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Articles : eSourcing : Sourcing Strategy

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SOURCING STRATEGY

A growing trend in business today has been foreign sourcing. Generally, this sourcing involves allowing a foreign company to handle elements of a company's production and/or service process. Most companies simply view foreign sourcing as a way to save money because these countries charge considerably less in labor costs than American, Canadian, or even European firms for the same work. However, simply looking at the cost-savings when considering using foreign sourcing is somewhat shortsighted. Companies thinking of engaging in this type of sourcing should look carefully at the big picture to identify some of the other potential advantages that can go with foreign sourcing in addition to lower costs.

Instead of being viewed as a separate cost-saving measure, foreign sourcing needs to be thought of as part of the overall supply chain strategy of the company. To that end, the decision needs to be evaluated in a number of different ways. The following sections will outline these items in additional detail.

First, companies must look at the technology differences between their current country of production and the lower cost alternative. Obviously, not all countries are functioning at the same technological level. If a company's production involves proprietary information or processes that need to be protected, such as a pharmaceutical firm's creation of a specific drug, then foreign sourcing may pose problems because many countries have lax laws regarding the protection of intellectual property. Furthermore, if the production requires either a high level of technology or has a need for frequent technology updates, then those lower labor costs may be negated by the added expense of bringing and keeping technology up-to-date in the area.

Another issue is the company's overall marketing strategy. Manufacturing a product in a low-cost country may save money if it is sold overseas but if the company has plans to also sell that product in the area around the manufacturing facility, then further consideration may be needed. Decision-makers will need to evaluate their competition, not only now but also in the future since what may be true today may change dramatically in the next 2 to 5 years.

Besides these two issues, the company must also keep in mind other possible changes that could save them money. Many companies mistakenly turn to foreign sourcing as their only means of lowering production costs, but it is most effective as part of a comprehensive expense reduction process. Companies need to carefully review all areas of production-related spending if companies are to receive the maximum benefits possible from foreign sourcing.

Finally, the company must create a procurement strategy that will govern the methods of securing a supply of the goods and services needed to continue a steady production after foreign sourcing has been set in action. For example, if a U. S. based company can only supply certain raw materials, then the strategy must factor in the additional costs of bringing those materials to the foreign plant. Likewise, the strategy needs to evaluate vendors that would be local to the foreign area since using nearby suppliers could save further costs on shipping if the quality remains high.

The bottom line when it comes to foreign sourcing is that it is not simply a stand-alone, quick-fix to lower production costs, to improve competitiveness in the global market, and to increase profits. Instead, foreign-sourcing needs to be a carefully thought out decision that is evaluated in terms of the company's existing goals and strategic, long-term business model. A failure to think of foreign sourcing in these terms generally results in disappointing results.

Even if foreign sourcing is implemented, companies need to continually evaluate their decision and analyze whether or not it is helping them meet their overall objectives. Because market environments are increasingly unstable than ever before and because responding to changes in those environments is critical to a business's success, manufacturers cannot afford to continue a foreign sourcing policy without regularly tracking its benefits for the firm's profit margin.

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