A Complete Guide to Global Sourcing

Over the last two decades, many larger businesses have shifted to sourcing their raw materials and/or finished products from foreign markets. What began as a trend is slowly becoming an industry standard. Global sourcing or international procurement, as it is known, is one of the most explosively debated management strategies implemented by companies in their supply chains.

What is global sourcing? Do businesses really need to source from foreign markets? How do businesses implement a global procurement strategy? – Let’s answer these questions and more.

What is Global Sourcing?

Global sourcing, at its simplest, is the activity of procuring raw materials and finished products from international markets across a business’s home country’s borders. Global sourcing forms the base for creating international supply chains. Businesses rely on global sourcing strategies for both procuring raw materials and finished products.

There are various reasons why businesses implement sourcing strategies that rely on international entities.

Lower Costs

Lower costs are the first and foremost reason why businesses look for foreign entities. Buying from or manufacturing in other countries which provide lowered taxes and more affordable labor can help reduce acquisition costs and drive up profit margins.

Access to Raw Materials

The raw materials a business needs may not be available near its manufacturing facilities. It is also common that raw materials are cheaper in other countries where they exist in abundance. In both these scenarios, sourcing globally can be the cheaper alternative. For example, the countries in the Middle East are the main source of oil due to both abundance and the fact that they are the only ones that can meet global oil demands at the lowest prices.

Labor Availability

Outsourcing production to developing countries can help improve the bottom line for most businesses. Developing countries are often a great source for more affordable highly skilled laborers. South-East Asian countries have become the very backbone of many businesses that rely on global sourcing.

Do Businesses Need Global Sourcing Strategies?

There is no simple answer to this question. Every business and its requirements are unique. The simple truth is that without proper plans, logistics, and service networks, sourcing internationally can be a pipe dream for most businesses.

The reason why global sourcing has become a growing trend in recent years is due to how profitable it can be if done right. Both sourcing and logistics management are often isolated silos that are not exploited to their full potential due to a lack of information.

However, the rise of various technologies that enable supply chain and trade data intelligence, businesses can now lower production costs and gain a competitive advantage through these two avenues. Trademo’s own supply chain data solution, Intel, is used by global businesses such as Amazon and Unilever to source international manufacturers for finished goods.

In a market where new innovation is reverse-engineered within months, any long-term competitive advantage can help businesses. Global sourcing is definitely a way to be competitive by reducing internal costs. So if your competition is strong and you have the capability to establish the necessary network for it, feel free to start procuring internationally. If not, try and optimize your existing manufacturing & trade lanes.

The Pitfalls of International Procurement

Procuring from international entities comes with its own set of challenges and limitations. Let us understand some of the challenges to a global procurement cycle:

Cultural Diversity

Diversity is probably the greatest challenge businesses face when establishing a global sourcing strategy. Different countries have different cultural outlooks and different work cultures. Companies looking to source from international suppliers/buyers/manufacturers/workers must have at least a rough idea of the entities they are dealing with and the people working in them. Multinational companies are probably the best at circumventing cultural barriers since they tend to invest both time and resources in the countries they are trying to source from. This challenge is not a new phenomenon, but over the years businesses have grown internationally nullifying some of the effects by integrating cultural traits and localizing through subsidiaries.

Quality Control

When procuring finished goods from international suppliers, quality control is one of the largest pitfalls you can face. Most businesses that rely on international sourcing don’t have complete control over the quality of goods they get. Being able to manage and ensure strict control of the quality of goods is extremely important. This is slowly becoming less of a problem as businesses like Apple and Walmart sign contractual deals with international manufacturers enabling them to become Original Equipment Manufacturers(OEMs) with stringent manufacturing constraints to ensure high-quality goods.

Logistical Challenges

A strong logistical network is imperative for an optimal global sourcing strategy. “Before 2021, no one ever considered container space on a cargo ship as a potential supply chain risk” – Eric Johnson, Trademo Supply Chain Firesides. The last couple of years have been a challenging time for supply chains putting logistical inefficiencies on full show. The importance of supply chain resilience came to the fore with businesses investing heavily in technologies to ensure that it doesn’t happen again.

The 7 Sourcing Models

There are various sourcing models that can be established for your business and its supplier relationships. In a nutshell, sourcing models define the nature of the relationship between you and your supplier. Here are the 7 sourcing models for your business:

1. Basic Provider Model

As the name suggests, in the basic provider model, the purpose of your supplier is to provide you with the goods you need at the lowest possible cost. This model is ideal for purchasing raw materials or low-importance products/product components. For eg, plastic pellets, pig iron, etc.

2. Approved Provider Model

Probably the most common supplier relationship, approved suppliers are suppliers that sign a master agreement and are selected based on provided discounts and the fact that they have a proven track record with you.

3. Preferred Provider Model

These providers sign exclusive supply agreements and volume discounts. This often simplifies sourcing and helps repeat business deals fast.

4. Performance-Based Model

In this sourcing model, the business depends on supplier expertise and outsourcing to help manage the procurement process. This model is great for products/services that are available in abundance at low cost.

