Global sourcing to grow-but slowly
By Staff -- Purchasing, 5/18/2000 2:00:00 AM
The term 'global sourcing' has become ubiquitous in purchasing circles, referring typically to the idea that buyers are more frequently stretching their sights beyond U.S. borders. Constant pressure to reduce costs for U.S.-based operations is one reason to source in regions with low labor and engineering costs. Buying in foreign markets is also seen as a way for companies to break down high cultural and economic barriers to selling in those markets. The Internet is expected to accelerate the trend to global sourcing by raising both visibility and accessibility of foreign suppliers and by reducing friction of communications across vast physical spaces.
For all the talk, however, it appears that typical purchasing organizations are doing remarkably little buying abroad-at least in support of U.S.-based operations. A recent reader poll by Purchasing Magazine finds nearly two-thirds of purchasing pros claiming to buy offshore. However, the percentages of total buys made in foreign countries are relatively low. Average portion of buys going to non-U.S. sources is around 12%, according to the poll. Going outside of nafta (the U.S., Canada and Mexico), the number drops to less than 8%.
Buy American
Among the one-third of polled purchasing organizations who buy nothing outside the U.S., a few say they're constrained by "buy American" policies. For example, the purchasing specialist for a company in Waukesha, Wis., says, "Materials need to be bought in the states." Still others work in industries (steel, for example) known for waging loud trade wars with their foreign competitors. The purchasing manager for a steel firm in Magnolia, Ark., says his firm tries to buy domestically "because of foreign steel competition."
For most in this group, however, scale is the primary reason for not looking beyond U.S. borders. Ray Davis, purchasing manager for Houis Precision Products in Simpsonville, S.C., says his company is simply "too small and delivery times are too short for the company to afford qualifying global suppliers while maintaining our own supplier requirements."
Michael Queen, purchasing agent at Fischer Packing Co. in Louisville, Ky., says, "[We] don't have the means to source materials offshore." Meantime, the parts manager for an audio electronics interest in Texas says his firm doesn't have enough volume with any one source to warrant sourcing outside the U.S.
Even among buyers who look abroad for sources, the list of challenges they cite is long and complicated. These include-
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Identifying sources
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Language barriers
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Time differences
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Quality problems
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Inflexible quantity requirements
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Long leadtimes
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Shipping costs
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Complex logistics
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Currency exchange risks
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Political instability
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Import duties
The Internet may solve some of these problems-finding sources, allowing companies to combine volumes, bridging time and even language barriers-but it can't make governments more stable or industry and labor interests less belligerent about imports. Nor can it change the fact that goods must still travel across oceans (typically on ships) and clear customs before being transported to U.S. factory floors-at which point they might be rejected because the foreign producer failed to properly interpret a specification or drawing.
The senior buyer for a major U.S. pharmaceuticals interest says the toughest part of sourcing abroad involves "controlling quality and excessive leadtimes." Bill Wilde, purchasing manager for Wilden, a maker of air-operated diaphragm pumps in Grand Terrace, Calif., says the difficulty in sourcing offshore lies with "selecting and qualifying suppliers that have capabilities to adhere to expected quality levels and ensuring supply of materials is available when required."
Notorious inaccuracy of materials requirements forecasting is also magnified when products must travel great distances, buyers say. For example, the commodity manager for an industrial automation firm says the trouble with global sourcing lies with "poor forecasting from marketing and our customers." Likewise, the commodity manager for a small-home-appliance manufacturer in the Midwest says offshore buying is made difficult by issues of "inventory management, accurate forecasting and unclear understanding of requirements."
Big cost benefits
Despite the challenges of sourcing globally, Purchasing's poll does find evidence that the practice will continue to expand, even among smaller companies. Eighty percent among those who buy offshore say they've increased foreign buys over the past five years and 64% expect to see a corresponding increase in the coming five years. What's more, 43% say they buy at least some critical production components from foreign suppliers.
Many among the purchasing pros polled say relentless pressure to reduce manufacturing costs forces a wider look at offshore sources. For example, the manager of purchasing for an OEM in Warren, Mich., say his company will continue to emphasize growth in global sourcing "due to the cost advantages." The purchasing pro for a major U.S. appliance maker says the company will pursue "cost reduction by buying offshore." In addition, he says, the company is also encouraging its suppliers to "purchase components offshore or manufacture outside of the U.S."
