When considering where to build your supply base, source components, and source finished products, the prevailing idea seems to be that domestic sourcing allows for better quality control and shorter time to market, but international sourcing is cheaper. While these can be true, the lines become blurred as to when to choose one over the other, and these vast oversimplifications can lead to poor strategic decisions.
The key to any informed strategic decision is agreeing to and measuring the decision drivers. Thus, it is imperative to take into account all quality, technical, timing, cost, and commercial drivers when comparing your sourcing options. Only after considering all these factors can you come up with the most accurate “all-in” cost and feasibility analysis necessary for a robust comparison and decision.
Low-cost country sourcing (LCCS) is a type of international sourcing in which a company sources materials from countries with lower labor and production costs in order to cut operating expenses. The ideal countries for LCCS are resource-rich and have regulated wages such as: China, India, Indonesia, Bolivia, Brazil, Russia, Mexico, and all throughout Eastern Europe. End plant shipping to location, raw material and component weights, and end customer location can also tip the scale in favor of domestic sourcing. For example, metal powersports roll cages for ATVs are often produced domestically due to the large expense of shipping these heavy components from international markets that would eliminate any piece price savings.
In many circumstances, there are drivers that encourage localized sourcing and manufacturing. If your company is headquartered in a country that has a weak currency relative to the supplier’s country, it is probably cheaper to source locally. Logistics are typically quicker and less costly when shipping domestically, as trucking carriers can be leveraged as opposed to ocean carriers. When working with local manufacturers, it is usually easier to provide production control oversight to ensure your suppliers are meeting deadlines and quality requirements. Local sourcing also minimizes the time and monetary cost of communicating with and traveling to suppliers, which often falls through the cracks in an all-in cost and feasibility analysis.
There are a number of pitfalls to avoid when considering LCCS, such as geopolitical and logistics barriers (i.e. government stability, inclement weather, and port infrastructure). When sourcing internationally, it is important to be cognizant of common/possible supply chain disruptions in the region in order to mitigate risk. Volatile currency, trade protectionism, emerging new suppliers and technologies, economic disruptions, and regulatory shifts can reveal themselves as unseen costs over time. International shipping can increase the risk of freight damage and product modification requirements. In-hand delivery timelines for international sourcing can also change due to delivery delays; that lost time translates to money being left on the table.
All in all, each of these decision drivers should be taken into account when comparing domestic and international sourcing decisions. Whether local or global, unfavorable sourcing decisions can cost you valuable time and money, so careful analysis of key decision drivers is vital for ultimate sourcing success.