One of the biggest trends in business today is global sourcing. In 2001, the United States alone sourced over $1.3 trillion in goods to low-cost suppliers around the globe. Of course, the biggest reason for global sourcing is the cost savings; which can be significant. Most companies report an average savings of up to 30% when they begin global sourcing (also known as offshoring). Despite this savings, however, many pitfalls can prevent these cost-conscious companies from finding the success with overseas suppliers that they had planned for.
The biggest pitfall that many companies have found during offshoring is that those initial savings don't always equal total savings in the long run. For example, it may cost less to produce the goods in China, but when the costs of shipping the raw materials, dealing with government taxes and tariffs, and bringing the finished products back to the home company, the actual cost of production may actually be higher. Also, some companies have found out the hard way that they often get exactly what they pay for. Cheap labor in other countries can spell lower productivity, poorer quality, and more defective goods, which further increase the overall costs of production.
Many of these companies have fallen into these traps simply because they only looked at the cost factor instead of realizing that global sourcing is only effective when it involves a total evaluation of all factors. These other factors include the costs of the materials, of the transportation, of the inventory carrying costs, of the tariffs and taxes, of the operational performance, and of the operational risks. Only when all of these factors are taken into consideration can a clear picture about the effectiveness of global sourcing be predicted.
Additionally, companies sometimes fail to realize the importance cultural differences can play in the success or failure of an offshoring venture. Most western business individuals simply do not have significant knowledge of other cultures to effectively work with them. If these business people fail to realize this problem beforehand, they can doom the partnership before it ever gets off the ground. For example, do not tend to believe women should be involved in business. If a U. S. company looking to outsource some of their projects in that country sent a top female executive to conduct the negotiations, this company might be making a major error in judgment. In order to work in different countries, western companies must be willing to train their employees to work with different cultures and understand how these paradigms play out in business relationships.
Another aspect of the global sourcing process involves being knowledge about changes in trade regulations and costs in other countries. For this reason, individuals involved in global sourcing need to be extremely familiar with both the Harmonized System Code and the International Commerce Terms. The Harmonized System (HS) Codes are six to ten digit numbers that represent different trade regulations and tariffs around the globe. Hundreds of these codes exist and appropriate codes must be applied to any goods that need to cross any border. The International Commerce Terms (Incoterms) are a collection of 13 standards that dictate the rules and responsibilities of buyers and sellers responsible for goods that are being transported across borders. When businesses attempt to do business overseas without a thorough understanding of the HS Codes or the Incoterms, those situations might become somewhat problematic.
Overall, global sourcing is not as simple as just moving production from the United States or other higher-cost country to a lower-cost country like China or India. While companies can save money through offshoring activities, they must also take the time to evaluate the big picture that includes multiple factors such as shipping costs, tariffs, and potential risks. They must also be willing to do their homework on other cultures and to expand their knowledge to include the HS codes, Incoterms, and other regulations so that they can carry out their offshore operations smoothly and cost-effectively.