Global Sourcing Basics
This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.
Setting up global sourcing processes can be a herculean task, even for major corporations with deep working-capital and knowledge-base pockets. Your small business might decide to tackle all areas and construct an infrastructure that provides transparency to every action, or simply outsource the sourcing function to a trading agency or stateside vendor representative.
Product drives nearly every decision in global sourcing, from defining the region with the most capable manufacturers to establishing testing protocols for compliance with product-specific regulatory standards.
1. Vendor Selection
Choosing a factory among possibilities worldwide can be overwhelming. Start by pinpointing a region, country, and industrial area that specializes in your product category. Find vendors that have the capability and capacity for producing what you need. Visit factories to look at production flow and equipment. And, discover if owners have any mechanisms for engineering product designs, planning and monitoring production, and checking quality. Keep in mind that vendors may own factories, represent a group of factories, or subcontract work to factories.
Depending on the nature and complexity of your product line, the evaluation and selection process may include raw material sources. Vendors will typically have their own material suppliers but you may want to find sources that provide unique components or offer better pricing; selecting outside sources, though, generally means that your business is accountable for material availability and transportation.
Social Compliance
Verify that vendors comply with standards: international trade regulations, country laws, local labor laws, human-rights standards, environmental requirements, U.S. customs, consumer-products standards, etc.
Take a tiered approach to this process:
- Check for general compliance and obvious violations during initial investigations.
- Conduct a thorough evaluation prior to placing a purchase order or engage a third-party in certifying factories.
- Perform periodic audits to confirm ongoing compliance.
- Monitor legislation and ensure compliance with new requirements.
Establish your own terms of engagement with vendors that may surpass requirements or adopt industry-recognized standards. Consider hiring third-party agents to conduct checks, tapping this expertise while achieving a neutral stance in vendor selection. (See examples of compliance approaches from Levi Strauss; Li & Fung, a global trading company; and Bureau Veritas, a third-party testing and certification firm.)
2. Product Development
Your product may be an original with a patented design, an item that can be purchased directly from an existing line, or something in between, either requiring basic customization (a logo on blank product) or more radical changes (modifying features with specialized materials).
So, unless your business is sourcing a standard item, establish a product-development process to handle a series of communications between your small business and the vendor. Supply the vendor with information about product requirements such as design drawings, components, and specifications. If possible, send a prototype to be reproduced or built with modifications.
Request a sample, review for compliance with specifications, convey any modifications or corrections to the factory; repeat until you are happy with the finished product.
3. Quality Assurance
A quality assurance program can help your company get the right product that looks, feels, and performs as expected. Begin quality efforts in the product-development phase by providing comprehensive specifications to vendors; cover issues such as product dimensions and performance characteristics. Establish and communicate requirements relating to component testing, in-process reviews, and finished-product inspections, along with acceptable results and timelines for approvals.
4. Production Control
Make sure that your vendor can complete production runs and ship orders according to established timelines. Ask about capacity and order-to-delivery lead times when evaluating vendors, but don't stop there. Initiate communications to uncover and resolve production problems (such as delays in receiving materials or glitches in scaling to full production) before they impact timely deliveries.
5. Transportation and Logistics
Review options for moving freight from global origins to your destination, which could involve various ocean, trucking, rail, and air carriers. Note booking arrangements, ports of call, cutoff dates, and lead times relevant to your shipping needs. Investigate requirements associated with customs clearance.
Figure out if you'd like to control the transportation and ownership of goods throughout its global travels (specifying FOB Destination Freight Prepaid, for example), or simply take possession of goods when they arrive either at a nearby port or your company's facility (FOB Origin Freight Collect). Create processes for specifying, tracking, and troubleshooting all steps, which will include defining timelines for transferring titles of shipments along with payments as well as preparing paperwork for U.S. customs.
6. Program Negotiation
Negotiate all aspects of the sourced program, not just product pricing. Design purchase agreements with all details, such as delivery dates and packaging materials.
Do sourcing yourself for cost savings or hire intermediaries (trading agents, vendor representatives, customs house brokers, etc.) to save time and control risk.
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