With every purchase made, businesses face a decision that directly impacts their bottom line.
Where you procure goods and services from directly determines the costs and margins you face. Lower costs improve profitability or maybe you find the higher quality option that results in a better product that can be sold at a higher price.
Restricting which options you’d consider sourcing from could be impacting your overall profitability. That’s why businesses everywhere look to global sourcing to bolster profits, improve quality, and tap into new tiers of scale.
What is global sourcing
Global sourcing is the act of obtaining goods or services from international suppliers as opposed to domestic sources.
As the world of commerce has become increasingly globalized, businesses have opportunities to save costs or leverage different skill sets by looking beyond their borders. The possible pool of suppliers increases greatly and is more diversified.
Since countries vary in their economies, industries, and skills, you may find higher quality or lower cost opportunities due to a currency exchange or market value. Whether it’s contracting an expert abroad or tapping into international manufacturing, you could potentially be getting more for less money.
Global sourcing complicates the procurement process, but with these new challenges comes a wealth of efficiency and cost savings.
Global vs local sourcing
Global sourcing and local sourcing accomplish the same goal: obtaining a good or service needed in your operations. But how you source globally and locally differs greatly.
Customs and tariffs
While some countries have free trade agreements, others will tax imports and exports.
These taxes are called tariffs. Tariffs are implemented to incentivize domestic supply and consumption by making it costly to import from or export to another country.
Tariffs and taxes are charged after shipments go through the customs process. The customs process is when shipments are reviewed to ensure they were accurately documented and any relevant tariffs are charged.
Customs and tariffs will add both costs and processing times to shipments. Plan accordingly to ensure costs are kept in check and give shipments extra time to get to their destination.
Costs of fulfillment
Costs of fulfillment vary from country to country for many reasons. However, two big factors determine the cost of procuring something abroad.
The first is that countries have access to different natural resources and develop industries around these endowments. A common example of this is Canada which specializes in lumber production and supply building off of its vast forests.
If a country has a surplus of something and is efficient at extracting or producing it, the costs are typically kept low.
The second is that one country’s currency may be stronger or weaker relative to another. The United States dollar was at an all-time high in 2023 which made it more appealing to foreign vendors.
As a result, the purchasing power of an American dollar increased meaning you could get more value back for the money you spent, so long as it was being spent outside of the country.
Specialization
Domestically, there is some variety in specialization across cities, states, and regions. But this variety pales in comparison to the amount of specialization when looking at the entire world.
Across the globe, there are countries with differing natural resources, labor force makeups, and government programs that incentivize a certain type of production. In these cases, the country develops what’s called a “comparative advantage.”
A comparative advantage means the country has a lower opportunity cost when producing that good or service. As a result, it becomes a focus of their industry leading to technological advancements and new efficiencies.
Oftentimes, this results in a better overall product. If you take advantage of global sourcing, you may find better deliverables at a lower cost.
The five tiers of global sourcing
Global sourcing strategies are broken up into tiers. With each tier, the business becomes more dependent and strategically focused on international suppliers, while individual business units have increased autonomy in choosing an international vendor.
The first tier is domestic purchasing. Domestic purchasing means sourcing all materials, manufacturing, and labor within the same country (i.e. no global sourcing is taking place).
The second tier is international sourcing. This is when the business is open to tapping into international markets, but doesn’t have a formalized process to do so. In this case, the business would jump at an opportunity if it presented itself, but isn’t actively monitoring international markets.
Businesses formalize their global sourcing process in the third tier, international procurement. At this point, the business has set practices for reviewing global markets for opportunities and comparing them against domestic providers.
Come the fourth tier, centralized procurement across locations, there are set processes for international procurement that individual business units must follow. There may still be an approval or review process before the procurement process begins.
The fifth and final tier is an integrated global sourcing strategy. At this point, domestic and international vendors are treated as equal. While the processes for domestic and international vendors differ, each are standardized and documented such that anyone can procure from abroad without seeking approval.
Benefits of global sourcing
Global sourcing comes with complications. But businesses put in the extra work to procure from abroad for good reasons—you could experience benefits across multiple business units and functions.
Some of the benefits of global sourcing include:
- Cost savings: Multiple factors drive cost savings when taking advantage global sourcing. The cost of labor, access to materials, exchange rates, and unique comparative advantage of a country all contribute to the cost of a good or service when buying abroad.
