When Global Sourcing Backfires
In the past few months, I've thought that Industry Week has done a good job covering the global sourcing and supply risk arenas. Over the weekend, I had the chance to read through their latest piece on the subject. Penned by GT Nexus' Andy Stinnes, the article examines how global sourcing initiatives often fall short of delivering expected savings because "the risks and costs of longer, more complex cross-border supply chains were not properly understood, tracked and managed." Some of the case studies Stinnes notes should serve as perfect warning signs for companies jumping into the global sourcing game without thinking through all of the risks and challenges. Consider, for example, a manufacturing company who "successfully expands its global supplier base, saving $20 million, only to find that logistics costs had increased by $38 million" due to increased transportation expenses.
Or what about the case of the "diversified Fortune 250 retailer ... [who embarked] on an initiative to increase from 5% to 30% a number of material, component and service activities sourced in four low-cost countries, with a projected savings in cost of goods sold (COGS) of $200 million." In reality, the projected COGs savings had to be "significantly adjusted downward" do to the increased logistics costs of sourcing globally.
In practice, it is the unexpected additional costs like these which often render global sourcing decisions much more complex and risky than many companies first think. All too often, that 20% piece part savings can take a turn towards negative territory after an organization takes all of the total landed costs from a low cost country sourcing decision into consideration.
- Jason Busch
Or what about the case of the "diversified Fortune 250 retailer ... [who embarked] on an initiative to increase from 5% to 30% a number of material, component and service activities sourced in four low-cost countries, with a projected savings in cost of goods sold (COGS) of $200 million." In reality, the projected COGs savings had to be "significantly adjusted downward" do to the increased logistics costs of sourcing globally.
In practice, it is the unexpected additional costs like these which often render global sourcing decisions much more complex and risky than many companies first think. All too often, that 20% piece part savings can take a turn towards negative territory after an organization takes all of the total landed costs from a low cost country sourcing decision into consideration.
- Jason Busch
Compaq followed this model back in their heyday and achieved remarkable results. The SVP of WW Manufacturing called it a "freight and duty" game and Compaq played it to win. The Compaq Procurement organization pursued total landed cost of globally sourced components with an intensity that left their competitors in the dust.
IBM called the same play on a larger scale with their Integrated Supply Chain organization and Tim Carroll speaks about it often at conferences and events.
Global sourcing can be a complex and risky venture. Tackle the complexity head on and tilt the odds in your favor by not trying to go it alone.