The risks of going abroad—October 2012 print edition

Organizations should consider total lifecycle costs when sourcing overseas

October 9, 2012
by Michael Power

Everything in life involves risk. Accepting risk is part of buying a home, having children, changing careers or starting a business. Risk teaches us to make goals and follow through, face fears and discover new things about ourselves and the world. Risk is a familiar fact in procurement and we take a detailed look at some of those risks—and what to do about them—on page 10. Those risks may be especially highlighted when sourcing overseas. Low-cost country sourcing (LCCS) can look great on paper (for example, electronic components from China may cost less than from much closer to home) but does reality reflect that?

China, of course, often comes to mind when talking about overseas sourcing. In the early 90s, many rushed to source from that country—followed by a retreat as some felt burned by high costs. Post-recession, we’ve seen many companies heading back. China will continue as a key player in international supply chains, according to Keith Carruthers, president of Truro, Nova Scotia-based Strategic Sourcing International. Carruthers has said so at both Supply Chain Canada’s annual conference in May and PMAC’s national conference in June. He’s quite deliberately used the word “exceptional” when referring to Chinese goods. Still, he offered advice: be clear what you need from Chinese suppliers and don’t make assumptions based on cultural differences. As for nearshoring in countries like Mexico or the US, Carruthers stressed one doesn’t have to entirely replace the other. Effective global sourcing relies on mutual trust and good relationships, so having local contacts helps.

China still has value, said Garland Chow, associate professor at the Sauder School of Business at the University of British Columbia, who also spoke on the subject during both events. But it has eroded due to exchange rates making Chinese money worth more. The eastern coast—traditionally a sourcing hub—suffers earthquakes, floods and typhoons. How about the rest of Asia? Weather can be worse and the region tends to have lower productivity than China. Nearshoring from countries like Mexico is an option, but logistics there hasn’t ranked well. Mexico is further away than the northern US so lead times may still be several weeks.

Having geographically dispersed suppliers can help cut risk. Organizations may have to make sure they have appropriate inventory levels and make sure they can accurately forecast future levels. As well, it can be tough to react as quickly. So as a procurement strategy, I’d say sourcing from overseas is here to stay. But to deal with the risks, organizations should make sure they’ve considered the total lifecycle costs and have alternative plans in place. Sounds like everything else in life.