How do you make your business grow in this era of globalization with a competitive market scene where businesses have adopted the procurement process? Conducting business overseas seems like a feasible option. This is where global sourcing comes into play.

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But what is global sourcing? It is more than procuring and trading goods internationally. It covers some essential aspects like trade compliance and product manufacturing, amongst other things.

What This Guide Covers:

• What Is Global Sourcing?
• Levels
• Advantages
• Disadvantages
• Final Thoughts

What Is Global Sourcing?

Global sourcing is the sourcing strategy of substituting your domestic market for a global one to procure goods and services at a cost-effective rate. It is a centralized procurement system that utilizes advanced resources and skills that are locally unavailable.

Business process outsourcing (BPO) is an ideal example of global sourcing. For benefits like low-cost labor, reduced trade traffic and tax breaks, companies often set up call centers in countries like India, Pakistan and the Philippines. And the practice is growing.

As per Grand View Research, the global business process outsourcing market valued at $245.9 billion in 2021 will expand at a CAGR of 9.1% from 2022 to 2030, reaching $538.4 billion.

One of the primary goals of global sourcing is to make sourcing beneficial for both countries and companies. But how do you make it ethical and successful? Let’s go through these points below to find out:

Evaluate Suppliers

Securing the right supplier for your business is not an easy task. You will need to assess the market to conduct research. But how do you execute this? By implementing an effective sourcing strategy.

Once the supplier ticks all the boxes and meets regulatory compliance, you are free to proceed. Make an informed decision based on the supplier’s management, financial and technological resources. You can conduct social audits and physical inspections, start the bidding process and automate RFI/RFP creation.

Set Quality Standards

Launching low-quality products on the market will negatively impact your business. How do you prevent this? Simple! By establishing high-quality standards and conducting inspections from the start.

This means you will need to start by auditing existing and potential suppliers, generating comprehensive product specifications, and implementing ISO-related standards based on sustainability and industry.

Establish Manufacturing Contract

After finishing the first two steps, you must seal the deal with a contract. This will feature clauses and restrictions that mutually benefit both parties. You have the liberty to include clauses that protect your intellectual property and have detailed product outlines to avoid future confusion.

Having a contract is a foolproof way to ensure product ownership. A manufacturing contract will cover the entire production process and include terms for its smooth completion.

Build Relationships

Building effective buyer-supplier relationships are also part of the global sourcing strategy. Why switch between multiple suppliers when you can foster meaningful alliances with a handful? Ensuring transparent communication and keeping suppliers informed about current products and developments helps earn goodwill.

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Levels

Now that we’ve established a global sourcing definition, let us dive deeper. How does global sourcing help your company collaborate with the international supply network? It does so by following some basic sourcing standards.

Discussed below are the five levels of global sourcing:

Level 1: Domestic Sourcing

Are you a newbie in the industry and still learning the ropes? Why rush when you can take things slowly by sticking to your home ground? Now that’s level one for you: domestic sourcing. Before you make it to the big leagues, start sourcing within your locality and country.

Level 2: International Sourcing

This level is all about international trade and sourcing based on need. In case of local supply shortages, you will need to expand your search. How do you achieve this? By looking for cost-effective sourcing options on an international scale.

Level 3: International Procurement

Once you have slowly but steadily made it through the first two levels, you unlock a new one. It’s international purchasing as part of the procurement strategy. Now that you have become more acquainted with the global market, you continue reaping the benefits of global sourcing while not disregarding your local market.

Level 4: Global Procurement Strategy

When you shift your focus to the international market and integrate global sourcing into your procurement strategy, that’s level four for you. Some of the perks include improving market status on a global scale and forging lasting alliances between two organizations and countries.

Level 5: Global Sourcing Strategy

Once you have moved up the ladder, you find yourself at the ultimate level of global sourcing, which is basically the integration and coordination of a worldwide global sourcing strategy. You implement global sourcing at different levels and source and trade from multiple suppliers at this level.

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Advantages

The benefits of global sourcing vary from lower production costs to increased competition. It aims to source suppliers at a cost-effective rate to help maximize production.

To understand further, let’s take an in-depth look at the different pros of global sourcing:

Multiple Supplier Alternatives

Based on your product and manufacturing type, access multiple vendors within a cluster of global manufacturing hubs. This ability to switch between suppliers to lower your total cost of ownership and procure items at competitive prices is one of the prime advantages of global sourcing.

Cheaper Rates

If you are looking into global sourcing, you already know that countries like China or India provide cheaper labor charges. This, accompanied by their governments allocating tax incentives to encourage manufacturing, further reduces the total cost of production.

Increased Production Capacity

When the raw materials and labor are not abundant in your country, you source globally for product diversification. With increased consumer demand, global sourcing for maximized production should be the key.

Skilled Workforce

When it comes to the diversity of product manufacturing, each geographical location specializes in one particular niche based on its expertise and resources. Marketers rely on global sourcing to seek such skilled labor at low rates.

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Disadvantages

The advantages of global sourcing are plenty but come with some cons or challenges. From cultural issues to language barriers, global sourcing challenges can be tedious but easy to deal with.

Let us discuss in detail some of the different cons of global sourcing:

Limited Quality Control

When relying on global sourcing, keeping track of your supplier’s daily activities is not always viable. Oftentimes, this leads to a dip in quality maintenance as you are trying to meet the consumer’s quality expectations. The solution for this is to conduct frequent on-site quality inspections.

Varied Time Zones

This is one of the most obvious cons related to global sourcing. When you are sourcing globally and your supplier is halfway across the world, time differences can be a major issue. Communication becomes difficult. To mitigate this, you can hire sourcing experts to handle global suppliers better.

Cultural Issues

Cultural differences can be a major issue when it comes to global sourcing. Differences in time, language and other cultural aspects can affect the operational, financial or strategical portion of your business. You can help curb this by getting more acquainted with your supplier’s country’s culture and societal values.

Logistical Risks

There are multiple facets like theft, delay, damage or loss of product in transit when it comes to logistical risks. Lack of communication due to time zone differences, the inclusion of permit documentation and regulations are some of the other reasons for this challenge. One solution for this is investing in insurance and implementing airtight contingency plans to avoid potential risks.

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Final Thoughts

The various advantages of global sourcing outweigh its pitfalls. All you need is a robust methodology and the perfect sourcing strategy that fits your business model. Ultimately, relying on global sourcing helps boost productivity, increases profits and overall grows your business.

If you are planning to invest in a global sourcing and procurement solution, definitely check out our procurement requirements template for more information.

How do you handle global sourcing for your company? Let us know in the comments below!