Global sourcing is the term used in the context of a manufacturing concern, global sourcing as the name suggests refers to that sourcing that is done from international markets and not domestic markets besides this sourcing can be of labor, materials, machinery, or capital. In order to get a better understanding of this term, one should look at some of the advantages and disadvantages of global sourcing –
Advantages of Global Sourcing
Cost Saving
The first and foremost advantage of global sourcing is that it helps the company in saving a lot of costs because the company does sourcing from global markets as they find it cheaper, hence whether its importing cheaper raw materials or outsourcing the jobs to countries where there is cheap labor, or raising capital from countries where the rate of interest are lower than the domestic rate of interest all these things result in saving of costs for the company which in turn increases the profit margin of the companies.
Global Sourcing Provides More Alternatives
Another benefit of global sourcing is that company gets more alternatives as due to global sourcing the company has access to suppliers from across the world and when there are more alternatives than it results in suppliers offering a good deal to get business from the company. In simple words just like a tourist who is a US national will have a limited choice if he or she is asked to travel only in the USA but if he or she has the option to visit any place in the world then he or she can choose the best destination from all over the world due to a variety of choices the same thing applies to companies also as they can choose the best and quality resources at competitive prices from across the world.
Specialization
Specialization is a situation where a country can produce and deliver products due to its location, expertise, and availability of resources. Hence for example countries like India and China are known for cheap labor whereas countries in the African region are known for rare raw materials and so on making them specialists in their area of work which in turn ensures that companies dealing with such specialist suppliers will get the best possible resources which are effective and efficient and thus will put the company ahead of their competitors.
Disadvantages of Global Sourcing
Distance Related Issues
The biggest disadvantage of global sourcing is that global suppliers are far away from the company and unlike domestic suppliers who can be reached quickly, in case of global suppliers company does not have this luxury and any problem with resources will lead to delay in rectification due to distance. Hence for example if the company has imported raw materials from global suppliers and if that raw material turns out to be faulty then the company cannot get a replacement easily and quickly due to the long-distance involved between the global supplier and company.
Exchange Rate Problems in Global Sourcing
Another drawback of global sourcing is that in the case of global transactions companies will have to make payments in foreign exchange, unlike domestic sourcing where the domestic currency is used and hence the company is exposed to all the foreign exchange market risks associated with dealing in foreign currencies. Hence for example suppose the company from the USA has ordered raw materials from the UK and the exchange rate between the USA and UK is 1.5 dollars but due to global issues the exchange rate shoots up to 2 dollars then the company will suffer losses, not due to company’s fault but due to exchange rate fluctuations, in simple words, global sourcing results in additional exchange rate risks for the company apart from other business risks.
Cultural Issues
In the case of domestic markets since the company is dealing with local people there is no problem of language, culture, way of talking, and so on but when it comes to global sourcing since the company is dealing with people who are completely different whether it’s their language or culture or way of doing business, communication methods and so on making global sourcing a tricky task operationally, culturally, financially and strategically.
As one can see from that global sourcing has pros as well as cons and that is the reason why any company thinking of doing global sourcing should carefully read the above points and then take any decision whether it wants to source its resources from domestic markets or global markets.