Global sourcing as defined by Tim Minahan Aberdeen Group research analyst in the August 14 Aberdeen Abstract, "Global Sourcing: What You Need to Know to Make It Work," is the process of identifying, evaluating, negotiating and configuring supply across multiple geographies in order to reduce costs, maximize performance and mitigate risks. Factors that must be understood and balanced can be segmented into six categories: material costs; transportation costs; inventory carrying costs; cross-border taxes, tariffs and duty costs; supply and operational performance; and supply and operational risks.
- Material costs - price, setup, tooling, transaction and other costs related to the actual product or service delivered.
- Transportation costs - transportation, drayage, fuel surcharges and other fees included in a freight rate.
- Inventory carrying costs - warehousing, handling, taxes, insurance, depreciation, shrinkage, obsolescence and other costs associated with maintaining inventories, including the cost of money or opportunity costs.
- Cross-border taxes, tariffs and duty costs - often referred to as landed costs, which are the sum of duties, shipping, insurance and other fees and taxes for door-to-door delivery.
- Supply and operational performance - the cost of noncompliance or underperformance, which, if not managed properly, can offset any price variance gains attained by shifting to an offshore source.
- Supply and operational risks - including geopolitical factors, such as changes in country leadership; tariff and policy changes; and instability caused by war and/or terrorism or natural disasters (e.g., typhoons, earthquakes) and disease, as in Severe Acute Respiratory Syndrome (SARS), all of which may disrupt supply lines.
To understand and manage these factors, supply managers must stay abreast of tariffs, trade regulations and geopolitical landscapes that are constantly in flux. Understanding and optimizing the total cost of offshore sources also requires supply managers to have a solid understanding of the Harmonized System (HS) Code and International Commerce Terms (Incoterms).
Minahan concludes, "Just as the best financial portfolio managers rely on market intelligence and tools for analyzing financial vehicles, supply managers must have access to current information on global supply markets, as well as the proper methodologies and analytical tools to make sense of such information."
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