In today’s global economy, there are more options than ever before to support your supply chain. The abundance of options can mean sourcing materials and finished products can become an interesting predicament. There are competitive options and opportunities in the domestic and international markets. With these options come pros and cons in either situation. A business must analyse the advantages of domestic and international options and weigh the trade-offs that they might incur.
It’s important to do a full cost-benefit analysis of domestic and international options before deciding where to channel your sourcing. Historically, there has been an overriding idea that domestic sourcing yields better quality control and allows for a product to get to market quicker. In addition, there is the generalisation that international sourcing is cheaper. However, depending on what you are sourcing and the nature of your business, it’s necessary to dig deeper into these costs and compare details wisely.
If you are looking overseas to source materials, it is imperative to look at several different countries. Low-cost country sourcing (LCCS) facilitates sourcing options in countries where the operating costs are lower. This means standard labour and production costs are lower in the overseas country rather than domestically. This is passed on to companies in the form of a cheaper ordering cost. There are numerous LCCS countries that implement regulated wages and have the capabilities to meet sourcing needs. Some of these countries include China, Indonesia, Russia, Mexico, Indonesia, and India, as well as several countries in Eastern Europe.
Beware Hidden Costs
Although materials and products can be sourced from LCCS locations for a cheaper ordering cost, there may be other costs and barriers incurred in the products. Depending on the overseas location to the domestic country, there might be significant shipping costs. So even if the ordering cost is cheaper with LCCS, the shipping costs may turn out to drive the overall costs up higher than the domestic price. Buying heavier materials will often be the driver of higher shipping costs. Other barriers include poor infrastructure in LCCS ports, corrupt government officials, climate changes and weather disruptions, and currency fluctuations.
With domestic sourcing, there are a multitude of advantages, alongside some hindrances as well. Generally, logistics are simpler and the shipping process is quicker. Since the materials can travel overland by truck, there is no extra cost of shipping vessel fees and long transport time. In addition, when sourcing domestically, companies and manufacturers can interact and have more face- to- face contact. Troubleshooting, production control, and site visits are easier and stakeholder relationships can be stronger in a domestic setting. Domestic sourcing is also a good option if your country has weak currency. If the supplier’s country has a stronger currency, it would impact the overall ordering cost.
Setting price aside, a domestic market may not have the resources or infrastructure to produce the materials or product you are looking for. If you are trying to bring a new product to your domestic market, sourcing domestically will be nearly impossible if the right materials aren’t available in your country. Moreover, sourcing internationally will open up the variety and quality of materials available. There may be more options to negotiate and get competitive prices overseas as well.
There are many factors to take into account when deciding between international and domestic avenues. Be sure to evaluate them closely, as it can have a significant impact on your costs and overall end product.
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.