Our Voice

Global product sourcing strategies are now used by almost every major retail manufacturer. Clothing firms operate in a crowded and highly competitive marketplace, which means they're constantly seeking ways to make their supply chains more efficient and cheaper to run. Often, these goals can be achieved by establishing relationships with suppliers in countries where the cost of labour and raw materials is significantly lower.

Advancements in transport and telecommunications enabled global sourcing to grow massively over the last few decades. European and American shoppers became used to finding a 'Made in China' or 'Made in Bangladesh' label on their clothes, as manufacturers realised it was cheaper to hire labour and premises in these countries and rapidly built up a network of overseas suppliers.

The result is that companies in the retail sector now view global sourcing not only as an opportunity to gain competitive advantage, but as a fundamental aspect of their business model. Global sourcing is no longer a potential strategy to consider - it's a fact of life. But how exactly does it work? And what are the implications for businesses with global sourcing operations?

MORE THAN A MONEY SAVER

A 2008 report by PricewaterhouseCoopers stated that the term global sourcing initially meant 'low-cost country sourcing'. For the majority of companies, it was a process with a simple objective: obtain product or components from a country with lower labour costs, thereby achieving a cost advantage.

Of course, cost is still a key driver for all global sourcing companies. For many, it is the main criteria against which they judge the success of their sourcing activities. But a growing number of businesses understand that global sourcing means more than just cheaper labour. It's a term that defines the complex nature of supply chain relationships that transcend geopolitical boundaries. It describes the process of integrating procurement requirements across worldwide business units to create products that meet necessary standards of efficiency and quality.

One head of external sourcing at a global consumer products company told PwC that global sourcing is a frequently "misused" phrase. He said: "Companies based in one country and buying from the Far East … this is not global sourcing. True global sourcing is when a business manufactures and sells a consistent product globally, sourcing some or all of the product from third parties chosen to enable cost-effective and efficient sourcing, and coordinated globally."

GLOBAL SUPPLY CHAIN RISKS

Like anything that offers large rewards, global sourcing also carries a number of risks. The more diverse and complex a global supply chain becomes, the greater the risks will be. Over the years, we've seen how extreme weather and natural disasters can wreak havoc on companies with global sourcing operations. Japan was hit by the catastrophic earthquake and tsunami of 2011, while severe floods devastated Thailand just eight months later. As well as destroying homes and causing widespread loss of life, these events decimated supply chains for many automakers and technology firms. In Japan, a factory manufacturing an estimated 60% of engine airflow sensors used in all new cars was forced to close in the wake of the tsunami.

Events like these cause major disruption to global supply chains when they occur, but businesses are powerless to prevent them. All they can do is mitigate their impact by building supply chains that are as robust as possible. Perhaps the most alarming fact for businesses is that the frequency of natural disasters on this scale is believed to be increasing. The 2012 World Economic Forum risk report revealed that two-thirds of the 25 most costly insured catastrophes during the past 40 years have occurred since 2001.

Natural disasters inevitably grab the headlines, but it's also important for companies to address the more nuanced risks of global sourcing, which are more pervasive and arguably just as damaging in the long-term. Creating a production line that spans a complex network of interdependent global relationships can have grave implications for quality, compliance and brand reputation if these issues do not receive sufficient attention. Quality control procedures and inspections have a role to play here, but ultimately companies must know and trust every global supplier they partner with.

 

Originally published 23/11/2013

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