A Global Sourcing Strategy: What’s Different?

PurchTips - Edition # 120 February 20, 2007

By Charles Dominick, SPSM

What Should A Global Sourcing Strategy Address?

Costs – A global sourcing strategy is often used to benefit from lower labor costs abroad. But there are also other additional costs for a buying organization to bear that aren’t part of domestic transactions. They include multi-modal freight charges, broker fees, bank fees, taxes called duties, and insurance to name a few.

Laws – Global sourcing forces buyers and suppliers to choose one of three bodies of law to apply to their contract: the law of the buyer’s country, the law of the supplier’s country, or one applicable under a treaty accepted by both countries.

Currency – The buyer and the seller must agree on a currency to use. While some buyers insist on their own currency for simplicity’s sake, prudent decisions consider use of the supplier’s currency when the buyer’s currency might strengthen relative to the supplier’s currency between the agreement and payment dates.

Lead Time – Lead time for global purchases is usually significantly longer than for domestic ones. This is due to ocean travel being slower than air travel and customs clearance adding time not involved in domestic sourcing.

Language & Culture – If you’re unfamiliar with the supplier’s language and culture, you increase the risk of communication challenges, misunderstandings, and offensive or uncomfortable encounters.

Transportation – While domestic sourcing usually involves one shipping mode, global sourcing involves multi-modal transportation – a strategy for combining air, water, and ground transportation to get goods from the supplier to the port of the supplier’s country to your country’s port to your dock.

Payment Methods – Global sourcing often involves payment using a letter of credit which requires the involvement of both the buyer’s and supplier’s banks.

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