In every industry, networks of suppliers, manufacturers, trade intermediaries and customers have spread around the globe as companies strive to lower their costs, increase their profits and improve productivity in a highly competitive global marketplace. A paradigm shift has occurred in which companies that once built domestically to sell internationally now look globally for raw materials, services and finished goods to sell into a defined marketplace. This shift is happening because of reduced barriers to trade and investment, lower transportation costs, ease of information flows, new enabling technologies and the emergence of economies such as China and India. Supply chain management aims to manage the flow of goods, information and finances among these business networks in the most efficient manner. Companies have discovered that effective supply chain management cuts costs, reduces waste, prevents over-production and helps ensure that customers are more satisfied with product, price and service. This means it is an essential tool for competitiveness in a global marketplace.
Challenges that companies face with global supply chains include the following: Currency fluctuations: When dealing with suppliers or customers overseas, companies must plan for fluctuating charges and income from foreign exchange rate variations.
Maintaining intellectual property protection: A company might be able to have a product assembled overseas more cost effectively than assembling it domestically. However, some countries have less stringent laws regulating protection of intellectual property.
Identifying and assuring the reliability of international business partners: With suppliers, distributors, customers and business partners located in many regional areas of the world, it can be difficult for companies to monitor the business practices and financial stability of all organizations in the supply chain.
Accessing finance and insurance: Financial transactions conducted internationally are always more complicated than domestic transactions. Companies must establish lines of credit with banks and work with other members of the supply chain to identify preferred methods of payment. Obtaining the correct insurance to protect foreign property and shipments is also essential.
Compliance with international regulations and standards: Quality standards, import and export restrictions, safety and packing regulations and labelling regulations vary around the globe. For companies new to international trade, ensuring that materials provided by a foreign supplier will meet all domestic entry regulations can be a daunting undertaking.
If you ignore or mishandle these risks, they can result in cost penalties and distracting inefficiencies. Identifying the risks up front, so you know what to look for, can be the key to success. The following six risks can easily have a negative impact on your business:
- Quality levels and defects. Manufacturing processes aren’t perfect, so the industry typically accepts a certain quality level for products. Complexity and variability are part of any production process, and unfamiliar sources might not adhere to accepted U.S. defect levels. Choosing a non-U.S.-based sourcing firm can open up questions and disputes about which party is liable for defect percentages that rise above normal.
- Time zones. Some U.S. firms experience issues when dealing with companies on the other side of the country—and never mind the 13-hour time difference between the United States and Asia. Waking and working hours do not coincide, which can be a challenge when a pressing issue arises. Waiting one day to clarify a product question or process change can often simply be too long for companies that are trying to run nimble operations.
- Long-range logistics. Purchasing items at a delivered price is easy, but the shipment can be delayed. Whether it is a factory hold-up or transit problem, ignoring the complexity of long-range logistics can be a risk.
- Accountability and compliance. Companies should consider social compliance every time they look at global sourcing. They need to conduct due diligence about child labor practices, acceptable working conditions, forced labor, and fair compensation practices. Barring the hiring of local staff members, however, there isn’t a surefire way to ensure social compliance from across the globe. Risk comes in the form of severe brand damage due to unfair or illegal practices that come to light.
- To receive on-time product delivery, it is vital to have firm completion dates and shipping timeframes. An item that is globally sourced, however, is often just a piece of a bill of materials that must be on hand for product completion. Delays from a non-U.S. source can derail production and drive up related costs.
- Language barriers. Global partners offer competitive pricing and efficiencies, but still often conduct day-to-day business in a different language. Managers will likely speak English, but their directions must be relayed to line staff, and your own words might be lost in translation. Errors are bound to happen when communications aren’t translated and interpreted perfectly.
These six factors present mighty risks, but they are not insurmountable. Companies looking to take advantage of global sourcing opportunities can build their own teams located in the United States or abroad, or work with experienced partners to mitigate and remove these risks. The benefits of sourcing from outside the country can be great when handled properly.