risks of global sourcing

8/8/2019 Risks of Global Sourcing

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Risks Involved In Global

Sourcing


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Global sourcing is a term used to describepractice of sourcing from the global marketfor goods and services across geopoliticalboundaries.

Global sourcing often aims to exploit globalefficiencies in the delivery of a product orservice. These efficiencies include low costskilled labour, low cost raw material andother economic factors like tax breaks and

low trade tariffs.


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Need for global sourcing


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Costs

Quality requirementsAvailability of Materials or Technology only from Global

Sources

To establish additional sources of supply

Anticipation of actual material shortages Expansion in the domestic market

Global Sourcing for large variety and volume of products

Global Sourcing to tap worldwide scientific talents and

technological skills.


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Risks Involved


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Risk of not estimating the labour cost

The sourcing company has to study the

prevailing costs and wages in the target

country from where it plans to procure thegoods and services, failing which it may

end up paying more than fair price for the

products and services, which will affect its

profitability


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Estimation of Prevailing Wages

For example, salaries in Northern and

Western China are 60% lower than

Shenzhen. So if the sourcing companydoes not know this fact and sources from

Northern China, it may pay more for the

goods and services thinking that Northern

China salaries are equal to Shenzhen.


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Improper Product Classification

Different products attract different taxes & tariffs In the

country of supply.

Different products attract different shipping charges In

the Country of supply. Different products attract different taxes,

& tariffs in the country of Import (destination)

Proper calculation of total costs, otherwise the products

which should attract lower tariffs may attract higher tariffs causing loss.


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Ambiguity In Terms Of Trade

The International Commercial Terms (Inco terms) were

devised so that there is uniform understanding all over

the world about each of the terms.

Ambiguity or lack of clarity about the terms of trade in theagreement may lead to disputes, supply interruptions

and expensive litigation

The agreement should mention whether the price offered

and accepted is Ex Factory,FOB,CIF

Etc


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Overlooking Packaging Process

Depending on the product shipped and

transportation mode chosen, product

packaging must be given consideration for

protection against damage, spoilage and

corrosion.

The wrong packaging can negatively

impact the cost savings potential of aglobal sourcing model


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In House Logistics Management

Sourcing Companies lacking In house experiencedteam, in supply chain management, may

invite the risk of losses by procuring the productsthrough longer shipping routes ,delayed

arrivals, etc.

It is better to outsource the work to 3 PLs that is thirdparty logistic companies which have the

expertise to ensure supply through the

cheapest,quickest and most efficient mode and route of transportation


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Product Quality

Deviations by supplier from prescribed quality

causes multiple losses.

Rectifying the defect at destination plant or

business also increases the cost .

Cost Of returning the defective parts to Supplier

will also entail losses. Some multinational

sourcing companies station their quality controlexperts at suppliers plant to ensure quality of

production


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Fluctuations In Exchange Rates

Fluctuations In Exchange Rate may cause

uncertainty In total costing.

Usually Sourcing companies (Clients) AndService Providers (Suppliers, Vendors)

agree at the time of contract, to

renegotiate price if the exchange rate

rises above or falls below, a certain level.


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Political Risks

Macro level risks all over the suppliers

Country,such as unforeseen increase in customs duty,

value added tax(VAT),riots, strikes ,terrorism,

coups, civil war etc..


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Micro Level Unrests

Micro level risks at the suppliers plant like strike by

workers, change of ownership, default by suppliers, their

refusal to share financial data, seizure of plant and

equipment of defaulting suppliers by financial institutions

etc.

For example The vast accounting scandal at

Satyam Computer Services increased investor

nervousness about weak corporate governance in

emerging markets and strained its relations with existing

clients till Tech Mahindra Ltd ,took over the company.


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Risks Of IPR Violations

Supplier May Violate Intellectual Property Rights

(IPRs) of sourcing company (Client).

For example, the product plans, specifications,

drawings may be given for rival companies ofclients.

The specifications, drawings could be given to

another country Inimical To clients country

India & China figure among major violators of IPR


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Thank u

Pradeep Imandi

risks of global sourcing

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