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“ ONE OF THE BIGGEST PROBLEMS IN DEALING WITH OVERSEAS SOURCING IS COMMUNICATION. MOST PROBLEMS CAN BE AVOIDED FROM THE BEGINNING WITH PROPER COMMUNICATION.”
– GRACE ZHANG, STRATEGIC GLOBAL SOURCING LTD.
GLOBAL SOURCING RISKS AND HOW TO MITIGATE THEM
Consider the several major risks connected with global sourcing and you might be put off ever doing it again. Those risks pertain to:
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Currency fluctuation: Purchases can become more expensive than anticipated if the value of the dollar drops.
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Transportation: Shipped around the world using various modes of transportation, goods are subject to loss, damage and delay at a higher rate than if purchased in Canada, closer to their destination.
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Low health standards: Lower health and safety standards in some countries mean that products arrive for sale in Canada in a condition that prevents their sale; the use of lead-based paint on toys, for example, is prohibited in Canada but not in all countries.
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Liability and reputation: The sale of imported goods that are found to be unsafe or manufactured under conditions that violate human rights can be disastrous for a company’ s reputation and profit.
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Language and cultural differences: Different social customs and ethical standards are observed in business relationships around the world. Misunderstandings in this area can put an enormous strain on a business relationship and lead to both financial loss and court battles.
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International politics and legal differences: Loss or delay of product can be caused by a purchaser’ s lack of awareness of trade barriers, disputes or laws or government instability in the country of origin.
Being aware of the risks in sourcing goods outside of Canada is an important first step in protecting your company against them. But awareness is not expertise; much more is needed.
Research and alternative plans are essential, says Crupi. Knowing your suppliers and understanding the countries from which you’ re importing will help to mitigate the risks associated with global sourcing, as will having backup suppliers for critical products and services. He recommends, too, that you assess the potential costs related to each risk, and manage those with the highest possible costs most diligently. If the cost associated with a risk is determined to be low, that risk requires little monitoring, especially when time is limited.
In Zhang’ s view, hiring a global sourcing professional, as either an employee or a consultant, is the best way to mitigate the risks inherent in buying from outside of Canada, in particular from overseas. The right person for this role will have a strong background in and knowledge of your industry, as well as the language skills and cultural knowledge to deal effectively with manufacturers and other supply chain parties in the country of origin.
“ One of the biggest problems in dealing with overseas sourcing is communication,” said Zhang.“ Most problems can be avoided from the beginning with proper communication.”
Zhang offers as an example the possibility of misunderstanding when communicating with a Chinese supplier, who might say“ yes” during conversation, meaning only that he heard what was being conveyed. It could be a costly mistake to instead assume that the supplier in such a case had agreed to whatever was being discussed.
Another option to mitigate risk is emerging, says Crupi. Competitors in an industry, mostly large companies that are all sourcing the same parts and services, are coming together to share the risks in purchasing those products overseas. This collaboration helps all of the companies meet their requirements with reduced risk.
THE HIDDEN COSTS OF GLOBAL SOURCING
While costs for duties and tariffs are always part of the expense of importing goods – and so are not really hidden – they can be underestimated. For those who“ do their homework,” says Crupi, these costs can be a known factor.
There are, though, costs to global sourcing that supply chain managers do often overlook, say both Zhang and Crupi. Among them are the costs for the additional time it takes to coordinate with suppliers that are overseas. Different time zones and languages need to be navigated, multimodal transportation planned and border crossings organized.“ The process is more complicated,” said Crupi. Late deliveries caused by shipping delays can have a detrimental impact on a company’ s relationships with its customers. Further, delays caused by quality issues will likely be longer when imported goods are involved.
“ Your production line can be stalled waiting for a replacement shipment to arrive,” said Zhang. Monitoring the production process and regularly checking on the status of ordered goods is critical, she says. Audits of the overseas manufacturing facilities from which you source will help to cover this risk, she adds.
To limit unexpected costs, Zhang strongly recommends that buyers try to negotiate the use of Incoterms DDP( Delivered
12 • SUPPLYCHAINCANADA. CA • SCMA