Global sourcing – definition and benefits

Global sourcing definition

Not all of the materials or raw materials needed to achieve our business goals are available for purchase in Poland. The solution is to apply the strategy of global sourcing, which is a specific way of managing the supply chain. It involves looking for suppliers, and business partners from whom it would be possible to purchase goods at a profitable price. In this way, it would be possible to optimize some costs associated with production or distribution.

Global sourcing involves building relationships with contractors in the international market to expand one’s supply chain, territorial reach as well as outsourcing services. By entrusting this area of business to an external entity, we can focus on other aspects of running the company. Consequently, this is one of the tools to increase one’s competitive advantage.

Advantages of global sourcing

The main advantages of using this strategy can be considered:

• A very large number of entities are willing to establish business cooperation;
• It’s getting easier and easier to reach and work with contractors around the world, thanks to technology;
• Reducing production costs and commodity prices;
• Access to goods that are not available on the domestic market – enriching your product portfolio;
• Opportunity to reach new customers;
• Streamlining the procurement process;
• Achieve a competitive advantage in the domestic market;
• Collaboration fosters mutual learning among companies and benchmarking, that is, comparing their processes and using best business practices.

Disadvantages of global sourcing

However, it is worth keeping in mind the possible risks that global sourcing entails. E.g.:

• The political situation and regulations can have a significant impact on the possibilities of forming such strategic alliances. Therefore, it is always important to thoroughly familiarize oneself with the prevailing regulations in a given country and to keep an ongoing check on the activities of stakeholders before entering into a partnership.
• Cultural differences can sometimes prevent consistent communication between companies and lead to misunderstandings. It is worth bearing in mind the different organizational cultures that prevail in different parts of the world.
• Exchange rates play an important aspect in international transactions. Their fluctuations can rapidly change the prices of goods or services. To protect yourself, from the consequences of this, you can use hedging tools such as currency swaps, futures contracts, forward contracts (you can learn more about them in the article about financial instruments ). Another solution may be to include a valorization clause in your contract with your counterparty, in which you do not include the amount of payment for the provision of services, but only the method of calculating it.
• Ethical issues can be a major concern in this case. Quite often in the context of global sourcing, there is talk of the working conditions faced by those employed in, for example, garment factories in India, China and Bangladesh. This is because, in these geographic areas, there are reported cases of underage employment, exploitation in the form of low wages for labor and being forced to take extra hours, unsafe working conditions, negligence of health and safety in such factories

How to introduce global sourcing in your company?

Today, international cooperation is a requirement for companies if they want to stay in business. So how can you incorporate global sourcing into your business management strategy?

1. Identify the purpose, type and nature of the deliveries you would like to make with the contractor.

Evaluate your company’s capabilities. Decide in what quantity you need a particular commodity, raw material, etc., how much money you can allocate for the purchase, whether you have sufficient transportation resources, and which countries, or geographic areas you could cooperate with. Also conduct a risk analysis, to make sure your company is prepared for it and develop preventive measures.

2. Conduct due diligence

This is an important element worth paying a lot of attention to. The success of the entire initiative and the achievement of your strategic goals depend on the selection of the right entity. Gather as much information as possible about the company that interests you. Take into account such aspects as, among others, the financial situation (consider financial statements and reports, analyze individual financial ratios ), their market environment and legal situation, attitude to environmental protection, use of the opinions of experts in the industry, and following media reports.

3. Prepare a supplier selection card

The supplier selection charter allows for a thorough analysis of contractor bids so that the entrepreneur can objectively evaluate them and make the best decision for himself. The criteria in the charter address the following (these may vary depending on the project in question):

• Financial Situation;
• Level of technological advancement, innovation;
• The comprehensiveness of the offer;
• Lead time;
• Production capacity and quality of production processes (licenses held, quality certificates, etc.);
• Strategy and effectiveness of management style;
• Regulatory compliance;
• Corporate social responsibility and sustainability aspects.

Putting the project up for auction

The prepared draft strategy along with the supplier selection sheet is put out to bid. This is the moment when we can expect an influx of bids from potential contractors. 3 types of bids can then appear:

• Request for information (RFI) – this is a request for information and data about the entrepreneur, his range of services, and business potential;
• Request for Price (PFP) – this is a request to provide a solution to a business need with a quote;
• Request for Quotation (RFQ) – is used when obtaining a price for a specific product or service.

After selecting any of the offers, there is a time of negotiation and preliminary setting of the terms of global sourcing cooperation. Then the appropriate contract is drawn up. Sometimes this process can take several months.

Summary

The growing market requires entrepreneurs to constantly look for new ways to expand, and provide the best products and quality services while optimizing costs. This is a key aspect to make running a business profitable and profitable. Global sourcing is just one of the interesting solutions to try. Knowing the advantages, risks and the process of implementing this strategy, you can assess whether it is possible to apply it to your company.

Read also: What is blind recruitment?

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