5. Vested Business Model

This business model is perfect for businesses and their suppliers that depend on each other’s success to drive revenue. Many OEMs come under this category. These models are highly collaborative and such sourcing can often lead to great innovation, improved risk management, and co-development.

6. Shared Services Model

This model is essential for those businesses that create smaller subsidiaries to support their broader business. In it, the organization creates a stand-alone ‘supplier’ that sells to various parts of the same organization. This system is highly centralized and the goods are priced at market competition to maximize profit.

7. Equity Partnerships

Joint ventures, acquisitions, and subsidiaries are all part of equity partnerships. In such a sourcing model, businesses invest directly in their suppliers to innovate, drive up revenue and build capabilities together. It is a costly sourcing model and usually a very high business risk.

How Do Businesses Implement a Global Procurement Strategy

Any business looking to enable international procurement processes must first do a proper cost analysis. And if it decides to source internationally, the business must be extremely proactive. Global sourcing is a multi-faceted operation with multiple touchpoints that needs to be planned together and executed individually.

Here’s how you can go about building and implementing a sustainable procurement management strategy:

Teambuilding

Building the right team is the first step toward global procurement. To give a rough idea, you need people from procurement, supply chain operations, risk management, finance, R & D, and other product-related stakeholders.

Market Intelligence and Data Analysis

Access to supplier intelligence is a key step in strategic sourcing. There are millions and millions of businesses out there that can supply to you. However, what you need are the right ones.

Identifying potential suppliers, assessing market conditions, analyzing the competition, and checking if these suppliers operate in trade lanes beneficial to you are all important processes that must be dealt with.

For that, you first need access to supplier market intelligence. If you’re looking for supplier information, Trademo Intel hosts a library of 10 million global buyers and suppliers along with granular data for over a billion shipments operating across the world’s global supply chains.

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Developing Your Strategy

Once you find the list of suppliers you need, you must start strategizing the plan for your optimal global sourcing strategy. Forecasting your expenses, planning the logistics, evaluating suppliers, regulatory compliances, etc.

Here’s where the team you’ve built will help perfect the various touch points that will be involved in your global sourcing strategy.

Negotiations

Once you have a plan – time to start bidding. It can take anywhere from 3-6 months to negotiate & finalize a deal that works for you. Suppliers work differently and based on the product or raw material, you will either RFI(Request for Information), RFQ(Request for Quote), or RFP(Request for Pricing).

Relationship Management and Optimization

Supplier relationships are critical to your business. Maintaining a good rapport with them will be important to your business. Further, your supply chain, in the beginning, may not be at its efficient. Supply chain optimization is a continuous process that can help you improve operational resilience and drive up business efficiency.

Supply Chain Sourcing – Best Practices

Sourcing is a part of your supply chain’s upstream and the first node of a supply chain spread around the globe. A flexible and resilient supply chain has long-term relationships with its suppliers and strategic sourcing partners.

Effective sourcing will help decrease the overall resource consumption involved within your supply chains. It can help you optimize your overhead costs and help maintain ideal inventory levels. Here are a few strategies you can explore to help your supply chains.

• Proximity Sourcing: Looking for the different suppliers you need from the same geographical location and proximity can be a good idea. A simple analysis of supply chain procurement data can help you achieve your aims. To give perspective, you could potentially get all your raw materials from the same port. This can help you sign long-term contracts with shippers and drive down your supply chain procurement costs.

• Utilizing Smaller Freight Forwarders: Continuing on the proximity sourcing point, you can hire localized freight forwarders to bring goods to your larger shippers. This way you can ensure you get the goods you need right on time.

• Transparency Where Needed: Develop a positive working relationship with your suppliers and share information with them where needed. Improve the sourcing model you have with your suppliers based on their track record.

• Incremental Improvements: The initial supply chain sourcing models you implement will not be as efficient as you need them to be. Constantly review your sourcing strategies, suppliers, and improve your strategy regularly.

The Impact of Geopolitics on Global Sourcing

One of the prerequisites to creating a global sourcing strategy is to assess how the geopolitical environment will affect your supply chains. In fact, geopolitical risks such as sanctions, bans, or conflict can severely affect your supply chains and your business.

The geopolitical environment is a major source of worry for most risk analysts due to its volatile and unpredictable nature. Geopolitical tensions can disrupt even the most effective and sustainable procurement strategies. To give perspective, global sanction lists have been updated once every 22 minutes since the beginning of the Russia-Ukraine war.

However, the benefits of global sourcing usually outweigh the geopolitical risks involved. In addition, countries often sign free trade agreements and specialized tax deals that can actually benefit your organization.

An analysis of compliance data for the products/raw materials you want to source may help you decide which countries are ideal for your sourcing needs. Trade compliance solutions such as Trademo Compliance can provide an all-round view of global regulatory compliances and also help you calculate landed costs for over 5000 HS Codes. Check it Out!

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Summing Up

With how global markets operate in the modern day, global sourcing is a strategy that businesses must consider to stay both competitive and profitable. So why waste more time? Start building your team today and start procuring the goods you need!