It’s easy to oversimplify the differences between sourcing for parts locally or internationally. When considering where to purchase from, the prevailing idea seems to be that domestic sourcing allows for better control and shorter lead time, but international sourcing is more cost-effective. Let’s compare the strengths and weaknesses of both international and domestic sourcing options.
Low-cost country sourcing is a procurement strategy that falls under a broad category of procurement efforts called global sourcing. This strategy involves a country from a high-cost country area — typically US, UK, Canada, Australia, and West European nations — purchasing materials from resource-rich low-cost countries; think China, India, Indonesia, Bolivia, Brazil, Russia, Mexico, and East European nations.
The aim of a low-cost country sourcing strategy is to minimise capital investment and maximise profits, with all other costs being equal. This form of sourcing is typically used for simple components or cheap consumer goods such as t-shirts — poor stitching on t-shirts pose a less serious consequence than a minor mistake on a computer battery!
Reaping the benefits of international sourcing
With the explosion of globalisation, it’s hard to ignore the allure of sourcing globally.
Leverage manufacturers and their network
Some countries are just better at some things than yours. Tapping into another country’s products allows you to improve the quality of your own products.
Higher production capacity
If your company doesn’t have the capacity or infrastructure to manufacture as it would want to, they can only outsource it to a company that has the capabilities to.
New technology and capacity
Businesses might outsource internationally because they might feel that domestic suppliers are lacking or not making the necessary investments to stay competitive.
Risks of sourcing internationally
When sourcing internationally, it pays to be aware and anticipate common challenges. Here are some of the common pitfalls to avoid when considering low-cost country sourcing.
Local tariff and tax
Understand the local tariff and tax structures involved. Depending on the low-cost country’s tax structure you may or may not be saving on costs prove to be a net gain depending on the level of export taxation in the source country and tariff levels in the importing country.
Political unrest, both internal and external, can halt supply lines. Consider events like protests, riots, pirate activity, airport closures and more. Political instability can cause interruptions to your supply chain.
While shipping is a fairly economical method, the overall cost analysis of low-cost country sourcing and domestic sourcing is critical to the overall cost equation.
Unleashed’s purchase cost feature allows businesses to update costs like duties, freight or labour as they are received, even after goods have been receipted in and sold.
Don’t forget to factor in lead time when considering international sourcing. The effect of longer lead times will affect how much you order and how much safety stock you’ll hold.
Honestly evaluate the extent to which managers will need to monitor, mentor, audit and build your supplier relationship.
Sourcing internationally can create a complex supply chain that complicates your inventory control processes. However, this shouldn’t be a problem when you have great inventory management software.
Here’s how Karma Kola used Unleashed to manage their stock across multiple locations.
While international sourcing may be the best alternative where other countries have lower labour and production costs, domestic sourcing may be a better alternative in some cases.
Benefits of sourcing locally
Shorter lead time
You will also save time and money when shipping domestically as this is typically faster and much less expensive than shipping from international suppliers. Trucking carriers can be leveraged, while ocean carriers will largely be inflexible in terms of costs and timeframes.
Builds consumer confidence
Domestic sourcing tends to build consumer confidence, especially when it comes to fresh food and drinks. When consumers can buy with confidence, businesses gain their trust, resulting in increased brand awareness and loyalty.
Strong relationships with local suppliers
Businesses that source domestically can enjoy the benefits of being in the same time zone as their supplier, meaning quicker communication so problems are solved speedily. You’ll also likely have better production control oversight to ensure that your suppliers are meeting deadlines and quality requirements.
Risks of sourcing domestically
Sometimes the local scene lacks the technical capabilities or the natural resources needed.
Less efficient suppliers
If a majority of local suppliers are small businesses, they might be restricted with limited economies of scale and be less efficient. It might make sense to leverage the economies of larger manufacturers overseas.
Depending on your local government restrictions and exchange rates, it can impact costs and tilt the balance in favour of global sourcing even when considering logistics costs.
Manufacturers should consider these pros and cons when deciding between international or local sourcing as there is no one-size-fits-all solution. Whether international or domestic, making the right decision is vital for supply chain success.
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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.