Source domestically or internationally? 3 considerations to keep in mind

PRINCIPAL  KEYWORD: global sourcing

Global and domestic sourcing is inherently linked to the performance of firms,  as procurement decisions critically impact the success of businesses because costs on purchased parts represent a substantial chunk of the sales of a vast majority of them. Global sourcing has for years has been seen as one-way traffic in which manufacturers. Especially from the developed countries, tend to purchase materials at a lower cost to enjoy the cost advantage. However, the outbreak of Covid along with extensive supply chain disruptions and complications has acted as a wake-up call. Which has made businesses think global sourcing is’ not the- be -and end-all’ strategy.  However, the purpose of this article is not to enter into a theoretical debate. It would consider three considerations each for global and domestic sourcing respectively from the purpose of carrying on your operations.

Global Sourcing: Considerations

  1. Obtain Multiple quotations and Samples

Finding vendors is not as easy as it appears on the Internet. You need to weigh the options before determining whether you would go through a trading company or deal directly with the factories only. In addition,  It is necessary to check a number of parameters as creditworthiness, reliability, and cost-effectiveness of vendors. Language consideration is as important as the quality of material being sourced.

Once you have identified and shortlisted the vendors, it is necessary to get the quotes with minimum quantities that they are willing to ship. And obtain samples to determine who would fit your bill the best.

  1. Document all the elements and expectations with actual samples

Proper documentation is indispensable in global sourcing. And, is because it is necessary to comply with the regulations of not only the exporting countries but importing ones also. Both technical specs and commercial conditions would have spell out. The tech pack should include dimensions, tolerance, material, color, testing standards, etc.

  1. Understand the Payment terms, shipping, and transaction costs

Payment options vary from Letter of Credit to presentation of the document. In cases where the shipment is not covered by an LC, effecting the payment after clearing the document through your bank would be the next best option.

Given the fact the Covid has caused and is still causing high disruptions. It is essential to assess more thoroughly the contractions obligations and remedies for the delayed transactions. In extreme circumstances, it may even ‘force the Majeure clause in the event of the vendors not being able to fulfill the contractual obligations. You need to make an analysis of the ability of your business to withstand such a shock.

In regard to shipping,  you would be thrown with Innumerable shipping options as for instance Ex-works, FOB, C&F, CIF, Landed duty paid, (DDP) or delivery duty paid, (DDP). Some of them may be good only in theory and the most common ones from which you can choose are related to FOB/C&F/CIF. Before choosing the shipping lines, check the transit time, the number of free days they offer in terms of the container detention period after landing. And also the costs at the discharge port and Container Freight Station, (CFS).

Domestic Sourcing: Considerations

It considers that sourcing domestically is relatively easier compares to global sourcing. The considerations describe keeping this principle in the background.

  1. Choice of the suppliers:

You need to determine whether it is possible to handle directly with the manufacturer or go through a distributor. While the traditional practice is going through the distributor, even if you have an option to go through directly with the manufacturer, yet you should weigh the option carefully because you may need after-sales service,  the distributor can be more responsive and be flexible and may be open to offering a discounted pricing by absorbing a part of it from their margins.

  1. Evaluation of Suppliers

This is a common feature for both global as well as domestic sourcing. But the variables for evaluation in respect of domestic suppliers are far less. Nonetheless, such parameters as tech specs, price, and minimum quantities offered, as well as the ordering convenience,  the terms of payments, quality, service and delivery time, etc. are equally important considerations in your decision making.

  1. Economic Order Quantity

In domestic sourcing, how much is purchase acquires more importance than from whom it has purchase because of the relative easiness in handling with the choice of suppliers. In this regard, a practical formula that can come in handy is the Economic Order Quantity (EOQ)  propounded by Waters. It denotes the balance point between acquisition costs and holding costs. Nonetheless, caution needs to exercise. By taking it into account determining the quantum of safety stock in order to meet delayed arrival or an unexpected surge in demand.

In sum, by taking into account important features that distinguish global and domestic sourcing, the common considerations you need to keep in mind are:

  • Knowing your product.
  • Getting to know your supplier – look for long-term players.
  • Getting multiple quotes and samples from the vendors.
  • Researching the labeling, testing, etc. requirements
  • understanding all costs including the miscellaneous ones.
  • Documenting even the unknowns in order to leave nothing to chance.

Keywords:

SOURCING, COST, CONSIDERATION, OPTION, Global sourcing, SHIP, VENDOR, SUPPLIER, Global and domestic sourcing, QUANTITY

 

 

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