Global sourcing and procurement is a fantastic business strategy to acquire goods or services from a global market. The main aim of global sourcing is to lower production costs (companies can save anywhere between 40% and 70% of domestic prices) while maintaining high levels of quality. With a reliable and experienced global sourcing partner at the helm, businesses that use global sourcing can get many benefits. Benefits include better value for money, increased production capacity, high-quality products, an opportunity to adopt new ideas and products and tap into new skills and resources. With so many benefits, global sourcing has significantly high profit potential.
Unfortunately, like most things, global sourcing poses challenges at every step of the way. Those challenges include supplier-related issues like non-adherence to international standards, no accountability, and compliance problems. It also includes other challenges like working across multiple time zones, delays in supply, language and cultural barriers, and business risks. That does not mean that it is impossible to manage global sourcing ethically and successfully – it simply means you take a closer look at how do you manage global sourcing. Here’s a look at how to overcome challenges and minimize risks of global sourcing at the same time ensuring profitability and the procurement of high-quality goods.
The suppliers that you work with can make or break your business. It takes a certain level of dedication and willingness to hunt down, qualify, and then negotiate with global suppliers. That is not a quick or easy process – and you will require patience. Then, once you hone in on a few suppliers you think you might be able to work with, the next step is to test and qualify the quality of their goods. For all this, you require a successful sourcing strategy.
Conduct market research on various suppliers. When you conduct market research, you assess market conditions and the ability of suppliers to deliver a product under those conditions. When sourcing data for your market research, gather data from a variety of sources like:
Industry trade journals
Annual corporate financial reports
Your network of industry professionals
Trade associations and conferences.
Create a supplier evaluation scoreboard. Establish score criteria and then assign scores for each supplier based on their:
The above information will give you a clear understanding of how disciplined, organized, and reliable each supplier is compared with the others. That includes physically inspecting the factory, conducting social auditing, and meeting with decision-makers and the factory manager.
Finally, start the bidding and negotiation process. That could include Request for Information (RFI), Request for Quote (RFQ), and Request for Pricing (RFP).
Other necessary steps to know who you are working with include:
Cross-checking whether the supplier’s factory has the certifications required to make products of a particular standard.
Verifying the factory’s address and information about the company’s management.
Checking factory license and other business documents.
If a supplier refuses to share information or withholds partial information from you, do not consider getting into business with them.
Quality is a critical aspect of the success of your business. You want to ensure that your suppliers provide you with nothing but the highest quality products. It all begins with establishing acceptable quality standards right from the beginning. That will:
Ensure the safety and reliability of your products/services.
Compliance with regulations.
Meet environmental objectives.
Control internal processes.
When quality standards are not set out right at the very beginning with unknown suppliers, there is a risk of low-quality products leaking into your business. Here are four steps to ensure you set acceptable quality standards right from the word “go:"
Audit potential and existing suppliers. That will ensure they will provide you with high-quality products, support continuous improvement, and operate efficiently.
Things to look out for include standards like the ISO series, social accountability, sustainability, and standards relevant to specific industries (AS 9100 for the aeronautic sector, TS 16949 for the automotive industry).
Develop comprehensive and detailed product specifications. Product specifications must include acceptable quality levels, expectations for each supplier, defect details, and classifications. To be able to do all this, you must first have thorough knowledge about your product.
Test products to determine standards are met and also to troubleshoot. Use applicable industry-related standards to measure the product’s properties and evaluate its performance.
Inspect throughout production, before shipment, and after delivery. Once production begins, you will have to ensure end-to-end quality inspections. That includes pre-production, production, post-production, and pre-shipment inspection, container loading inspection, and piece-by-piece quality checks conducted by a professional QC team headed by senior QC inspectors.
Ensure the manufacturing contract covers the end-to-end process and outlines all the terms you and the supplier will work on together. The manufacturing contract must include:
The design: All the required specifications. It can also include a prototype, mold, or pattern.
Intellectual property: If you want to protect your IP, include specific restrictions on the supplier’s license on top of the confidentiality clauses.
Quality control: Include clauses that require the supplier to complete certain obligations related to the quality of the product. That could also include running regular tests and periodic quality control inspections.
Ownership and indemnity: This specifies at which point ownership passes from the supplier to your company. That helps avoid any confusion if there are damages to the products during shipping, etc.
Practical considerations: For example, whether the supplier will have the ability to store your products on your behalf and assist with packaging the goods so that they are ready to be sold.
Ordering, pricing, and payment: Have a detailed account of the procedure followed for placing an order and if there will be a minimum order to be met. Ensure the pricing terms of the raw materials and variable prices are outlined so that there is no confusion. Include details of when payments will be made. If there will be instances when payments will be withheld (for example, a delay in product delivery), mention that too.
The products supplied by your suppliers can improve your business and increase your efficiency and bottom line. So, how you deal with them must be a part of your global sourcing strategic plan. If you treat your suppliers right, you can be sure that they will respect and stick to the rules you lay down in terms of:
First impressions are crucial, so you must always start on a good note. Here’s what you can easily do to improve your relationship with your global suppliers:
Always pay your suppliers on time to earn their goodwill. Pay them on time, and you can benefit from various types of perks they might offer you.
Keep in mind your supplier’s production methods and needs. Give your suppliers a reasonable lead time on your orders.
Personalize your relationship with each supplier. Visit their offices and invite them to your office.
Keep your suppliers abreast of what’s happening in your company. For example, keep them informed about new products, promotions, new people on the management team, etc. Suppliers might be able to use this information to find you potential customers.
