Is global sourcing becoming obsolete?
The UK economy has proven remarkably resilient. In fact, figures from the Office of National Statistics show that the UK has surpassed France and Germany in terms of GDP growth since the pre-pandemic year of 2019. However, its domestic supply of raw materials is limited. For many years, beneficial contracts with suppliers all over the world have compensated for this shortcoming. But the COVID-19 pandemic and geopolitical events, including the UK’s departure from the EU, have shown that “best cost country” sourcing alone is no longer a long-term guarantee of a cost-effective, reliable supply of resources. Global procurement has recently led to significant supply chain management problems, which can change in a matter of days or even hours. This makes unexpected bottlenecks and spikes in demand difficult to absorb, especially over a short period of time.
But if global sourcing is no longer reliable, is focusing on local sourcing - also known as regional sourcing - a better approach? What does the logistics sector need to prepare for in this context?
Global sourcing vs local sourcing: advantages and disadvantages
Both are legitimate options and neither one is without its drawbacks for companies. In individual cases, it’s a matter of finding the right mix and the appropriate weighting of each variant. Below is a comparison between global sourcing and local sourcing.
The benefits of global sourcing
The main advantage of global sourcing is cost saving. Many foreign manufacturers can offer their services and products at very competitive prices, particularly in regions where wages are low. These suppliers enable companies to buy goods in large quantities comparatively cheaply. Other potential benefits include the following:
- There’s a wider selection of products in foreign countries.
- Small and medium-sized enterprises (SMEs) have better opportunities for cooperation, for example where small product volumes are involved.
- Having several suppliers in different regions protects against supply chain problems caused by natural disasters or political unrest.
- Global sourcing can be a springboard for opening up new markets abroad.
The disadvantages of global sourcing
- Different industrial or technical standards in other countries may not meet your requirements.
- Different trade regulations can affect imports and exports at both ends of the transaction - for example when it comes to quotas and tariffs.
- Documentation requirements for cross-border processes can be time-consuming and complex.
- Exchange rates fluctuate.
- Delivery times are comparatively long.
The benefits of local sourcing
Local sourcing refers to the procurement of products or materials from manufacturers in the home country or even in the local region. But shopping locally often comes at a price. The decision to invest in a manufacturer close by is sometimes more expensive than investing abroad. On the other hand, local procurement can be faster and easier.
- Local procurement is often equated with sustainability and is therefore good for both a company’s corporate image and its ecological footprint.
- Short travel routes and personal contacts strengthen the relationship with local suppliers and create a unique sense of community. This is important in terms of customer loyalty and satisfaction.
- Local sourcing promotes transparency and control, as it’s possible to negotiate numerous developmental and management aspects of business swiftly and transparently.
- Procurement of specialist products from local suppliers is much easier, as requirements can be discussed in person.
- Shorter supply chains result in improved predictability of turnaround times.
The disadvantages of local sourcing
- Cancelling a contract with a local supplier could result in bad publicity in the local area.
- Products of suitable quality may not be available in the area.
- Cooperation between SMEs is especially likely to lead to interdependencies.
- As there is limited choice, you’ll often end up paying higher prices.
Global sourcing, local sourcing — or both?
The optimal long-term choice for procurement and logistics can only be determined individually and in conjunction with all stakeholders involved. A hybrid solution, i.e. a combination of global and local sourcing, is also an option. This strategy combines the advantages of proximity, relationship building and flexibility with the huge opportunities and competitive advantages of global networks. The key to an effective procurement strategy is a tailor-made approach based on specific business requirements. Success is not about choosing one over the other, but about combining the two models according to individual product requirements and situational needs. Balancing the benefits of local familiarity and global diversity remains crucial for developing adaptable and responsive business models which meet diverse market requirements.
When choosing a procurement strategy, companies should consider factors such as industry and market trends, costs and quality, geographical location and logistics, environmental and social impacts, as well as risk management and business continuity.
There are five different levels of procurement which any company can apply to find the ideal sourcing model:
- Level 1: Domestic purchases only.
- Level 2: International purchases as needed.
- Level 3: A procurement strategy which includes global purchasing.
- Level 4: Centrally coordinated purchasing across global locations.
- Level 5: Global coordination and integration with external stakeholders.
As a rule, the higher the level achieved or targeted, the greater emphasis should be placed on global sourcing.
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