Great big world—March/April print edition

The pros and cons of global sourcing

May 10, 2013
by By Michael Power

No matter where an organization sources from, some risk is bound to arise. Even if a company sources components, commodities or products locally or within Canada, challenges and mishaps highlight the risks inherent in the sourcing process. A shipment can wind up late or go missing altogether. Supply chain visibility can get blurred. An order can turn out sub-par.

But sourcing abroad can result in even more potential pitfalls. Whether it’s the risk of overseas political unrest, tainted children’s toys from China, the threat of natural disasters or simply longer lead times, risks abound on international waters.

Given these threats, how popular is international sourcing these days? And what are the challenges—and benefits—of sourcing abroad?

China is still perhaps the most 
popular and best-known destination for international sourcing. And the 
country remains an attractive destination for companies looking overseas for opportunities, says Garland Chow, associate professor, operations and logistics division at the University of British Columbia’s Sauder School of Business. In fact, China has stayed popular despite losing ground on some of the advantages (such as low wages) it had a decade ago.

“It hasn’t disappeared,” Chow says. “But relative to wages in both developed and near-sourced countries (the cost) has gone up relatively. The exchange rate has also had an impact there, so they’ve lost some of their advantages. But there are some circumstances that will keep production in China for the foreseeable future.”

China’s production capacity remains intact, Chow notes. China’s labour force buttresses that capacity, as well as its infrastructure and supporting industries. Clusters of related industries have sprung up surrounding several Chinese suppliers to provide them with inputs.

“For example, in apparel, while the factory may stitch things together you must have suppliers for many of the components—specialists who might do certain processes and so on,” Chow said. In China these days, those specialists might be around the corner.

Low-cost labour was one of the factors that drove North American companies to source from China in the first place. But while other Asian countries like Vietnam, Thailand, Indonesia and India have lower labour costs, China has seen several improvements in its production quality over the past decade. The country has increased its capacity, worker skill set and many companies have relatively new equipment. As well, its supply chain is relatively good.

“(China) has very nice highways, the railway systems have improved substantially and, of course, they have great ports,” says Chow. “They have the capacity, infrastructure and supply chain and they’ve been making these products for 10 years. Even if the lowest-level employee is floating from place to place, the management and techniques are there.”

Even lower labour costs may cause some organizations to look at other countries as potential sourcing destinations—but remember that many locations lack China’s capacity, Chow says. Product shortages would likely be the result for a company switching its entire production to a country like Vietnam.

“They just don’t have the capacity yet to take all that production and I don’t think they ever will,” Chow notes. “But those countries are just like China 12 years ago. They have low labour costs, their supply chains are weak—they’re just learning. The difference is, while they have lots of labour it’s not as large as it was in China.”

Just a commodity
The increased commoditization of products has also driven organizations to source abroad, says Mickey North Rizza, supply management analyst and vice-president of strategic services at BravoSolutions. The more commoditized (when goods with their own attributes wind up becoming simple commodities to consumers) a product becomes, the lower its costs. Those low costs put pressure on margins and can drive companies to search overseas.

“More companies have been doing this over the last two years,” she says. “No matter what new product comes out, it’s (all about) how quick can we commoditize it, how quick can somebody else get their hands or name on it? How do we lower the price point? If you think about our global environment, that’s putting more pressure on commoditizing things faster.”

Companies are working harder to connect supply and demand, North Rizza notes. Organizations are asking questions like the cost to ship a part, how much does extra inventory cost, whether that inventory will sell, what’s the inventory carrying costs and so forth. “It’s beyond total landed cost; it’s really total cost-to-serve,” she says. “You’ve got to factor in what geography you need it in and how many other products it needs to go to—you start looking at what it actually costs to serve that market. Sourcing is a very big component of that.”

When it comes to sourcing from up-and-coming locations like Vietnam, North Rizza recommends looking at the entire equation. You may get lower wages, she says, but you may have to source at high volumes. As well, consider other risks like the potential for intellectual property theft or sub-par infrastructure that lengthens lead times.

Get it in writing
Sourcing abroad can give organizations an edge over competitors, says Jon Heppenstall, Canadian director of strategic sourcing and supplier strategy at Staples Promotional Products. Although commoditization makes it more difficult, companies can sometimes find unique products when abroad, he notes. There are several steps organizations can take to protect themselves against the risks inherent in sourcing overseas.

Recent fires at factories in Bangladesh and Pakistan have thrown into relief the risks of sourcing from some locations or regions. Factory fires in the Pakistani cities of Karachi and Lahore on September 11, 2012 are considered the worst industrial factory fires in the country’s history. The Karachi facility (which saw at least 300 people die) had its SA8000 certificate, issued by New York-based Social Accountability International.

“There’s the risk that even though you’ve done all you think you can do, you can still run into problems,” Heppenstall says. “What’s that going to do to your brand?”
One mitigating step is to set up formal vendor agreements, he notes. Those agreements signal compliance is important to an organization, he says. Independent factory audits (like those done by Bureau Veritas or SGS) are also useful, as is product safety testing. Try to ensure third-party auditors are reputable, Heppenstall warns, since factories have been known to pass audits when they shouldn’t if money has changed hands.

Agreements with vendors are even more important as consumers become savvier about what they’re buying and insist on traceability of the components in a product, he notes. At one time, knowing where a product was made was sufficient for most consumers, Heppenstall says. But some consumers now insist on knowing the history of the parts that make the whole. Organizations can ask for sections in their agreements that provide traceability to the product.

“The consumer has become much more educated and demanding with companies to ensure we understand what we’re buying as well as what they end up buying and, ultimately, what goes into the consumer’s hands,” Heppenstall says. “In the last 10 years, that’s probably the biggest challenge in the marketplace.”

In conclusion, global sourcing appears to be here to stay. New locations—not to mention risks—will continue to appear, so staying informed remains as important and useful as ever.