Top 8 Global Sourcing Issues to Consider

There are 10 basis points companies should keep in mind when looking to source from around the world:

1. Total Landed Cost

It is easy to focus on the lowest unit cost and assume that's the best way to go. However, unit cost is just one of the pieces completing the total cost equation. Other factors include transportation, customs and duties, brokerage services (both at origin and destination), banking fees, financing, and insurance, to name a few.

Further, there could be additional, it is unexpected costs. If customs decides to examine the freight, you should add in charges for the examination and local coordination charges.

2. Product Quality

The quality of the product has ramifications over and above the unit cost on the balance sheet. Quality needs to be defined so that both the supplier and buyer understand and are in agreement. If there are issues with the quality of the product, it is much harder to address them with a vendor through cultures, time zones, and geographies, than if you are meeting with a local supplier.

Poor quality affects everything downstream. Most obviously the rate of returns is by dissatisfied customers. Returns drain the business, taking up resources that are more typically focused on getting good product out to the market, not receiving bad product back in. Defective product may need to be sold at a discount or written off as a loss.

3. Logistics Capability

All the great products and quality will mean nothing if you are unable to get the goods to market. What type of transportation is available, both domestically and internationally? After all, you've got to get the goods to an airport or seaport for transport; is there a reliable transportation infrastructure in the country? Is there a sound transportation infrastructure from the sourcing/manufacturing origin point to the port?

Once the freight is ready for international transport, is there space or lift available? Seasonal fluctuations and weather should be taken into consideration. The impact of last year's hurricane season on the Gulf Coast of the U.S. is a great example. Katrina affected the logistics of industry and business far beyond the immediate region. It is important to have the flexibility with service providers to quickly implement alternate plans in case the primary plan or transportation lane becomes unavailable.

4. Location

The close proximity of a country may make it a more attractive source. Canada is the largest trading partner of the U.S., both for imports and exports that in fact, it is the largest recipient of U.S. goods.

In the same vein, Mexico is the second largest importer of U.S. goods, and third as a source of imports to the U.S. behind only Canada and China. The close proximity leads to benefits like doing business in the same, or close, time zones.

In addition, common cultural differences and similarities, including language, are known, as many of the populations in the three North American countries have their origins or families in the neighbour countries. NAFTA has also done a lot to ease restrictions on trade between the countries.

5. Trade Regulations

There are many governmental regulations that can enhance or detract from the ease of doing business with a given origin. For years, there were quota restrictions with respect to textile imports from China. That restriction was removed in January 2005, leaving China trending toward sourcing up to 50 percent of the world market share of textiles.

Before any sourcing decision is made, it is imperative that all trade incentives or restrictions are carefully evaluated. It is also essential to be familiar with documentation requirements for U.S. customs clearance. There are many government sponsored publications, brokers or consulting organizations available to help educate an importer in the legal requirements of international trade.

6. Time to Market/Responsiveness of Supplier

Time to market is becoming an increasingly critical factor in sourcing decisions. If one's competitor has product available more quickly, the result could be lost market share and, more importantly, lost revenue. It is important that your supplier be receptive to, and able to accommodate, change.

Perhaps the product needs to be tweaked slightly, or sales are exceeding expectations and production needs to be ramped up. Is the supplier in a position to do this? The sourcing in Latin America may make sense with its proximity to the end market and quicker transport time.

7. Value-Added Services

Are there additional services available at origin to add value to the product? Is it less expensive and more efficient to have garment hang-tags attached at the factory or consolidation site prior to shipping? This can expedite the delivery in the U.S. by bypassing a facility to do the same work, most likely at a higher labor cost than if done at origin.

Does the supplier guarantee it will pack the freight to ensure it arrives intact at destination? A new importer might make the mistake of cutting corners on the packaging when importing honey from China.

8. Communication/IT capabilities

How will you know what has shipped? Is your supplier a real-time, internet-savvy, information-sharing partner? Or will you be waiting for documents typed on an IBM electric to be pouched over in a DHL envelope? An open line of communication between the supplier and buyer is imperative. Late, missing or inaccurate documents can cause delays of customs clearance and, ultimately, delivery to destination.

Inaccurate product information may result in swim shorts going to Seattle in September and umbrellas to Phoenix, requiring additional freight and time to correct such errors. E-mail and the Internet, and good old phone calls, can go a long way toward supply chain efficiency.