Ralph Salier-Hellendag, senior corporate buyer, purchasing and supplier development for International Truck and Engine Corp. in Westchester, Ill., says global sourcing will increase due, among other things, to the "need for competitive pricing and innovation." Robert May, purchasing agent for Wakefield Engineering in Beverly, Mass., says global sourcing will rise in pursuit of "cost savings for high volume, labor-intensive parts."
Quite a few purchasing pros suggest they'll be compelled to source offshore due to supply shortages in North America, especially for low-end commodity or end-of-life-cycle items. One purchasing pro remarks that, "several new products or second sources are needed that aren't available domestically." Likewise, the senior buyer for a major pharmaceuticals firm says her company needs to "source different specifications [for chemicals] not available in the U.S."
Donald Jones of Carson Helicopters in Perkasie, Pa., remarks that, "Supplier materials for the mature' aircraft we fly are becoming less available in the U.S. and Canada." Larry Dick, senior buyer for Horton Automatics in Corpus Christi, Texas, says "volumes are such to demand sourcing in China on components and sourcing in Europe on specialized items."
To manage the risks that come with sourcing offshore, quite a number of purchasing pros say they'll focus on creating inventory stateside, often at the expense of foreign suppliers. For example, the PM for a major maker of plastics processing equipment will manage global sourcing risks through a combination of "Internet communications, forecasting, securing capacity and on-site inventory owned by suppliers." The commodity manager for an hvac company in Michigan refers to "advanced planning and consignment inventories."
More travel is another way that purchasing pros intend to make global sourcing work more to their advantage. For example, the PA for a firm in Ormonde Beach, Fla., will "travel to overseas businesses to ensure quality workmanship and develop better business relationships." May of Wakefield Engineering will work on "effective planning, forecasting and site visits." The commodity manager for a maker of small home appliances will cultivate "closer ties with customers and more attention to specifications and drawings."
Buyers also report growing use of consultants or local third-party purchasing organizations to overcome barriers and support growth in global sourcing, according to the poll. The PM for a Michigan-based OEM will employ "supplier development techniques and third-party coordinators," to manage the risks of global sourcing. In addition to frequent supplier visits and currency risk management, Thomas Feldhusen, purchasing manager for Phoenix Products Co. in Milwaukee, says he will use "third-party consultants" in global sourcing activities. The global analyst for a major multinational U.S. OEM will garner "support from suppliers and our people in other regions."
Vincent Saunders, senior buyer for OEA Inc. in Denver, Colo., sums up the sentiments of many when he says, "If real-estate sales depend on location, location, location, 'then overseas sourcing depends on follow up, follow up, follow up.'"
What and where they'll source
According to Purchasing's recent reader poll on global sourcing, it appears that most offshore sourcing will continue to go for low-risk, labor-intensive commodity items in a few specific industries and regions.
Given the considerable challenges of global sourcing, it's no surprise that Western Europe and East/Southeast Asia emerge from Purchasing's poll as favored trading blocs for U.S. buyers. Among those who claim to buy abroad, nearly two-thirds (64%) report buying from each of these regions, although, in percentage terms, East-Southeast Asia appears more popular than Western Europe (a function, no doubt, of lower labor and engineering costs there). Just 28% report buying in West, Central, or South Asia, 16% say they buy in Eastern Europe, and fewer than 10% report purchasing goods or services in Australia/New Zealand, Africa, Central America (excluding Mexico), South America, or the Caribbean.
For the future, the hottest spots for finding new suppliers will be (in no particular order) China, Korea, Taiwan, Germany, England, Norway, Italy, Slovakia, Romania, Hungary, Mexico and Brazil, according to the poll.
Most popular candidates for future global sourcing include-
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Primary metals
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Scrap metals
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Castings
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Forgings
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Fasteners
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Metals machining services
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Plastic parts
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Electronic components
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Electrical components
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Commodity chemicals
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Plastic resins
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Wire harnesses
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Pumps
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Compressors
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Motors
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Fans
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Wire
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Gears
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