The Case for Global Sourcing

“Is global sourcing really worth it?” For a variety of reasons, executives at many companies are reconsidering whether or not they should be buying products from international sources. Companies are facing higher than expected costs of materials and labor, a declining U.S. dollar, and rising fuel prices, while some are experiencing the persistent quality issues that we continue to read about in today’s headlines. Concerns regarding quality affect consumer choices. A Reuters/Zogby poll recently released on Sept. 19 found that 78% of Americans worry about the safety of Chinese imports, and 25% have stopped buying food from China. In the poll, 35% of respondents were “very worried” and 43% were “somewhat worried” about the safety of Chinese goods.

Not only must executives be concerned with the quality and reputation of their own products and brand, but now there are risks of being associated with a larger brand — “Made in China.” At a time when China has become the largest source of imports for the U.S., company executives are evaluating their reliance on China-based suppliers. Though the government of China is working to improve the country’s brand image by instituting and enforcing quality standards, it might not be enough to stave off buyers from reconsidering their sourcing decisions. International sourcing and procurement can have high rewards, but those rewards bring additional high risks.

Many companies still make procurement decisions based primarily on unit cost. The global explosion of connective technologies, well-educated workers, and capital has made it possible to, almost literally, have the entire world compete for the opportunity to sell to your business. And with that competition is a tremendous opportunity to reduce costs—especially labor cost. Of course, many companies procure goods from global sources for other reasons as well, including:

• Access to fresh research, design or specialized intellectual capital.

• Availability of new technology and capacity. Many companies source overseas because domestic suppliers lack the capacity and are not making the necessary investments to stay competitive.

• Plans to sell or service locally. Some companies source locally to help break the barrier to local market entry. Or their customers have now moved manufacturing processes to that country and want to be serviced locally.

• Proximity to raw materials.

• Superior quality. Many companies praise the quality of international source product compared to U.S. products. This is typically due to supplier investment in technology and capacity to attract global business as mentioned above.

John Brockwell is vice president, in the global trade management division of JPMorgan Chase.

The Case for Global Sourcing, Part II

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