Local and Global Sourcing: How to Balance it

Local and global sourcing are two sourcing strategies supply chains use to locate the right raw materials and services for their operations.

When sourcing raw materials and services, the supply chain typically has two objectives: speed and cost. This is what informs its decision-making on what type of sourcing to favour.

However, considering the current economic climate, these supply chains have to strike a balance between the two.

A balance helps them satisfy their customers while ensuring lower costs. Remember, a supply chain is in business to ensure customer satisfaction and reduce costs.

In this article, we will discuss guidelines that can help your supply chain know when to favour either local or global sourcing. The knowing is what strikes the balance between the two.

Let’s dive into these guidelines……

 

1. Consider the Nature of the Product

The nature of the product plays a significant role in whether the supply chain needs to source the goods locally or from a further distance because of perishability and distance.

When a product has a low shelf life, transporting it over a large distance will likely prove unwise for most supply chains. Although there are exceptions.

For instance, when transporting by air, the distance means little, but that will be too costly for 99% of supply chains out there.

Another scene where this is fine is when there is no other local option, which is rare. However, when this is the case, there is usually a storage system built into the transportation vehicle.

But as you already guessed, this cost money. The price is usually transferred to the consumer. However, this scenario could be problematic because there is usually little room for price flexibility.

 

2. Total Cost of Ownership

The total cost of ownership is the total amount it takes to purchase and deliver a product from source to destination. A typical example is buying a product from China in large quantities and hiring a vessel to transport it.

The total cost of ownership is the price of the product and shipping cost, including custom payment, insurance, and any damages or losses that may occur.

When balancing local and global sourcing, factoring all of these can save your supply chain a ton of money. Buying the same product mentioned above locally may cost more initially if you are comparing each unit to the version of it bought from China.

However, when you factor in the total cost of ownership, the long-distance cost may swallow up the local. When this happens, these supply chains must prioritize the local over the global.

On the other hand, when the reverse is the case, it only makes sense to prioritize global or long-distance sourcing over local. The bottom line is the entire costing story is in the total cost of ownership. Understanding it and planning with it makes a lot of difference.

 

3. Demand Forecasting and Market Fluctuation

When sourcing, in any case, the demand for the product and market fluctuations play a vital role in deciding what type of sourcing to undergo.

When engaging in the global sourcing strategy, the distance is often an issue because of the time it takes to get the product from source to destination. On the other hand, local sourcing may take a day or two.

If the supply chain favours global sourcing and demand outstrips the forecast, then the supply chain will have an issue bridging that gap. This is because they cannot do anything about the goods in transit.

However, in many cases, they can fall back on safety stocks and local suppliers, even if it is a bit expensive. But to do this effectively, the local supplier has to be a part of the supply chain partners. That means all the onboarding and other vetting processes have already been settled.

It will help the supply chain escape the stress of doing everything in a hurry when the problem is right in their face. Rush often precedes errors.

Balancing the local and global sourcing will require a reliable mix of local and global suppliers. It ensures the supply chain can better manage this sort of challenge.

 

4. Inventory Turnover and Lead time

A high inventory turnover rate often pushes supply chains to local suppliers. This is particularly the case when the price is not a problem for the customers.

This is because when there are high inventory turnovers, acquiring enough goods to combat the lead time of global sourcing may be too much for most supply chains.

So, supply chains might decide to partner with local counterparts and gradually do the “take and pay” model. It is faster, less complex, and the market is ready for it.

It will often be okay to do both of them alongside each other. Engaging local suppliers helps the supply chain reduce the initial capital needed.

 

5. Transporting Risk

Transportation can be a big issue. It doesn’t matter whether it is local or global sourcing, especially when factoring in the risk involved. It could be external or internal risks, but they are equally devastating.

For instance, the breakdown of vehicles (ships, trucks, and trains) could impact the lead time of the sourcing process. When going over long distances, this could be devastating, especially when getting technicians to fix it is a problem.

You also want to consider pirates and theft of goods. Situations like this are not rare, but they can greatly disrupt the goods. Yes, there may be insurance in place. But if the goods do not arrive on time, your customers are left unsatisfied, which becomes a problem for the business.

When using global sourcing or transporting the goods over a long distance, analyzing these risks can make all the difference. If it is a local sourcing, it is much more manageable for any supply chain.

 

𝗕𝗮𝗹𝗮𝗻𝗰𝗶𝗻𝗴 𝗹𝗼𝗰𝗮𝗹 𝗮𝗻𝗱 𝗴𝗹𝗼𝗯𝗮𝗹 𝘀𝗼𝘂𝗿𝗰𝗶𝗻𝗴 𝗰𝗮𝗻 𝗱𝗶𝗰𝘁𝗮𝘁𝗲 𝘁𝗵𝗲 𝗱𝗶𝗿𝗲𝗰𝘁𝗶𝗼𝗻 𝗼𝗳 𝗮𝗻𝘆 𝘀𝘂𝗽𝗽𝗹𝘆 𝗰𝗵𝗮𝗶𝗻. 𝗜𝘁 𝗮𝗹𝘀𝗼 𝗵𝗲𝗹𝗽𝘀 𝗳𝗮𝗰𝗶𝗹𝗶𝘁𝗮𝘁𝗲 𝘁𝗵𝗲 𝗮𝘃𝗮𝗶𝗹𝗮𝗯𝗶𝗹𝗶𝘁𝘆 𝗼𝗳 𝗿𝗲𝘀𝗼𝘂𝗿𝗰𝗲𝘀 𝗶𝗻 𝘁𝗵𝗲 𝘀𝘂𝗽𝗽𝗹𝘆 𝗰𝗵𝗮𝗶𝗻 𝗮𝗻𝗱 𝗵𝗲𝗹𝗽𝘀 𝗮𝘃𝗼𝗶𝗱 𝗱𝗶𝘀𝗿𝘂𝗽𝘁𝗶𝗼𝗻𝘀.

𝗪𝗵𝗶𝗰𝗵𝗲𝘃𝗲𝗿 𝗺𝗲𝘁𝗵𝗼𝗱 𝘁𝗵𝗲 𝘀𝘂𝗽𝗽𝗹𝘆 𝗰𝗵𝗮𝗶𝗻 𝗱𝗲𝗰𝗶𝗱𝗲𝘀, 𝗮 𝗺𝗶𝘅 𝗼𝗳 𝗯𝗼𝘁𝗵 𝗶𝘀 𝘂𝘀𝘂𝗮𝗹𝗹𝘆 𝘁𝗵𝗲 𝘄𝗮𝘆 𝘁𝗼 𝗴𝗼.