Sourcing is defined as the acquisition of a product or service to be used for a business. If a company doesn’t produce its own products, it must find a manufacturer to source from. This raises the question: should a business source its products domestically or internationally? There are pros and cons to both strategies, and it varies on the needs of the business. Here are five factors to consider when deciding between domestic and international sourcing.
Sourcing Cost
Sourcing from another country is much cheaper than sourcing in the U.S. on average. The low cost of living in countries like China and India makes them huge hubs for manufacturing. Chinese workers earn 3.5 times less than American workers. This allows Chinese manufacturers to offer significantly lower prices. However, the cost of production is only one part of the overall expense.
When sourcing products from another country, the cost of shipping increases. Countries that are farther away with low shipping volumes will have high shipping rates. Duties, taxes, and tariffs on imported goods can also increase costs. However, in many cases, the low price of production often offsets additional shipping and tariff expenses.
Production Capacity
Some countries have better infrastructure for producing certain goods. A larger facility overseas may be a better choice to meet high order volumes. It’s also important to consider whether a facility has access to the raw materials needed to make a product. If the raw materials are not available domestically, then it may make more sense to source the final product instead of the raw materials.
For example, solar panels are made of multiple layers of semiconducting materials. Four of the top five producers of semiconductors are in East Asia. China (the fifth largest producer) has invested $50 billion in solar panel manufacturing and development. China has access to raw materials, has invested heavily in infrastructure, and can produce solar panels at a much lower cost. This gives them a huge competitive advantage in the market and allows them to create solar panels faster and cheaper.
Speed and Control
It will take longer to receive products when you source them internationally. Even though production may be faster due to a better infrastructure, lead times from manufacturer to customer will be higher. When sourcing from another country, you relinquish some control to another party. This makes it difficult to perform quality control and audits which could result in more errors and damage.
Some businesses prefer to have manufacturing operations closer to their customer base to reduce lead time. This is known as nearshoring and has become a very popular strategy to avoid inventory disruptions. Another strategy is storing enough inventory on-hand to account for any potential delays.
Cultural Differences
Cultural differences may make it difficult to source products from other countries. Language barriers can affect communication between businesses and result in a loss of efficiency. The businesses will need to find a way to communicate with each other or hire a translator. Additionally, time zones will create a limited window for scheduling calls or slow response times.
There may also be regional or cultural factors that could cause delays such as the Chinese New Year (CNY). During CNY, all factories are closed, and employees go on vacation for two weeks. This pauses manufacturing in China and the other countries that celebrate. If a business sources from China during this time, they will need to be prepared by having enough inventory on-hand to make it through that time. If a business cannot overcome this pause, then sourcing domestically may be a better option.
Laws and Regulations
Any products sourced from other countries and imported into the U.S. must follow the laws and regulations enforced by the U.S. Customs and Border Protection. The company/entity receiving the product is responsible for paying any duties, taxes, and tariffs upon receiving the goods. If the value of the goods exceeds $2,500, they must be stored in a customs bonded facility. Alternatively, the goods can be delivered to a Foreign Trade Zone to delay payment of duties until the goods leave the zone. This adds another layer of complexity to the shipping process.
Sourcing Domestically or Internationally?
If the business requires more hands-on control and faster lead times, then domestic sourcing is ideal. For a business that requires low-cost manufacturing, international would be best. Depending on the needs of the business, it can be beneficial to source products domestically or internationally. It ultimately comes down to individual business goals.