- Benefiting from emerging markets: When a country has a sudden boon, global sourcing positions you to take advantage. A recent example is Vietnam’s electronics manufacturing which took off when new free trade agreements were launched, lowering costs and fostering growth within the country.
- Scalability: When you depend on a small amount of suppliers, you’re limited by what those suppliers can provide. What happens if you need to double or triple production? Having a mix of suppliers from different areas helps you scale up without a single bottleneck.
- Market expansion: Sourcing goods or services abroad may help you break into that market as a seller. By working with a provider, you’ll learn the ins and outs of the market and may find an opportunity to expand there as a seller yourself.
- Minimizing supply chain risk: Diversifying your supplier base across multiple countries reduces the risk of disruptions, such as tariffs, geopolitical changes, or natural disasters.
- Access to new technology: Different countries focus their research and development on different initiatives. This creates opportunities to benefit from a technological advancement that may not come stateside for months or years.
Ultimately, global sourcing is about maintaining flexibility to find the best option for the best price, especially if conditions change. If you depend on a single supplier, you lack bargaining power and are more likely to experience the downstream effects of any problems they encounter.
Challenges of global sourcing
Savvy businesses use global sourcing to optimize their operations and maximize profits. But adopting the practice isn’t a sure shot if you aren’t mindful of the challenges it brings on.
Global sourcing isn’t for everyone and you must be equipped to face the following changes if you want to incorporate the practice successfully:
- Logistics: Global sourcing means stepping away from your domestic procurement process and building something new. It’s essential to understand how the logistics differ including shipping costs, turnaround times, and potential blockers before locking in an agreement.
- Monitoring exchange rates: The value of currencies constantly fluctuates which could either boost or eat into your savings. You need to track exchange rates to know when a deal is no longer benefiting your business.
- Quality control: With potential language barriers, longer turnaround times before a product is in hand, and less visibility into production, it’s harder to maintain quality with the good or service you’re being provided.
- Compliance and regulations: As globalization has been on the rise, countries sometimes pass laws to make importing goods or services more difficult. The purpose is to push people to use domestic providers. Look into tariffs, taxes, and import rules that would impact how and what you can import.
- Cultural differences and communication: When working with someone from a different country, you’ll encounter differences in language and expectations. From the initial stages of negotiation to managing an ongoing engagement, this could present unexpected hurdles you don’t feel prepared to handle.
- Working across time zones: It can be frustrating working across time zones where an important question or request may not be seen until the next day. You’ll need to be strategic with your communication and potentially work atypical hours to get a deal locked in and fulfilled.
- Intellectual property risks: Intellectual property laws protect designs, but they aren’t enforced internationally. Manufacturers may take your design and sell it to a local business or take it for themselves.
- Managing cross-border payments: Domestic payments are made easy since all banks are on a universal system of transferring funds. International payments have more steps in the process, higher costs, and exchange rates to worry about before hitting send.
Every business needs to understand its risk tolerance as well as the costs and benefits of using global sourcing in its operations. The extra work may offset the cost savings, especially for smaller teams.
How to build a global sourcing strategy
Whether you’re ready to integrate global sourcing for the first time or looking to formalize your processes, follow these steps to build a successful global sourcing strategy.
- Assess your needs: Define what you’re looking to accomplish including what you’ll look to procure from an international market and the volume of business you’re looking to do abroad. The more you’re looking to outsource, the greater the emphasis on developing a scalable process.
- Conduct research: Look into the potential markets you’d like to tap into. Do some cursory research into labor costs, manufacturing costs, and specialization to determine which countries you should start with.
- Choose potential partners: Once you have an idea of where you’d like to start, it’s time to dig into the specifics. Select a handful of potential partners with the understanding that some may not be the right fit—finding partners is a numbers game of prospecting with the hope that at least one will be the ideal match.
- Conduct due diligence: After identifying potential partners, do a deep dive into reviews, credentials, and even a potential factory audit. Much of this can be done by yourself, but consider using a third-party company that knows what to look for.
- Prepare for the logistics: Early conversations should cover the essentials of your logistics like shipping costs, timelines, payment information, and customs clearances. It may be worth bringing in a third-party logistics company to ensure all potential issues are covered.
- Learn the rules: See if there are any unique rules and regulations when procuring from the supplier’s country. It may be worthwhile to bring in a compliance expert, especially if the rules are particularly complex.
- Establish communications channels: Strong communication can be the difference between a botched batch and smooth procurement. Choose how you’ll communicate and what your expectations are for touch points and response times.
