The business environment is highly competitive, and companies are always looking for that extra edge. One of the main reasons customers choose one business over another is the possibility of getting good quality products at a lower price.
The cost of production usually determines the product’s price, and the cost of raw materials determines the company’s production cost. Today, companies have the advantage of the logistical means of sourcing for materials and goods from all over the world, and they are doing it; this is called global sourcing.
Advantages of Global Sourcing
Lower Production Costs: Global sourcing allows you to source anything you need to make your product. This ranges from materials to labor. You will find that some materials are pretty expensive in the company’s home country, but they can be found at a much lower cost elsewhere. This is especially true if the company’s home country doesn’t produce the item locally.
Companies that need it to manufacture their products would have to wait for someone else to import and then buy it with the middleman’s markup. Sourcing globally takes manufacturing where the raw material is already found. It eliminates the middleman and makes the item cheaper.
Many companies in the West have built factories in China and other parts of the third world due to the lower cost of labor, making their products cheaper and, therefore, more attractive to customers.
A fast increase in production capacity: Some countries such as China and India have made global sourcing part of their economic mainstay. To become competitive, they have invested heavily in their production capacity and the skills of their people.
The availability of a technical labor force on all levels means higher production capacity. Higher production capacity does two things; it reduces production cost per unit and allows the company to meet increased customer demands.
Since the infrastructure and human resources you need for increased production are already in place when you go for global sourcing, you can boost your production quickly enough to meet the demands of your customers.
Disadvantages of Global Sourcing
Language and Cultural Barriers: Many companies that go for global sourcing are American and some from the rest of the western world. On the other hand, global sourcing is primarily offered in Asian countries such as China. This means that the bulk of the company’s production staff will not speak English. The inability to communicate clearly can make the work challenging and cause occasional errors.
Tariffs and Taxes: Governments of the countries where the sourcing occurs have to levy some taxes and fees on the company. Because it is a different company and system of government, you as a client company can get the information wrong. There is also the challenge of the country from which you are sourcing having less developed resolution mechanisms when you make mistakes. The lack of well-developed mechanisms means you will probably be operating at the whims of the officials in charge, which can cause lead to uncertainty and corruption.
Political Instability: Internal political instability within the source country can lead production to halt, affecting your ability to supply your customers. International political stability can make it challenging to ship your products affecting your business, unlike when you produce them locally. While shipping is generally cheap, the cost could rise due to issues like piracy and other issues on the international stage.
Jason D. Feintuch is a global business leader and professional with several years of experience in the food and beverage industry.