Many companies utilize offshore or overseas suppliers as a source for their raw materials and finished goods needs. Others use them for outsourcing their manufacturing operations or other business processes. The reasons for going offshore can be economic, such as to obtain lower costs to remain competitive, or can be more strategic, like gaining access to new markets (to potentially drive future export sales) or reducing the risk of domestic shortages or economic slowdowns.
Whatever the business reason for going global with a supply chain, there are some significant risks in doing so. The following are a few of the more critical items to consider.
- Cultural and language barriers. Perhaps the most significant risk or challenge of working with offshore suppliers is navigating the culture gap. Every country has its own language and culture, and successfully working with each requires some knowledge of how they prefer to transact business, along with the ability to effectively communicate with them. This is often accomplished by having someone “on the ground” in that country – whether an employee or a representative – who is a native or is otherwise very knowledgeable about the culture.
- Longer order cycles. With a supplier being physically located so far away, companies must factor in the additional time needed for transport of the goods. Companies that are used to ordering domestically and receiving their goods within a few days may find they now need lead times of several months when ordering overseas. Not properly considering additional lead times runs the risk of stock-outs or delays in the manufacturing cycle, and could ultimately mean lost sales or dissatisfied customers.
- Hidden or unexpected costs. The allure of lower product and labor costs is often at the forefront of decisions to source globally. But there are significant other costs that must be considered when determining the total landed cost of goods purchased from overseas, such as customs duties, taxes/tariffs, letter of credit fees, and insurance. There are also time and travel costs associated with sending supply chain professionals overseas to meet with suppliers and assess quality, or the costs of having that cultural representative “on the ground.”
- Quality control. Offshore suppliers and contract manufacturers have lower costs for a reason: they are typically located in developing countries and employ a largely untrained and migratory workforce. This workforce earns low wages, experiences high turnover, and has no vested interest in the company or the products they are producing. As a result, consistency of process and product quality can be very difficult to attain or sustain, and to manage from afar.
- Brand damage. There are a number of things that can damage a company’s brand, including cultural flubs, missed delivery times, and quality issues. While some of these are within a company’s control, other issues may arise that are outside the company’s control and yet could possibly be even more damaging. Imagine being linked to a supplier that is exposed for ethical violations, such as underage or underpaid workers or poor working conditions, or for a major environmental catastrophe.
Of course, there are other risks associated with global sourcing that are no less important than those described above: a country’s economic and sociopolitical climate, and foreign currency and exchange rates, to name a few.
Most of these risks can be mitigated with proper planning and due diligence. Companies should carefully assess all of the risks of doing business in another country, and proceed only if the rewards truly exceed the risks.