- Develop specifications and quality measures: It’s up to you to define what the finished product looks like. Clearly define what the specifications are and ways of measuring whether they are met.
- Start with a trial run: Minimize risk by starting small and evaluating what’s working. You may experience friction with your processes that need to be smoothened out or perhaps the supplier isn’t the fit you thought they’d be.
- Learn and iterate: From the initial trial to each following order, you should always be learning from your experience and striving to improve. Regularly check in with your team to understand the pain points and friction in your processes. Over time, you’ll refine your process to be efficient and effective while only working with suppliers that deliver quality results.
It’s unlikely you’ll perfect global sourcing on a first attempt. But if you continue to learn, adapt, and commit to improvement, you’ll start to experience more of the benefits without the downside of the challenges.
Global sourcing best practices
Global sourcing has become increasingly common. As more businesses start to procure across borders, shared learnings have informed best practices that you should follow.
Prioritize clear communication
You don’t have the same luxuries of transparency with global sourcing as you would when working with domestic suppliers. If anyone you’re working with is being difficult to communicate with, you should start considering other options.
A basic miscommunication can be the difference between a compliant exchange and a costly rule break. Always look for transparent suppliers who communicate clearly and exhibit strong customer service.
You take on more risk when procuring abroad. You should always feel that you and your prospective partner are on the same page with no room for interpretation.
Understand and manage your risks
Establish ahead of time what your risk tolerance is. You should define what’s a worst-case scenario you’re willing to endure.
You may deal with a bad batch of inventory, a shipment getting taken by customs, or costs being unexpectedly higher, amongst other outcomes. If any of this were to happen, how would you handle it? Would it be manageable?
The risks of global sourcing vary depending on what you’re procuring and where it’s coming from. Each country and industry has different risks that you need to invest time into understanding.
Diversify your suppliers
One way to reduce risk is to diversify your suppliers, especially across countries when possible.
New laws surrounding trade are regularly passed and when they do, you may find an existing partnership is no longer possible or doesn’t offer the same cost savings. But if you have multiple suppliers, you have options for moving your production to someone else without disruption.
Protect your intellectual property
Rules and regulations surrounding intellectual property vary by country. By moving production overseas, your designs and ideas could potentially be leaked to competitors who will undercut your pricing.
To combat this, you’ll need legally binding documentation such as non-disclosure agreements (NDAs) and non-compete agreements.
Consider working with a lawyer for drafting the documents. Getting it right the first time gives you a template for how you should proceed in every other instance.
Invest in the long-term
Think of global sourcing similarly to a deep sea dive. Regardless of whether you dipping into the shallows or going far underwater, you’ll need the same amount of prep work and gear to do it successfully.
That’s why it’s best to invest in the long-term from the get-go. How successful your global sourcing practice is depends heavily on the work you do ahead of time.
Even if you have a rough experience, try to focus on what you can learn and change because of it. Over time, global sourcing will become a well-oiled component of your overall operations.
Bring in help when needed
When you find yourself facing uncertainties or navigating a situation that you’re not sure about, it’s always best to reach out for a helping hand.
Global trade consultants specialize in helping businesses understand the ins and outs of importing and exporting. They’re experts who can guide you through rules, regulations, compliance musts, customs, and more.
Use technology to streamline
For many of the pain points that underlay global sourcing, there’s a tool that makes it easier.
Consider bringing on some of these tools to streamline parts of the process:
- Supply chain management (SCM): Get visibility into the flow of goods and money with insights on where there are delays, hold-ups, and inefficiencies.
- Enterprise resource planning (ERP): Understand how your procurement fits into the bigger picture. Find the balance between global and domestic suppliers and optimize your overall operations.
- Logistics and transportation management software (TMS): Track the progress of shipments and manage shipping costs to ensure goods are being landed at a reasonable price and on time.
- International payment platform: Send money abroad with ease. Keep transaction fees to a minimum and ensure payments always show up on time.
Managing international payments with global sourcing
After deciding to work with a supplier from abroad, the next question is how you’ll pay them.
Each option available to you has its own fees and processing times. Plus, some payment processors offer below market value exchange rates so they earn more on every transaction than they’re reporting to you.
BILL makes international payments easy by simplifying and streamlining the process, all while offering you complete transparency into the costs. No more getting blindsided by unexpected fees, no more jumping through hoops to get suppliers paid, and no more wondering when the payment shows up.
Get a demo to learn how BILL can save you time and money on international payments.
