Home or Away: Where Should Your Business Source Its Inventory?

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Procurement has changed a great deal over the last decade. When considering where to source raw materials and finished products, the general consensus has long been that domestically sourced products were typically higher quality and had shorter lead times, but that sourcing abroad could lead to major cost efficiencies.

These days, overseas factories in low cost markets are increasingly reliable and efficient, allowing businesses who procure abroad to breathe a little easier. At the same time, local producers are recognising that they need to compete on price with overseas factories much more than they historically have. So should your business procure internationally or at home?

Domestic Sourcing

If your business deals in a specialised, high volume product that needs to be delivered to a very lean schedule, domestic inventory manufacturing is likely to be the optimal choice. Without the hassle of customs, international transit and line haulage, turning around orders in the shortest time possible becomes much easier.

Being able to quickly turn defective product around to the manufacturer is also useful where you are procuring a particularly technical product that has fairly high production standards. Typically it’s not nearly as much of an issue if a large volume of product needs to go back to the manufacturer for a small fix. An entirely local supply chain can also be highly attractive proposition if you or your customers have a much lower tolerance for risk than the average business; if the next Eyjafjallajökull erupted and disrupted the global supply chain, could your business weather the storm? If not, you probably want to procure key inventory locally.

If the decision is evenly balanced, it’s also worth remembering that domestic procurement can be a strong marketing tool. Many, if not most, customers have some preference for buying local, so you may enjoy a valuable point of difference if your product can claim to be homegrown. Buying local can also be a wise choice if the particular product is perishable or highly regulated; particularly when it comes to fresh foods and medicines, regulatory barriers can often negate many of the cost advantages of sourcing product from lower cost markets.

International Sourcing

Although labour costs in many popular outsourced markets have been rising, some low cost markets can still deliver product at a lower cost than factories at home. That said, if price is a key decision driver, it’s worth checking whether any local suppliers would be interested in manufacturing inventory at a similar price point. Sometimes local manufacturers are willing to compete with foreign competitors on price, whether to build volume or spread steep fixed costs.

In smaller home markets, international sourcing can offer a customer access to expertise or inventory manufacturing techniques that might not be readily available domestically. Strangely, sourcing abroad can help some businesses reduce their lead times. Shipping the product halfway around can be the fastest option in the rare situation where local manufacturers are at capacity. Sourcing abroad can also open up innovative fulfilment and distribution options. Many overseas manufacturers are happy to facilitate ‘drop-shipping’, where your business purchases product unit by unit from the manufacturer, who then handles order dispatch.

Inventory manufacturing is becoming more homogenous across regions, making sourcing decisions more difficult than ever. Cost differences remain relevant, but the prospect of tighter margins is no longer the strongest decision driver. These days, the right procurement option is a product-by-product decision.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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