Through APQC's Open Standards Benchmarking survey in procurement, organizations submitted data on the extent to which they source from other countries. For analysis, these organizations were split into two groups: one with less than 1 percent of purchases sourced globally, and the other with more than 40 percent of purchases sourced globally. The survey results indicate that organizations conducting more global sourcing incur higher costs for multiple activities, which should be evaluated in light of any potential cost savings from this procurement strategy.
Organizations conducting heavy global sourcing report higher costs associated with developing sourcing strategies. At the median, these organizations spend $0.46 per $1,000 in revenue for this activity, whereas organizations with minimal global sourcing spend $0.27 per $1,000. This means that for organizations with $5bn in revenue, those conducting more global sourcing spend $950,000 more on developing sourcing strategies than organizations with little global sourcing.
Global sourcing organizations also report overall higher costs associated with appraising suppliers. At the median, organizations with more global sourcing spend $0.48 per $1,000 in revenue to appraise suppliers, whereas organizations with minimal global sourcing spend $0.33 per $1,000 in revenue. For organizations with $5bn in revenue, those conducting more global sourcing spend $750,000 more to appraise suppliers than organizations with minimal global sourcing.
The data indicates that when an organization begins to source globally, it must devote more time and resources to developing and conducting supplier evaluations, training and certification. These activities may be particularly time consuming for organizations sourcing from still-developing countries, where suppliers may need added mentoring.
Despite the additional costs, organizations conducting more global sourcing are more efficient in some areas. These organizations need fewer full-time equivalent (FTE) personnel for ordering materials than organizations with minimal global sourcing. This may indicate that organizations sourcing globally use more resources to set up their sourcing strategy, but need fewer employees to conduct purchasing once the strategy is in place. Organizations with heavy global sourcing further streamline the procurement process by purchasing primarily from strategic suppliers, or those with which the organizations have arrangements that make a strategic difference to both parties. At the median, organizations with heavy global sourcing also have significantly fewer active suppliers in their supplier master file per procurement FTE: 3.96 versus 77.88 held by organizations with minimal global sourcing.
The choice to source globally does not depend solely on internal factors. When deciding whether to initiate or continue a global sourcing strategy, organizations should also consider external factors such as transportation cost and time, export classification requirements and documentation, duty fees (or the elimination of fees through free-trade agreements), customs processing time, and political factors that could influence trade with a particular country.
When making sourcing decisions, organizations should consider all the areas of the procurement process impacted by global sourcing, not just the up-front cost savings. Changing political environments and legislative actions (such as the three free-trade agreements recently passed by the U.S. Congress) can also affect an organization's bottom line. Organizations should regularly revisit their sourcing strategy to make sure they are getting the best value.
Keywords: Sourcing & Procurement Solutions, Technology, Business Strategy Alignment, Quality & Metrics, Supply Chain Analysis & Consulting, Global Supply Chain Management, APQC, APQC's Open Standards Benchmarking Survey In Procurement
Timely, incisive articles delivered directly to your inbox.