Be aware of and mindful of cultural nuances.
Ensure proper communication to ensure transparency from both sides at all times.
Given the distance between you and your international suppliers, you must be prepared for a different set of challenges. Here are five critical challenges of global sourcing – aspects that need to be addressed with the utmost care – and what you can do to ensure successful global sourcing and procurement.
Language barriers can lead to simple miscommunications to your international business relationship with your supplier coming to a halt.
Hire a translator to translate all critical documents, agreements, and contracts into the local language. Also, get all necessary documents (your supplier’s factory licenses, permissions, certifications, etc.) translated to your language.
Please don’t rely on a single source of communication when dealing with critical business conversations. Follow up all Skype calls or phone discussions with an email that outlines the minutes of your online meetings.
There is a risk that your global sourcing and procurement efforts will be in vain because of product failures.
Many businesses hold the supplier accountable for low-quality products and charge them for the defective product. The problem with this solution is that you can’t do anything about the products once they are created and shipped. While you will get a refund, you still will not have fulfilled your customer orders. That, in turn, leads to unhappy customers and lost orders.
Be specific about product quality beyond what defects are not acceptable.
If you face product quality issues, first determine the causes for the flaws in the finished goods. You might not think that you have to fix product quality issues that occur in the factory. But providing your supplier with helpful and actionable feedback can help curb recurring product failures.
Understand the impact that the quality change you need will have on your supplier. For example, if they must invest in new equipment, tools, or processes to churn out high-quality products, it will mean added costs for them, and you won’t see them implementing the necessary changes. Ensure that your corrective or preventative actions do not hurt their business.
Hold suppliers accountable at various stages during the production phase and before shipping the product. Conduct pre-production, production, post-production, and pre-shipment inspections to ensure all your specifications are met.
Monetary risks that can impact costs of global sourcing and procurement include:
The unanticipated rise in prices of transactions and shipping costs.
Loss of goods during transit.
Costs related to time zone differences, extra storage time, and transport delays.
The cost of managing the entire supply chain.
Get familiar with the supplier’s country’s exchange rates, monetary policies, and financial trends.
Selecting an appropriate currency for your supplier contracts.
Set fixed costs and quantities of the products. If you are sourcing services, then specify a price for timelines for the services.
Invest in insurance for transport and cargo. Also, make use of currency exchange rate insurance.
Use third-party providers when making money transactions. That will transfer any monetary risk to that third party.
If you want to lower your costs further, use fewer suppliers to create higher volumes of the product at regular intervals. That will get down the price per unit of your product.
When dealing with global sourcing, logistical risks include loss or theft of an entire consignment of the product during transit. That could also include piracy.
Damage or deterioration of products is another common problem.
Communication delays could occur because of differences in the time zones.
There is the problem of dealing with multiple governments, complex documentation requirements, restrictions, permits, regulations, and licenses.
There is also the need for special packaging, formal international purchase agreements, and complicated shipping and handling procedures for international purchases.
You can decrease logistical risks by purchasing appropriate insurance to make up for any losses.
Ensure you have a proper contingency plan in place for any potential risk events. For example, you could have alternative local suppliers. Or, ensure your products are shipped through an alternate travel route to avoid disaster areas.
Also, demand forecasting considers extended time leads. Transport planning can help take care of security and customs problems.
Cultural differences can complicate business and lead to issues like shipping delays.
Read up and understand your supplier’s country’s culture, how organizations are run there, and societal values.
Hire a local agent to help bridge the gap between the two cultures.
Hire local legal counsel for negotiations.
What if you didn’t have to worry about any of the above problems. What if a company could consider all your international sourcing requirements – whether you want to buy ready-made products or create a unique product from scratch? A sourcing agent can do all this and more so that you get the high-quality products your business depends on.
When you hire a reliable global sourcing agent, you immediately minimize risks of global sourcing. Here’s what you get:
An agency that entirely and thoroughly understands your global sourcing and procurement requirements.
A company that will screen multiple suppliers and conducts strict verification processes to find the right ones to fulfill your product requirements.
An agency that, through proper communication, ensures that all your suppliers have a clear understanding of your product requirements.
A company that will negotiate with potential suppliers on your behalf to get you the best deals.
The agency’s undivided attention during the entire prototyping stage. The company will oversee the production of your product. The agency will also conduct trial runs on your product to ensure it is up to your standards.
Regular quality inspections during pre-production, production, post-production, and pre-shipment stages.
An agency that will ensure your suppliers are paid on time, so you don’t have to worry about monetary risks.
A company that ensures your product consignment is stored, shipped, and delivered to you as fast as possible.
A company that saves you a lot of time and money.
There are global sourcing agencies, and then there are reliable international sourcing agencies. You naturally want to find a reliable agency to ensure your global sourcing and procurement efforts are successful. Here’s how to find a reliable sourcing agent.
A good sourcing agent will have an official business license.
Choose an agent that has been in the sourcing business for several years and has relevant experience.
Look at the sourcing agent’s website. There must be testimonials on the agent’s company website. A reliable agent will not hesitate to provide you with testimonials and referrals.
Ensure the agent speaks fluently in both your language and the supplier’s language.
Ensure geographical proximity. For example, if you are interested in looking for a supplier in Shenzhen, then try to find a sourcing agent in Shenzhen.
The agent or agency should provide you with not one but several suppliers that you can choose from. In other words, select an agent who has an extensive network of suppliers.
A good sourcing agent will not hesitate to be transparent in all aspects of the supply chain.
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