Global sourcing
Encyclopedia
Global sourcing is a term used to describe practice of sourcing
from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include low cost skilled labor, low cost raw material and other economic factors like tax breaks and low trade tariffs.
Common examples of globally sourced products or services include: labor-intensive manufactured products produced using low-cost Chinese labor, call centers staffed with low-cost English speaking workers in the Philippines
and India
, and IT
work performed by low-cost programmers in India and Eastern Europe
. While these examples are examples of Low-cost country sourcing
, global sourcing is not limited to low-cost countries.
Majority of companies today strive to harness the potential of global sourcing in reducing cost. Hence it is commonly found that global sourcing initiatives and programs form an integral part of the strategic sourcing
plan and procurement
strategy of many multinational companies.
Global sourcing is often associated with a centralized procurement strategy for a multinational, wherein a central buying organization seeks economies of scale
through corporate-wide standardization and benchmarking
. A definition focused on this aspect of global sourcing is: "proactively integrating and coordinating common items and materials, processes, designs, technologies, and suppliers across worldwide purchasing, engineering, and operating locations (p. 304)"
The global sourcing of goods and services has advantages and disadvantages that can go beyond low cost. Some advantages of global sourcing, beyond low cost, include: learning how to do business in a potential market, tapping into skills or resources unavailable domestically, developing alternate supplier/vendor sources to stimulate competition, and increasing total supply capacity. Some key disadvantages of global sourcing can include: hidden costs associated with different cultures and time zones, exposure to financial and political risks in countries with (often) emerging economies, increased risk of the loss of intellectual property, and increased monitoring costs relative to domestic supply. For manufactured goods, some key disadvantages include long lead times, the risk of port shutdowns interrupting supply, and the difficulty of monitoring product quality. (With regard to quality in the food industry, see Roth et al. (2008).).
International procurement organizations (or IPOs) may be an element of the global sourcing strategy for a firm. These procurement organizations take primary responsibility for identifying and developing key suppliers across sourcing categories and help satisfy periodic sourcing requirements of the parent organization. Such setups help provide focus in country-based sourcing efforts. Particularly in the case of large and complex countries, such as China, where a range of sub-market
s exist and suppliers span the entire value chain of a product/commodity, such IPOs provide essential on-the-ground information.
Over time, these IPOs may grow up to be complete procurement organizations in their own right, with fully engaged category experts and quality assurance teams. It is therefore important for firms to clearly define an integration and scale-up plan for the IPO.
Sourcing
In business, the term word sourcing refers to a number of procurement practices, aimed at finding, evaluating and engaging suppliers of goods and services:*Global sourcing, a procurement strategy aimed at exploiting global efficiencies in production...
from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include low cost skilled labor, low cost raw material and other economic factors like tax breaks and low trade tariffs.
Common examples of globally sourced products or services include: labor-intensive manufactured products produced using low-cost Chinese labor, call centers staffed with low-cost English speaking workers in the Philippines
Philippines
The Philippines , officially known as the Republic of the Philippines , is a country in Southeast Asia in the western Pacific Ocean. To its north across the Luzon Strait lies Taiwan. West across the South China Sea sits Vietnam...
and India
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
, and IT
Information technology
Information technology is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications...
work performed by low-cost programmers in India and Eastern Europe
Eastern Europe
Eastern Europe is the eastern part of Europe. The term has widely disparate geopolitical, geographical, cultural and socioeconomic readings, which makes it highly context-dependent and even volatile, and there are "almost as many definitions of Eastern Europe as there are scholars of the region"...
. While these examples are examples of Low-cost country sourcing
Low-cost country sourcing
Low-cost country sourcing is procurement strategy in which a company sources materials from countries with lower labour and production costs in order to cut operating expenses. LCCS falls under a broad category of procurement efforts called global sourcing. The process of low cost sourcing...
, global sourcing is not limited to low-cost countries.
Majority of companies today strive to harness the potential of global sourcing in reducing cost. Hence it is commonly found that global sourcing initiatives and programs form an integral part of the strategic sourcing
Strategic sourcing
Strategic sourcing is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. In a production environment, it is often considered one component of supply chain management...
plan and procurement
Procurement
Procurement is the acquisition of goods or services. It is favourable that the goods/services are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location...
strategy of many multinational companies.
Global sourcing is often associated with a centralized procurement strategy for a multinational, wherein a central buying organization seeks economies of scale
Economies of scale
Economies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
through corporate-wide standardization and benchmarking
Benchmarking
Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time and cost...
. A definition focused on this aspect of global sourcing is: "proactively integrating and coordinating common items and materials, processes, designs, technologies, and suppliers across worldwide purchasing, engineering, and operating locations (p. 304)"
The global sourcing of goods and services has advantages and disadvantages that can go beyond low cost. Some advantages of global sourcing, beyond low cost, include: learning how to do business in a potential market, tapping into skills or resources unavailable domestically, developing alternate supplier/vendor sources to stimulate competition, and increasing total supply capacity. Some key disadvantages of global sourcing can include: hidden costs associated with different cultures and time zones, exposure to financial and political risks in countries with (often) emerging economies, increased risk of the loss of intellectual property, and increased monitoring costs relative to domestic supply. For manufactured goods, some key disadvantages include long lead times, the risk of port shutdowns interrupting supply, and the difficulty of monitoring product quality. (With regard to quality in the food industry, see Roth et al. (2008).).
International procurement organizations (or IPOs) may be an element of the global sourcing strategy for a firm. These procurement organizations take primary responsibility for identifying and developing key suppliers across sourcing categories and help satisfy periodic sourcing requirements of the parent organization. Such setups help provide focus in country-based sourcing efforts. Particularly in the case of large and complex countries, such as China, where a range of sub-market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
s exist and suppliers span the entire value chain of a product/commodity, such IPOs provide essential on-the-ground information.
Over time, these IPOs may grow up to be complete procurement organizations in their own right, with fully engaged category experts and quality assurance teams. It is therefore important for firms to clearly define an integration and scale-up plan for the IPO.
See also
- Low-cost country sourcingLow-cost country sourcingLow-cost country sourcing is procurement strategy in which a company sources materials from countries with lower labour and production costs in order to cut operating expenses. LCCS falls under a broad category of procurement efforts called global sourcing. The process of low cost sourcing...
- OffshoringOffshoringOffshoring describes the relocation by a company of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Even state governments employ offshoring...
- Offshoring Research NetworkOffshoring Research NetworkThe Offshoring Research Network is an international network of researchers and practitioners studying organizations in their transition to globalizing their business functions, processes and administrative services...
- OutsourcingOutsourcingOutsourcing is the process of contracting a business function to someone else.-Overview:The term outsourcing is used inconsistently but usually involves the contracting out of a business function - commonly one previously performed in-house - to an external provider...
- Strategic sourcingStrategic sourcingStrategic sourcing is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. In a production environment, it is often considered one component of supply chain management...
- Sourcing advisorySourcing advisorySourcing advisory is the use of third-party advise during the sourcing process. As such, it may refer to advise sought during outsourcing, offshoring or global sourcing. Advisors can be independent consultants or management consulting firms...
Further reading
- Gerd Kerkhoff et al.: Global Sourcing: Opportunities for the Future Wiley-VCH, Weinheim Düsseldorf 2006, ISBN 978-3-527-50232-5