Disadvantages of Home Country Sourcing

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

I’m afraid it was a Republican who used the line “There you go again” in a US Presidential debate. But … there you go again.

I have a few specific comments on the doctor‘s article on the advantages of home country sourcing:

  • Lower freight costs:
    Often true. However, consider that the distance from nearly all of Mexico (except the Zihuatenejo area) to Chicago is less than the distance from San Francisco to Chicago. And Shanghai is closer to San Francisco than Rio is.
  • Air freight is too expensive except for electronics:
    Often true. However you should do your own risk analysis. If you are considering ocean freight, also get an air freight quote. See what percent of the volume would have to go by air before the lowest cost supplier is no longer lowest cost. I’ve seen analyses showing more than 100 percent would have to ship by air.
    Incidentally, this is the basis of risk analysis during the sourcing phase. Find the lowest landed cost supplier and then evaluate several risks to see how much would have to go wrong before the lowest cost supplier is no longer the lowest cost. Consider if the same thing would happen with the second lowest cost supplier. If possible, assign costs to risk-mitigation techniques.
  • Fuel Prices increasing:
    True. That will raise costs for all forms of transit. It will be a smaller increase for ocean freight than it would be for air or truck.
  • Lower inventory Times:
    Having to hold safety stock is a risk mitigation technique. Do a risk analysis and see how much safety stock you would have to hold to make sourcing from the lowest cost supplier the wrong decision.
  • Time Zone Advantages:
    That’s right, unless you are in about the same time zone. It is tiring to make and receive those phone calls at odd hours. On the other hand, during development, there are advantages to having a supplier working during your night shift.
  • Labor productivity:
    Possibly true. The US has the world’s highest labor productivity. However, it might not apply to your product. And labor productivity isn’t the only factor affecting cost. Purchasing skills at the suppliers is another.
  • No Culture Clashes:
    That’s just silly. Try telling your boss that you can’t source from country X because you can’t deal with cultural differences. In most companies, proclaiming ignorance isn’t the road to success unless you state it as part of a training request. It’s a bit self-serving for me to suggest this but there are international purchasing training programs available. Good ones will help you understand the differences between domestic and international purchasing. Cross cultural skill is one of the most important.
  • Low cost factory repair:
    It might well be true that it’s cheaper to repair product at the manufacturer. That’s of course true for domestic suppliers too. But wouldn’t you require the supplier to cover transportation costs for returned goods? And why are you buying from a supplier from whom you expect failures?

It’s the easiest thing in the world to raise objections to buying outside of your home country. Unless you make that decision on a product by product basis based on facts and unless you separate costs from risks, you aren’t doing your job right. At the very least, any professional buyer should know the costs of products, shipping, and duties from major potentially supplying countries.

Dick Locke, Global Procurement Group.